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The Stiglitz Report: Reforming the International Monetary and Financial Systems in the Wake of the Global Crisis Paperback – April 27, 2010
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About the Author
With an introduction by Miguel d’Escoto Brockmann, United Nations General Assembly President
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The crisis that we have recently/are going through has many causes, microeconomic level incentive problems coupled with informational asymmetries allowed for the emergence of large scale misallocation of resources. There is a general widening of the distribution of wealth which has repurcussions to consumption patterns in the long run in developed nations. The surplus savings fuelled into the US came about as a result of surplus out of developing nations who felt the need for foreign exchange buffers to tide them over whatever next crisis would emerge. This behaviour resulted from previous crisis in which these countries were forced to undertake pro-cyclical instead of countercyclical policies. The risk aversion that exists because cross border capital flows themselves seem to be pro rather than countercyclical might even imply that there should never be a sovereign nation that has privelidge of being a global currency as they might be forced to run a deficit just to balance the surpluses run abroad that are embedded behaviour. Institutional arrangements both at the micro and macro level are discussed. The domestic institutional arrangement commentary should be heeded, the macro coordination etc will inevitably a lot more difficult.
As noted in this report quite explicitly, global commerce has advanced more quickly than global institutions to help regulate this commerce. There has been a race to the bottom in terms of regulation as the economic doctrine we have followed essentially assumed that markets regulate themselves as prices are signals that force countercyclical action. That is wrong, why its wrong is complicated and will probably never be truly understood, but asset markets and commodity markets have different dynamics and i guess we just need to accept that there are bouts of fear and greed that manifest themselves on the large scale.
Most of what this reports is reasonable. It talks to the heart of many problems and outlines what need to be fixed. It is argued forcefully that markets have their failures and that needs to be addressed period. It is in the times of crises that people can gain the momentum to affect change and we must use what has just happened to help gain the momentum to bring us to a more stable economic regime. There will be many who argue otherwise, usually due to vested interest. This is much more instructive than the recent book Freefall, and I think this is an excellent start that needs to be considered deeply by policy makers globally.
The recent meltdown of financial institutions that spread like wildfire from a few major economies to wreak havoc on the entire world should be enough to convince everyone that total disregard for government regulation of economic activity does not work, and government involvement is a necessary staple of a stable economy. (This is a lesson historians have mastered since the Great Depression.) The Stiglitz Report shows in accessible detail how this disaster could have been prevented by a robust system of regulation that must now be truly international in scope. He and his commission propose specific reforms of current practices and institutions, as well as outlining possible new international entities. Their guiding principle would be greater democratization: giving significant voice to all countries, especially the poorest, in bringing into existence a world economic system that promoted growth, stability, environmental sustainability, and greater equality for all.
The reading can be a bit tough in places for the lay person. But it is worth persevering to know what worthwhile ideas are out there. Much that is here runs counter to the still strong currents in favor of the status quo, controlled by a few national and corporate elites. We must remain vigilant lest the death of free market ideology is broadcast prematurely. One can hope that our policy makers around the world, at least, have encountered and pondered these important proposals.