Freefall: America, Free Markets, and the Sinking of the World Economy

This is an excellent book because it is very broad and comprehensive in its treatment of the recent 2007-2008 financial crisis but also because Stiglitz discusses the international consequences and the impact such a financial disaster should have on the field and study of economics. Stiglitz discusses the five primary underlying causes of the 2007-2008 financial crisis as bad lending practices, fees and incentives allowed mortgage originators and others to ignore the weaknesses of the underlying mortgages, the collateral was inflated in a housing bubble, the financial institutions were over-leveraged, and a wilderness of new derivatives gave the impression that risks were under control when in fact they had become unsustainable. Stiglitz does not look for villains or try to blame the crisis on moral or personal failures. Rather, he indicates and supports his contention that this was a systemic failure put into place by failure to correctly estimate the dangers of deregulation and to manage the incentive systems so that moral hazard was controlled rather than increased. Stiglitz is a structuralist who does not wallow in terms like ‘greed’ which is so evident in the popular press. In Stiglitz’s view, greed cannot be addressed but incentives and opportunities for greed can be. He takes a systemic structural view to how the crisis came about and how the crisis should be addressed. Stiglitz also is able to contextualize the crisis by pointing out data regarding how wages for the middle and lower-middle classes has stagnated since around 1981. More women entered the workforce which allowed families to maintain a stable standard of living but this required two wage earners for each household rather than one. As wages and standards of living stagnated for almost 25 years, home equity increased and equity withdrawals allowed middle income homes to maintain their standard of living. Stiglitz is an extremely well organized writer. For example he outlines the content of a good mortgage product: low interest rates, low transaction fees, predictable payments, no hidden costs, and protection against value loss or job loss. Stiglitz points out that financial markets should serve a societal good, like hospitals or schools or utility companies. Financial markets should optimally allocate under used capital for production and innovation while managing risks and maintaining low reasonable transaction fees. Stiglitz thinks these financial markets failed. There should be cause for concern around the financial health of the United States when in 2007 41% of all corporate profit was generated by financial firms. Support for innovations weakened in a market environment in which innovations that circumvented regulation and oversight gathered the focus of the financial industry. Stiglitz builds the case that efforts to blame the government for the 2007-2008 financial crises are insubstantial. Ironically the financial instruments used against the lower working classes eventually brought down the financial institutions themselves. Efforts to deregulate and weaken government oversight resulted in the United States owning the largest automobile and insurance companies in the world. Stiglitz points out those subsidies to financial corporations make the economic system less efficient and these subsidies when to financial firms which had gone to great lengths to avoid paying their fair share of taxes. Another irony pointed out by Stiglitz was that executive contracts at AIG were fully honored despite huge losses because the case was made that the government should not undermine contracts, whereas the union contracts at GM were undermined and had to be re-negotiated. One sentence from the book summarizes this: The 7 largest financial firms had losses of 100 billion dollars, were bailed out by the government with 175 billion dollars, and then gave the very executives that created the crisis 33 billion in bonuses. This book spends a reasonable amount of time on the financial crisis but then analyzes the recovery and stimulus strategies. Stiglitz points out that a crisis does not destroy the underlying assets of an economy- physical plants, natural resources, the knowledge and skills of the workforce, technical knowledge and technologies are all still there. He points out the necessary ingredients for a successful stimulus package which would include: fast action and implementation, use of the multiplier effect to spread the impact of the stimulus, address long term infrastructural problems, invest in the future through research and innovation, should be fair to the middle class working families not just the affluent, should provide relief for short term hardships and should target job loss. Stiglitz makes the case that the stimulus package after the 2007-2008 crisis was too small and only spread out the pain of a slow recovery. Stiglitz is also critical of the lack-luster efforts to restructure financial markets by stopping casino type risks in derivative markets that result in little if any larger societal good. Further, Stiglitz spends considerable effort to explain multiple strategies that could have been undertaken for homeowners other than foreclosures, none of which were pursued. There was a clear tendency to blame the financially illiterate lower middle classes for the crisis when responsibility lay with the financial industry infrastructure and its perverse incentives. Mortgage originators and banks engaged in poor risk assessments and predatory lending practices – yet most government rescue efforts went to those who perpetuated the crisis. Stiglitz points out that capitalism is an extremely robust economic model. It defeated feudalism during the middle ages. It can withstand high levels of inequality but eventually if private rewards are inverse to societal needs, then the entire system is in jeopardy. Stiglitz has studied the impact of unequal knowledge in market transactions and finds that imperfect and asymmetric information challenges the concept of transparent equitable market transactions. Therefore the interest of the consumer should be a government responsibility. Financial markets, in Stiglitz’s view, should benefit society as a whole by better allocation of capital to the most productive enterprise and to better manage risks. The financial crisis of 2007-2008 demonstrates that these markets failed. Their executives were rewarded with astronomical salaries and bonuses because they were supposed to know how to manage risks and they failed. Stiglitz points out that if these major financial firms were too big to fail, then they were too expensive to save and too big to manage. In fact, the failure of Lehman Brothers demonstrated these firms were unable to calculate their own worth. Lehman Brothers was showing 26 billion in assets on their books when in fact they had over 200 billion in losses. Stiglitz finds the argument that TARP was necessary to strengthen the firms that managed most of American’s pension funds. He points out those retired and retiring tax payers would benefit more if the TARP money had been used to strengthen Social Security. I found the book to be fascinating and far reaching with sections on how stock options for executives dilute share owner equity, the use of off-shore money havens that help support terrorist activities, and the Glass-Stegall act of 1933 that built a firewall between commercial and investment banking. Like Kaynes, Galbraith, and Krugman, Stiglitz does not think markets are self correcting. He points out that the irony of the Reagan-Thatcher approach to less government regulation led to more government control.

Generally, Joseph Stiglitz does a good, but tortuous job, of dissecting the problem and puncturing the arguments of the free market proponents. The first third of this book dwells on the many factors at play that precipitated the crises. Milton Friedman and the 'Chicago Boys', are particularly singled out for their part in creating the intellectual environment that nurtured and fed the build-up to the crises over the last 30 years or so. In the end, it's clear that special interests, an unhealthy and incestuous relationship between Washington (both Republican and Democrat) and Wall street, and the blind belief of the right in the ability of markets to self govern and self correct combined to create a dangerous cocktail that culminated in the collapse of the financial system and misery for millions across the globe. The shocking amounts of tax payer money both in America and the UK thrown at rescuing the fat cat investment banks are contrasted clearly by Stiglitz with America's handling of the Asian financial crises of the late 90's and developing nations at large, leading him to correctly question the fundamental morality of American Free Market Capitalism. His conclusion is damning to say the least. Throughout the book, Stiglitz is at pains to emphasize the impact of the banking crises on the lives or ordinary people, and how they will bare the financial burden in the long run. I also found this book very depressing. Stiglitz outlines the seemingly intractable problems America faces in the next twenty years that require serious thought and action. The depressing part is that the Right continues to propose the very medicine that will make the problems even worse, making the wealthier richer, and average Joe poorer and ultimately sinking America. Does America have the sense to see through the key issues of special interests, the rise of the corporate welfare state, the decline of the middle class and the issues of its corrupted economic and political system? Stiglitz, like Robert Reich in 'Super Capitalism', shows how lobbyists, at the behest of Wall Street and big business in general, have inveigled their way into the very fabric of American democracy to subvert it to the cause of big business, and in the process disenfranchising ordinary Americans, taking from them their chance of a better life. The American dream is no more. It has to be rebuilt. Period. The tragedy is, if the warnings in this book are not heeded, and an enlightened approach to government (read: curbing or outlawing of Government lobbying), economic management (read: capitalism within a strong and proactive regulatory regime), and an end is put to corporate `welfarism', America will continue on the path of long term economic and social decline. The last quarter of the book discusses in layman's terms the debates raging within the economics profession. It seems that the Keynesian view of how the economy functions slipped out of vogue in the early 70's to be replaced by monetarism which found its expression in the policies of Ronald Reagan and Margaret Thatcher and ultimately led to where we find ourselves as a society now. In terms of writing style, this book is heavy going, and could have been better organized in my view. Many Centrists and enlightened thinkers will no doubt look to Stiglitz to provide a moral and intellectual compass with which to argue their case, so I feel an opportunity to present a more structured argument to support them has been lost because of the way this book is organized. I also feel Stiglitz should have used more graphs, tables and illustrations to make his point. Having said that, the reference section at the rear of the book is quite comprehensive, and for those inclined, provides a valuable resource for further research. An extremely important book.

Joseph Stiglitz explains economic nitty-gritties for the layman. Complex terms, products, and dealings are simplified so well that the reader fully or near fully understands what happened in 2008 and the years before and after it. I have read several great books on the subject and this has been the best of all. Stiglitz discusses what went wrong and why and proposes solutions for the future. He also tells how likely those solutions are.

Joe Stiglitz speaks out again - eloqently, forcefully, convincingly. He is, in the words of Paul Krugman (New York Times), "an insanely great economist". His new book is nothing less than an intellectual settling of accounts with Wall Street, America's money-grabbing elites, and with Washington, the country's hotbed for corrupt politicians who deem themselves economic experts. Siglitz relentlessly takes them to task, blaming them for the disaster that has befallen the finanical world and exposing their professional incompetence in times of turmoil. The bubble has popped, but, as the author makes clear, it is not the capitalist system per se that has failed - the system is sufficiently flexible and has proved adaptable to serious challenges more than once -, nor are the monetary institutions of the Federal Reserve or the World Bank malfunctioning. It is the misconduct of chief executives and central bankers whose selfishness is about to ruin the country, dragging other countries into the abyss. In the spectacular crashes of Enron, World Com, and Lehman Brothers or in the blatant manipulations of Bernie Maduff, this conduct has been nothing short of criminal. What, in Stiglitz's view, conduces to unethical practices and aggravates the crisis is, more than anthing else, the "madness" of excessive deregulation.Under the guise of liberalism deregulation has caused the laissez-faire policy (ushered in by Maggie Thatcher and Ronald Reagan in the 1960s) which is now coming to fateful fruition. Carried to extremes, it has fostered a set of popular expectations to the effect that in a free market economy everybody expects everything to be up for grabs - commodities as well as consumer goods, public space as well as natural resources. In a real estate market totally out of sync with reason and realism the latter-day robber barons have wrought havoc in a way that is unprecedented. It will take the country a long time to recover. However, while unabashedly chiding the US monetary establishment, Stiglitz does not rest content with criticizing the free market ideology of Adam Smith's disciples. As economist he is also a humanist and a moralist. He addresses himself to the issues of moral values and societal trust. In a chapter entitled "Toward a New Socity" he delineates prospects for a future guided by the principles of solidarity and fairness. It is rare that contemporary economists venture into this field. All the more reason for the public to take note of this remarkable book.

A sharp analisys of actual crisis and its causes and consequences. Stiglitz is a great economist, and all pof his books are wrtitten very friendly even for one that's not good at economics stuffs. Nice reading.

As the Former Chief Economist of the World Bank, and a Nobel Prize Winner, Stiglitz clearly can write with authority on the world economy, and this book certainly deserves to be on the reading list of all candidates and interested voters in the next Election, if they would like to understand why American Style Capitalism has brought such abysmal consequences to America and the U.K.. The markets failed their in societal functions of managing risk and the mixed motivations of the Rating Agencies meant that the Institutions were not adequately appraised of the risks that they were taking. "In short, there was little or no effective quality control". Securitization did indeed spread risk but this was more than negated by the asymmetries of information. In other words people had little idea of the detail of what they were buying. Externalities are to economics what `collateral damage' is to the military; the damage caused to those who were not involved in the transaction. "If there are externalities, one can't logically believe in market fundamentalism." Contagion between financial institutions is of course the `quintessential externality'. Many who were sold sub-prime mortgages were ill equipped to understand what they were taking on, and yet they lost their homes, life savings, and dreams of a better future. Many were driven to divorce, some to suicide. The `deregulation frenzy' of the eighties and nineties left these people ill protected. Some of the thrust for deregulation was undoubtedly inspired by political campaign donations by Financial Institutions. Many of the financial products that were bought and sold by the banks were based on flawed models which were often evaluated by `lawyers untrained in the subtle mathematics of the models'. The Obama administration avoided nationalizing the banks, but it stands accused of socialising the losses and privatising the gains - what Stiglitz calls `Ersatz Capitalism'. Paradoxically the belief in free markets has led to the largest Government intervention in history. It has also been shown conclusively that the term `self-regulation' is an oxymoron. Serious though the subject matter is, this book is easy to read, and offers many excellent ideas on the way forward for a better kind of capitalism.

un point de vue saisissant sur la crise, ses causes et ses conséquences. La mise en perspectives des acteurs de la crise permet de mieux comprendre le pourquoi du comment.