Joseph Stiglitz Book on Economic Collapse

Freefall: America, Free Markets, and the Sinking of the World Economy. Joseph P. Stiglitz (Prof of Economics, Columbia U). NY: W. W. Norton, Jan 2010/361p/$27.95.

A Predictable and Predicted Recession
Former World Bank Chief Economist and winner of the 2001 Nobel Prize in economics declares that The Great Recession that began in 2008 has led to joblessness and shattered dreams for “tens of millions” worldwide, and “forces us to rethink” long-cherished views. “The only surprise about the economic crisis of 2008 was that it came as a surprise to so many. For a few observers, it was a textbook case that was not only predictable but also predicted.”

“How and Why Did We Let This Happen Again?”
Stiglitz explains how flawed perspectives led to the crisis and made it difficult to see the festering problems, the mistakes already made that have made the downturn longer and deeper than it otherwise would have been, and why the length of the crisis will depend on policies pursued. “We won’t and can’t go back to the world as it was before.” What is striking is that this man-made crisis appears similar to many that have gone before it, both in the US and abroad. The big question is “How and why did we let this happen again, and on such a scale?” Among the long list of those to blame for the crisis is the economics profession, which provided the special interests with arguments about efficient and self-regulating markets—even though advances in economics in the past two decades show the limited conditions under which that theory held true.

Specific Topics Discussed:
the making of the crisis and who issued warnings (those who engineered the bubble such as Henry Paulson and Ben Bernanke maintained their faith in the ability of markets to self-correct);
how the crisis quickly became global, and aftermath of the freefall (without a vision of the future and an understanding of past failures, the flawed response of the Obama administration floundered);
economic prospects as of fall 2009 (the best that can be said is that freefall seems to have ended, but there are still many shadows on the horizon such as collapse in commercial real estate);
the debt-financed consumption binge supported by a housing bubble (which has sustained the US economy and to a large extent the global economy before the crisis);
the US mortgage scam, and a plethora of bad financial products (e.g., “liar loans” where individuals were not required to prove their income);
excessive risk-taking by banks (banks don’t like transparency, because “a fully transparent market would be highly competitive” and profits would be driven down);
reforming economics (e.g., the flawed assumptions that information is perfect, or that a world with almost perfect information is very similar to one in which there is perfect information),
our economic system that encourages shortsighted behavior and economic growth based on borrowing from the future;
the “moral deficit” created by the unrelenting pursuit of profits.

The Crisis as a Distraction from Long-Term Problems
The crisis has distracted the US and much of the world from longer-term problems that must be addressed: climate change, energy, health care, education, aging populations, trade and fiscal deficits, etc. “The resources that are available to deal with them may have been substantially reduced because of the way the government mismanaged the crisis—in particular, by the money it squandered on bailing out the financial system.”

The State and the Economy in a New Capitalist Order
We now have to reconstruct a society with a better balance between the role of government and the role of the market, in turn required for a more efficient and a more stable economy. Creating a “a new capitalist order” requires:
an honest appraisal of the prospects ahead (the focus on GDP has been misleading);
a vision for America articulated as part of a global vision that addresses six kkey economic challenges: 1)global supply and demand where world productive capacity is underutilized even while there are huge unmet needs; 2) the distortion of prices by treating environmental resources as free; 3) the excess of consumption in some parts of the world; 4) the manufacturing conundrum where employment decreases as the sector grows; 5) growing inequality in most countries of the world; 6) growing financial instability);
addressing a series of sectoral problems in the US (inefficient health care and education, transportation, manufacturing);
promoting innovation while preventing exploitation.

Needed: A New Global Financial Order
“If no action is taken to manage the global financial and global economic system better, there will be more, and possibly worse, crises in the future.” The US will still remain the largest economy, but the way the world views America has changed, and China’s influence will grow. With the ballooning of America’s debt and deficit, and the unremitting printing of money by the Fed, confidence has eroded further. This will have a long-term impact on America and its standing, but it has already generated a demand for “a new global financial order,” including a new global reserve system (an idea pushed by Keynes some 75 years ago) and, more broadly, new frameworks for governing the global economic system. The new frameworks for the global economic system include:
a globally coordinated stimulus; and
a globally coordinated regulatory regime (without comprehensive regulation, there will be regulatory evasion, and finance will go to the least regulated country; there is also the risk of fragmentation of the global financial system, as each country tries to protect itself from the mistakes of the others).

Lack of Coordination: Potential Impacts
Without such coordination, many countries may conclude that unfettered American-style capitalism has failed; a variety of forms of excessive market intervention will return, and these will also fail. The poor suffered under market fundamentalism and trickle-down economics, and “they may suffer again if new regimes get the balance wrong…There has been no successful economy that has not relied heavily on markets.” As for a new global reserve system, “the world is likely to move out of the dollar and into a multiple-currency reserve system, producing global financial instability in the short term and a regime more unstable than the current system in the long term.”

What the US Should Do
The US should also do what it can to strengthen multilateralism, which means democratizing, reforming, and funding the IMF and the World Bank so that developing countries find less need to turn to bilateral support.

Among the several dozen recent books on The Great Recession, Freefall is one of the best if not the best. It is authoritative, future-oriented, clearly written for a general audience, and takes a necessary global perspective on what must be done to create a new financial order after the “near-death experience” of the global economy. It is sharply critical of governments, financial institutions, and the economics profession. The casual opening estimate of “tens of millions” seriously harmed worldwide is probably understated, while the hope that this event “forces us to rethink long-cherished views” is probably overstated. Offers 63 pages of footnotes, but, unfortunately, no index.