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Freefall: America, Free Markets, and the Sinking of the World Economy Paperback – October 4, 2010
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- Michiko Kakutani, The New York Times
“Asks some basic and provocative questions… Freefall is a must-read for anyone seeking to understand the roots of the financial crisis. Stiglitz brilliantly analyzes the economic reasons behind the banking collapse, but he goes much further, digging down to the wrongheaded national faith in the power of free markets to regulate themselves and provide wealth for all.”
- Chuck Leddy, Boston Globe
“As a Nobel Prize winner, member of the cabinet under former President Bill Clinton and chairman of his Council of Economic Advisers, Joseph E. Stiglitz has some practical ideas on how to ease the pain of the Great Recession and maybe help prevent the next one.”
- Carl Hartman, Associated Press
“Freefall is a spirited attack on Wall Street, the free market and the Washington consensus.”
- David Smith, The Times [London]
“Stiglitz offers a powerful account of the financial meltdown and criticizes the Obama Administration for 'muddling through' rather than pushing aggressively for change…. An excellent overview from a Nobel prize-winning economist of what caused the crisis and what reforms should be enacted…. I can only hope Obama makes room for it on his nightstand.”
- James Pressley, BusinessWeek
“Stiglitz is the world's leading scholarly expert on market failure, and this crisis vindicates his life's work. There have been other broad-spectrum books on the genesis and dynamics of the collapse, but Freefall is the most comprehensive to date, grounded in both theory and factual detail…. the definitive critique to date of how the Summers-Geithner strategy fails, both as economics and as politics…. The tone of this book is good-humored and public-minded.”
- Robert Kuttner, The American Prospect
“This is the best book so far on the financial crisis. Joseph Stiglitz . . . is knowledgeable about the historical background, immersed in the policy debate and a pioneer of the economic theories needed to understand the origins of the problems.”
- Financial Times
About the Author
- Item Weight : 13.6 ounces
- Paperback : 480 pages
- ISBN-10 : 0393338959
- Dimensions : 5.5 x 1.2 x 8.3 inches
- ISBN-13 : 978-0393338959
- Publisher : W. W. Norton & Company; Reprint edition (October 4, 2010)
- Language: : English
- Best Sellers Rank: #1,085,416 in Books (See Top 100 in Books)
- Customer Reviews:
Top reviews from the United States
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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.
a. How ol' Humpty got in that precarious position in the first place (What was he thinking? What were his assumptions? Why did he go up there anyway?).
b. Why "all the king's horses and all the king's men - couldn't put Humpty together again."
Columbia University's Nobel Prize winning economist, Joseph E. Stiglitz, provides the perspective that other authors who have authored volumes on the U.S. economic crisis have overlooked. It's a terribly important work that proposes explanations for the questions posed above. It's truly about 'freefall' - "When the world economy went into freefall in 2008, so too did our beliefs. Long-standing views about economics, about America, and about our heroes have also been in freefall.(p.xvi). Well, what might this all mean? Stiglitz is hopeful: "The crisis will, I hope, lead to changes in the realm of policies and in the realm of ideas." (p.xiii).
From Stiglitz' perspective, "This book is about a battle of ideas, about the ideas that led to the failed policies that precipitated the crisis and about the lessons that we take away from it. In time, every crisis ends. But no crisis, especially one of this severity, passes without leaving a legacy. "(p.xii).
It is distinctly a crisis of our own creation, as Stiglitz says: The system that failed so miserably didn't just happen. It was created. Indeed, many worked hard-and Spent good money-to ensure that it took the shape that it did. (P. xxiv.).
According to Stiglitz, the crisis is evidence that the marketplace of ideas failed us (particularly as this term relates to 'herd instinct'): "The marketplace for ideas is no more perfect than the marketplace for products, capital, and labor. The best ideas do not always prevail, at least in the short run. But the good news is that while the nonsense 0£ perfect markets may have predominated in, certain parts of the economics profession, some scholars were trying to understand how markets actually worked. Their ideas are there, now, to be used by those who wish to construct a more stable, prosperous, and equitable economy." (P. 274).
The crisis pointed out the central role of the "human element" that remains so dramatically misunderstood in economic behavior: "But the central bankers were, in a sense, right: no one with credibility in their circle challenged the prevailing view, but there was a tautology: no one challenging the prevailing view would be treated as credible. Sharing similar views was part of being socially and intellectually acceptable." (p. 253) --- a terrible cost to pay for ignoring the voices of dissent, in favor of a perceived "socially acceptable" policy position.
Now what? Stiglitz is clear: "The old rules, whether they worked well in the past, are not the right rules for the twenty-first century." (P. 207)...the final parts of this volume provide specific examples of what the authors suggests.
Finally, one sentence from Stiglitz really caught my attention. He writes, "Trust is the grease that makes society function." (P. 289). "Freefall" is really all about the process of how the marketplace of ideas 'greased trust' throughout the entirety of our economic system, facilitating our fall, and how we might approach putting the pieces back together again.
Needless to say, the latter is hardly a completed process and/or one where the marketplace of ideas is moving toward consensus. Will we be more successful than "all the King's horses and all the King's men?"
Imagine not having your head attached to your shoulders correctly...
Top reviews from other countries
The book is understandable for all audiences but some of the economics jargon may come a bit thick and fast for people who have not previously studied the subject.
Overall, a great read for budding economists and experts alike.