By James Kwak
I only recently finished reading Freefall,* Joseph Stiglitz’s book, so this review comes about two months late. It took me a while partly because I was busy, but partly because I didn’t feel a lot of dramatic tension . . . since I agreed with almost everything he said.
Unlike most crisis books, Freefall is relatively short on what caused the financial crisis. The historical background is mainly laid out in Chapter 1, “The Making of a Crisis,” although there is discussion of specific problems in later chapters, such as Chapter 4, “The Mortgage Scam.” Mainly this book is about the response to the crisis, what was wrong with it, and what needs to change in the future.
Reading the book gave me a familiar feeling. You see, our book (13 Bankers) is largely about historical and political background–our Chapter 1 begins with Thomas Jefferson and Alexander Hamilton, although most of the book is about the period since 1980–so there is relatively little topical overlap between the two. But where they do overlap, particularly in the discussion of government responses to the crisis, I had the sensation that we were saying much the same thing.
In Chapter 5, “The Great American Robbery” (by which Stiglitz is referring specifically to the bailouts of 2008-2009), Stiglitz replays the debate of a year ago over how to rescue the financial system–a debate that pitted Stiglitz, Paul Krugman, Nouriel Roubini, and others, who favored government takeovers of sick banks, against Tim Geithner, who convinced the rest of the administration that it was better to support the banks in their existing form. Stiglitz is actually considerably more acerbic than Simon and I:
“Almost surely, the failures of the Bush and Obama administrations will rank among the most costly mistakes of any modern democratic government at any time” (p. 110).
“The Bush and Obama administrations had made a simple mistake . . . that the banks’ pursuit of their own self-interest was necessarily coincident with what was in the national interest. . . .
“Nor did the deregulators and the politicians who stood behind them want to admit the failure of the economic doctrines that they had advocated. They wanted to return to the world as it was before 2007” (p. 111).
“Just as Bush used 9/11 and the fears of terrorism to justify so much of what he did, the Treasury under both Bush and Obama used 9/15–the day that Lehman collapsed–and the fears of another meltdown as a tool to extract as much as possible for the banks and the bankers that had brought the world to the brink of economic ruin” (pp. 118-19).
The problem, Stiglitz argues, is that even if the financial system was stabilized, the way it was stabilized has made the recovery “slower and more difficult than need be” (p. 135), and has also helped undermine public confidence in government, exacerbating the dysfunctions of our political system.
When it comes to financial regulation, Stiglitz is also highly critical, although here he aims his guns more at the financial sector than at the administration (the chapter is titled “Avarice Triumphs over Prudence”). Because of the threat of regulatory capture, he favors simple rules: “the regulations have to be simple and transparent, and the regulatory structure has to be designed to prevent excessive influence from the financial markets” (p. 149).
And this is what gave me that comforting feeling. I generally feel insecure about what I write. Having a Nobel Prize winner saying many of the same things makes me feel a little more confident. That doesn’t mean that what we wrote is true (many Nobel Prize winners have said many things that were false), but it reduces the chances that we wrote something that is stupid.
Freefall has a considerably wider scope than just finance, however. Stiglitz also discusses other issues such as the role of government in the economy, global imbalances, and the faults of the economics profession. So I would consider it more than just a crisis book; it’s Stiglitz’s blueprint for what needs to change in the world.
* I got a free copy from the publisher.