Book Review - Freefall

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Book Review Freefall (America, Free Markets, and the Sinking of the World Economy) by Joseph Stiglitz, 2010 If there is no other book that you read regarding the recent fall of our economy and its continuing challenges, this should be the one. Stiglitz explains the origins of our dilemma or Great Recession in terms that usually are easy to grasp. He imparts a solid understanding of how we got here, and how we hopefully can get out. This book is packed with information and insights and is quotable on nearly every page. I will do my best to summarize its lessons in a limited space. The thesis of this book is that our financial crisis that started in 2007 was the result of excessive speculation in the real estate and stock markets, as well as billions poured into speculative investments collectively called derivatives that essentially are bets on which way segments of the economy will go (also known as hedges, as in hedge your bets). Real estate prices grew and became unsustainable as the income of the middle class was actually shrinking. But this did not stop the banks and their brokers who continued to offer loans to nearly all takers because of the profits they made from the steep processing costs. These mortgages were then sold to millions of investors from around the world who provided a seemingly endless stream of funds which were converted into securities, large investments that separated investors by many degrees from borrowers. As buyers were increasingly unable to make their payments, lenders were more in danger of failing as they had less money in reserve. Businesses started to scale back or close due to the poor availability of funds, and this caused unemployment to rise. International mortgage-backed securities began to crumble. Stiglitz is particularly critical of the way that government bailouts were handled under Bush and Obama. He tells us that although a rescue became necessary to keep the economy from collapsing, the money should have been directed toward smaller banks that would have continued investing in the economy to sustain small and middle-sized businesses. Instead the funds were funneled to the largest investment banks that had created the most toxic investments. They then got all their money back from the insurance they had purchased with AIG against failure, even while telling their investors that the investments were sound. The government (you and I) bailed out AIG at 100%, much of which went to Goldman Sachs, which means that they suffered no consequences for their recklessness. The bailout was largely engineered by former Goldman Sachs executives who had become Treasury Secretaries Paulson and Geithner. Goldman and similar firms are now using cheap funds provided by the treasury to continue the same speculation and to loan only to favored clients rather than to Main Street where the money is most needed to stimulate the economy. Thus we are again heading for trouble. Stiglitz is for strict re-regulation of Wall Street firms, including re-separating investment banks from lending banks, which was abandoned in 1999 under a bill signed by Clinton.
He argues that it is essential that massive programs be started to improve the employment picture particularly in promoting industries and jobs that are likely to become selfsustaining because they meet real long-term needs, including new technologies. This is what ultimately worked to get us out of the Depression (and what our group has been pushing for years) and the funds could be recouped by the government if given as loans. He also believes that trade protectionism is counter-productive and emphasizes using World Bank funds to build up the economies of struggling countries so that they cannot continue to bring down the world economy (Greece is a recent example). Stiglitz argues that there is no such thing as a jobless recovery because without jobs there are not enough customers to buy the products needed to get the economy rolling. A recovery based on stock increases alone is not sustainable, as we are seeing today. Just leaving the market alone in the hopes that it will ultimately improve the worlds economy is an illusion. It results in the accumulation of capital at one end of the economic scale, and less customers for real products, which causes stagnation. This way of thinking is clearly a loser to anyone who has been paying attention the last few years. Also, people often dont invest rationally, but based largely on booms and trends (anyone for a cabbage patch doll?). We all know about the emperors new clothes, but at times were willing to believe anything if enough people agree to a common myth. Ultimately the government must get involved because individuals often dont act in their own long-term best interest, but those who act on behalf of our government must have a broader and deeper perspective. Capitalism can work, but it cannot be left on its own. What hurts one ultimately hurts all, and what helps one ultimately helps all. Ill give you one quote and then encourage you to get the book yourself. Today the challenge is to create a New Capitalism. We have seen the failures of the old. But to create this New Capitalism will require trust including trust between Wall Street and the rest of society. Our financial markets have failed us, but we cannot function without them. Our government has failed us, but we cannot function without it. The Reagan-Bush agenda of deregulation was based on mistrust of government; the BushObama attempt to rescue us from the failure of deregulation was based on fear. The inequities that have become manifest as wages fall, unemployment rises, but bank bonuses soar, or as corporate welfare is strengthened and the corporate safety net is expanded as that for ordinary citizens is cut back, generate bitterness and anger. An environment of bitterness and anger, of fear and mistrust, is hardly the best one in which to begin the long and hard task of reconstruction. But we have no choice: if we are to restore sustained prosperity, we need a new set of social contracts based on trust between all the elements of our society, between citizens and government, between this generation and the future. (Pp 208-9)

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