Trevor's Reviews > Freefall: America, Free Markets, and the Sinking of the World Economy

Freefall by Joseph E. Stiglitz
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Feb 17, 2011

really liked it
bookshelves: economics
Read in February, 2011

This is an important book and perhaps the best I’ve read on the current crisis - its causes, the reasons for those causes, possible solutions and the moral implications of our obsession and blind faith in free market economics: a theology of greed whose time has surely past.

In a decade in which per capital GDP in the US increased by ten percent while average wages decreased by 4 percent we have learnt that some rising tides only lift the biggest of boats. The increasing inequity of the US is but reflective of the increasing inequity in the rest of the world. But inequity has social, moral and even economic costs.

One thing that clearly got under Joseph’s skin was that after bringing the world economy to the brink of total collapse due to their failing in the basic requirements of their jobs, after only being saved by what may well prove to be a terribly flawed policy of pouring nearly a trillion dollars into the financial system to keep it afloat, the guys who got us into this mess gave themselves huge bonuses! The breathtaking audacity of such an action ought to have caused some kind of revolution – instead we effectively said, “Oh those guys, will they never learn…” Of course, even bankers couldn’t justify talking ‘performance bonuses’ at such at time – and so they called these dump-trucks full of money things like ‘retention fees’.

What is also clear is that, despite his clear warnings that we need more regulation, more effective government intervention in the economy, a closer alignment of incentives toward social needs – nothing is likely to change. And why? My own theory is that the US public is so enamoured with the idea that they live in the best of all possible worlds that too much of their effort is spent trying to find ways to justify the unjustifiable (to which the most unjustifiable is the extreme and increasing inequity that is central to economic, foreign policy, environmental degradation and elsewhere) that there is no strength left to look at how we might actually make the world a better place. Anyway, if this is already the best of all possible worlds …

Markets are efficient, self-interest brings social good, the blind-hand of the market fixes all, big government is bad government – all of these are myths carefully and clearly explained and deconstructed in this book. He also gives a fascinating explanation of the work he did in winning the Nobel Prize around how information asymmetries (even seemingly minor ones) destroy the possibility of market efficiency. And all this in clear and easily understood prose.

He points to the normative role neoliberal economics plays – saying that the more time people spend in business school and economics classes the more selfish and (let's not be cute) repulsive they become. It really is time to worry about the consequences of breeding generations of greedy bastards whose sole reason for being is to pillage and to gorge.

This is a lucid book, it is a book that challenges the existing assumptions (particularly neoliberal economic assumptions) and presents a way forward for a more stable, ecologically sustainable and more just society. It is written by a winner of the Nobel Prize for Economics (not that that is anything worth boasting about – they even gave one of those to Milton Friedman) and a chief economist with the World Bank. This is a guy from the centre of the establishment – when people like him start telling us things have got to change, well, who knows, perhaps it is time to start paying attention.

But I’ve been reading too many articles lately in the business pages of the paper saying things like, ‘remember when people where talking about the end of free market economics in all of the excitement caused by the GFC – when in fact what we need is a bigger dose of less regulation’. Those are the bastards likely to win. As we have seen, No Drama Obama is no salvation – we are allowing the audacity of greed to trump the audacity of hope, it seems. But perhaps, if we can at least learn and remember what these bastards have done by reading books like this, to remember what they have gotten away with, perhaps then we can move from empty hope to positive action.
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Comments (showing 1-19 of 19) (19 new)

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message 1: by [deleted user] (new)

I heard Stiglitz give an excellent presentation last year about the economic crisis. The whole audience was riveted for over an hour. Not bad for an economist.

My sense is that a lot of the US public - or at least most of those who bother to vote - are quite content consuming and believing the endless stream of infotainment that the TV networks call "news." Except for public broadcasting, commercial TV channels have basically become mouthpieces for the rich and powerful. Same for a lot of major newspapers. There is little to no mention of income inequality, environmental degradation, or through analyses of foreign policy.

I have to disagree about business school. Greedy business school graduates were most likely greedy teenagers or young adults on day 1 of school. Business school students can concentrate in areas like human resources, organizational psychology, accounting, and other disciplines that have nothing to do with gaming the system. I worked for my father's small business in high school (read: free labor) and became interested in how organizations operate, and eventually got two business degrees. Actually a central theme in my MBA program was the need for a healthy balance between regulation and the so-called free market.

Trevor He is beautifully clear. You are right, of course, business school isn't anywhere near as consistent in turning out inhuman monsters without souls. This is possibly something they will need to look at in the future, as surely there must be some kind of efficiency measure that this proves they are failing in.

He makes some very interesting comments on what he refers to as the intellectual incoherence of many of the arguments used by neoliberals. Particularly telling was his linking of Greenspan's call for people to take out variable interest rate loans and how this ought to be completely inconsistent with a belief in efficient markets. I guess I would add one of my own - that it is interesting that we need so many administrators (which is what I guess a Master of Business Administration makes one) in what I keep being told is a completely unplanned economy. All I can say is it is a damn good thing these people rarely get to act on the ideas they are supposed to believe in, or we might be in more trouble than we already are. Thank god someone is training people to plan and administer.

message 3: by [deleted user] (last edited Feb 17, 2011 06:48PM) (new)

It really is something how many people have fallen for the myth of the unplanned economy. The role of government in determining supply and demand is covered pretty early on in basic economics. Also, if it truly was a purely free market there would be no need for companies to have government relations offices or pay political lobbyists gazillions of dollars on an ongoing basis.

message 4: by Rosie (new)

Rosie Brocklehurst

Above is the link to a documentary film called Inside Job, out on DV in March, which is first in this medium to expose lies and greed to a shcoking degree. Will make you spit. Also exposes the venality of academic economists in the pay of banks.

Revolt by the masses in UK however is not something we are seeing yet as boss class and old Etonian politicians have diverted attention towards whipping up a frenzy against fraudsters of the welfare state. However, with inflation spiralling ( much higher in reality than the 5.1 % claimed) and unemployment soaring, the demand for blood from the correct target may build.
Meanwhile, some bankers are relocating to Switzerland.
HSBC has long threatened to move to Asia.
I fear that we will have to wait for the next crisis of capitalism for revolt of Egypt-type scale.

Trevor Gosh - I'm so disconnected that I didn't know this was out - I'm going to try to see it tomorrow night. Thanks Rosie.

Oh, and it is depressing that as soon as a US President congratulates a people on their revolution I immediately think the revolution can't have gone far enough.

message 6: by [deleted user] (new)

Rosie wrote: "...boss class and old Etonian politicians have diverted attention towards whipping up a frenzy against fraudsters of the welfare state"

Something similar is happening in the US. Bill Clinton's former Labor secretary just wrote about the middle and working class being pitted against one another to deflect attention from much-needed reforms.

Trevor I did see Inside Job today - good god! I'm not totally sure how that film got made, but I do hope lots of people get to see it. It makes the viewer as mad as hell. There are some amusing bits where either the bastards say things that are so gob smacking that laughter is the only response left or where the film maker gets one of them to squirm so much that, you know, if they were human I would almost feel sorry for them.

The film ends by saying that the same people still run the world and are still stopping regulation of the industry and are still gorging themselves. They still pay themselves 'retention bonuses' because our financial system is so complex that we need to retain their 'intellectual capital' to make it work (even if they can barely achieve that themselves). If there was ever a reason for 'simplifying' the financial system through re-regulation, I think that is it - clearly they are too stupid to run it and too greedy to be trusted with it.

I can highly recommend the film - although, it is a good idea to look up Ponzi Scheme before you go and not a bad idea to have some idea about how CDOs were supposed to work. The film is really not a substitute for this book - this book gave much more detail and was much easier to follow. There is actually too much information to be taken in for one short film - but this is such an important topic I'm really glad such a film was made.

I think we have virtually missed the opportunity to reintroduce regulatory frameworks to manage risk in the financial sector this time around - and that abject failure will be Obama's true legacy, well, and the crash that is coming with his name on it. The planet really can't afford to wait too long for the next crash - let's hope people do something more about that one than they have about this one.

message 8: by [deleted user] (new)

Trevor wrote: "They still pay themselves 'retention bonuses' because our financial system is so complex that we need to retain their 'intellectual capital' to make it work (even if they can barely achieve that themselves)."

Yes, because it's incredibly difficult to make profits from money that the Federal Reserve provides at a rate of nearly 0%.

message 9: by Cyril (new)

Cyril Hopkins Thanks for the insight into the book. I've pegged it as one of my reads in the coming days. I'm just thinking aloud and wondering whether in the book he proposes a fail-proof system as opposed to the present, which brings up countermeasures for the existent system. As per any rational inquiry already existent systems have flaws which result in pumping non-existent money into the economy to bring higher inflation, bankruptcy of companies resulting in job losses and market crashes, credit policies which encourage money spent but not yet earned which again is high risk, questionable ethics and practices to circumvent policy framework loopholes (these people are the ones in demand with high bonuses pocketed every year) ?????

Trevor I've just taken the book back today or I would go to the last chapter for you and list his recommendations. The short answer is yes. He repeatedly calls for the re-regulation of the economy. He also thinks that the US dollar as the world currency is problematic and that the 'reserve system' (where countries feel compelled to hold large quantities of US dollars as essentially insurance) is not good for anyone. He also points out that 'business as usual' - that is, capitalism needing to grow at 3% per year mostly through consumers borrowing money they can't repay to buy stuff they don't need - isn't sustainable in any sense. It is surprising to read an economist say rational things about the environment - it is almost enough to give me a sense of hope, but I try not to get too carried away.

His complete outrage at bankers and their bonuses is palpable, sincere and constantly repeated throughout the book. He points to other countries that actually did something about this and calls on the US to follow suit.

A friend of mine sent me a link to a This American Life episode on money as a figment of our imagination - - which was incredibly interesting. I didn't know the Fed had put over a trillion dollars into the economy following the crisis nor that it now owns quite so much real estate.

Yesterday someone else on this site complained about my supposed support for rent controls - hard to imagine anyone in the US singing the praises of a free market in housing at the moment - but there you go. The scary thing is that people will still argue that things could have been worse when all of the world is ashes.

message 11: by Ian (new) - added it

Ian Vinogradus Trevor, would you still recommend this as the best of the GFC books? Any others?

Trevor This was very good - but in an odd kind of circularity this one was also very good at explaining what happened:

Stiglitz's latest The Price of Inequity and Krugman's End this Depression Now! are also well worth reading.

message 13: by Ian (new) - added it

Ian Vinogradus Thanks, Trevor.

Trevor Let me know if you read any of them and write a review - I miss so much now, but I would be really interested. This stuff makes me furious - that there is an all too real possibility that Romney will be President soon and that we will go back to rewarding these bastards even more than Obama already has does my head in.

message 15: by Ian (last edited Oct 29, 2012 06:18PM) (new) - added it

Ian Vinogradus When I make a choice, it could be as soon as November, early December.

I've just read this for practice:

Trevor I've been recommended that repeatedly - need to get onto it. I'll read your review tonight.

message 17: by Ian (new) - added it

Ian Vinogradus It's very readable, but I don't think you'll learn much from it that you don't already know.

Mind you, it made me think about a lot of things.

Trevor Yeah, philosophy is like one of those kaleidoscopes - you can know all the bits and still be surprised by the new patterns they fall into.

message 19: by Ian (new) - added it

Ian Vinogradus That's probably a good description of the way I ended up writing my review.

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