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Clif's Book World

Adventures from reading books captured within short reviews.

Freefall: America, Free Markets, and the Sinking of the World Economy

Freefall: America, Free Markets, and the Sinking of the World Economy - Joseph E. Stiglitz, Dick Hill Now that I’ve read this book I have the dangerous idea that I understand economics. I learned about this book from this review by Travis. Therefore, blame him for my new know-it-all melancholy demeanor caused by exposure to the “dismal science.”

The author makes many suggestions on how to change world economics to better serve human interests. The suggestions offered seem to be good ideas to me. But I’m convinced none of the author’s suggestions will be enacted because the moneyed interests of the world, in addition to being “too big to fail,” are too politically influential to allow changes that may diminish their incomes. Welcome to the new corporate welfare state.

Financially stressful times are opportunities to make improvements. Many improvements were made to the banking system during the 1930s depression, but the author indicates that's not what has happened during the current crisis:
"With the banking system at the brink of collapse in the fall of 2008, lending dried up and the government stepped in to bail out the banks. This was the perfect time to start thinking about developing a truly efficient financial system that directs capital to where it is needed and where it is most productive in an efficient way, one that helps households and corporations alike to manage risk and that provides the basis of a fast and low-cost payment system. Instead, two separate presidential administrations undertook a series of measures to help the financial system, with little thought of the kind of financial system the country should have when if finally emerges from the crisis."

An irony that arises from the aggressive steps taken to prevent total financial collapse into a severe depression is that, by avoiding it, the public perception is lulled into thinking that things weren't so bad after all. And so now the members of congress who voted for TARP are now under attack for wasting so much money.

Another variation on this are those who say the whole mess could have been avoided if the collapse of Lehman Brothers would have been prevented. Maybe so, but there's a political side to the question to consider. The following quotation sums it up:

"A third view holds that Lehman's collapse actually saved the entire financial system: without it, it would have been difficult to galvanize the political support required to bail out the banks. (It was hard enough to do so after its collapse.)"

In other words, sometimes a bit of hardship is required to concentrate the mind.

The author of this book offers a lot of criticism on how things were done and suggests better approaches to the problems. He suggests that it would have been better to target small banks instead of big banks and home owners over bankers. He also says it would have been better to have more oversight on how the banks used money given to them by the government. I'm sure the author is correct, but I'm not convinced that his suggestions would have been administratively practical. Varied targeting and increased oversight would have required more time and increased government bureaucracy. (And we all know how popular government bureaucracy is.) Furthermore, the bankers and big investors would have complained so much that it would have become politically untenable. I think if both sides of the actions taken could be fully discussed and explored, I suspect what the Bush and Obama administrations did is about all that was possible. The author refers to it as muddling through. (Democracy and making sausage have a lot in common.)

It hurts me to say the things in the above paragraph. I would have loved forcing all investment bankers to have their salaries reduced to minimum wage until all government money was paid back. (The concept of paying big bonuses for losing money drives me crazy.) The author provided the following comparison of CEOs in various countries:

"In Japanese society, a CEO who was responsible for destroying his firm, forcing thousands of workers to be laid off, might commit harikari. In the United Kingdom, CEOs resigned when their firms failed. In the United States, they are fighting over the size of their bonuses."

The author doesn't seem to have much respect for the conservative politicians who believe that tax cuts can fix all problems:
"Unfortunately, especially in the United States, many shibboleths have inhibited figuring out the right role of the state. One common aphorism, a crib from Thomas Paine, asserts, 'The government that governs best is the government that governs least.' Conventional wisdom on the Republican campaign trail is that tax cuts can cure any economic ill -- the lower the tax rate, the higher the growth rate. Yet Sweden has one of the highest per capita incomes, and in broader measures of well-being ... it outranks the United States by a considerable margin."

We may be witnessing the end of American triumphalism:
"The fall of the Berlin Wall in 1989 marked the end of communism as a viable idea. ... historians will mark the twenty years since 1989 as the short period of American triumphalism. September 15, 2008, the date that Lehman Brothers collapsed, may be to market fundamentalism (the notion that unfettered markets, all by themselves, can ensure economic prosperity and growth) what the fall of the Berlin Wall was to communism."