Book Review: Freefall by Joseph Stiglitz

Joseph StiglitzThe flaky mortgage lending was aimed at exploiting the lower classes – he would say, deliberately. This is a clear and level-headed book on the causes of the American financial crash and the botched solutions to it.

Joseph Stiglitz is  a winner of the Nobel Prize in Economics, and a former head of the World Bank: hardly a political firebrand, but his book is deeply critical of the malfunctioning of the financial institutions and regulators which led to the crash, and the lack of truly systemic solutions since then. I have summed up key points from the book below.

  • There is a need for better measures of individual wellbeing – there is one created by the UNDP.
  • The US has limited individual security benefits, for fear of rewarding laziness or incompetence, yet in effect it has increased corporate security benefits (bailouts etc.)
  • “Rugged individualism combined with rampant materialism has led to an undermining of trust”.
  • “Securitization” removed any personal relationship between borrowers and lenders, and hence any scope to adjust or restructure problem loans.
  • “This crisis has exposed fissures in our society, between Wall Street and Main Street”.
  • We have seen an increasing short-termism, on the part of individuals, firms and government”.
  • He sees part of the role of government as to have a vision, to think longer-term. The system of campaign contributions and lobbyists makes this very difficult.
  • In 2010 “the total gap between what American homeowners owed and the value of their homes (was) between $700 and $900 billion.”
  • Commercial real estate also has a big “underwater” problem, i.e. the value of loans exceeds total value of property.
  • The way the Obama Government intervened to ‘rescue’ the banking sector has not restored lending to small/medium businesses, which is well below pre-2008 levels.
  • He cites evidence that the US treasury is overly identified with the interests of the building sector.
  • he talks of ‘Keynesian’ versus Hooverite approaches to recession, the first being that Government must increase spending, the latter that deficits must be cut to restore confidence. He gives many examples where this hasn’t worked.

The Dodd Frank Act of 2010, aimed at reforming financial regulation, is described by Stiglitz as “a Swiss cheese bill – seemingly strong, but with large holes”. Key elements are:

  1. Creation of an independent Consumer Financial Protection Bureau – a hopeful step.
  2. A systematic regulator – merely a council who advise the Fed.
  3. Curbs on excessive risk taking: pretty weak in actuality.
  4. Carbon derivatives: pretty weak in actuality.

He believes that the US “faces the risk of another major crisis within the next fifteen years” – most of the problems have barely been addressed. Trust remains low, and the global credibility of the US has been much weakened.

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