Tuesday, August 6, 2019


Freefall by Joseph Stiglitz Essay Freefall: Free markets and the sinking of the global economy by Joseph Stiglitz (2010) One page Summary Joseph Stiglitz is an American economist and a professor at Columbia University. Dr. Stiglitz is currently the Chair of Columbia University’s Committee on Global Thought. He received his PhD. from the Massachusetts Institute of Technology in 1967. Dr. Stiglitz served as the World Bank’s Senior Vice President for Development Economics and Chief Economist from 1997 to 1999. He was the Chairman of President Clinton’s Council of Economic Advisors before his tenure at World Bank. In 2001, he was awarded the Nobel Prize in Economics for his analysis of markets with asymmetric information and pioneered pivotal concepts such as adverse selection and moral hazard. He also founded a leading economics journal namely The Journal of Economic Perspectives. In 2011, Dr. Stiglitz was named as one of the 100 most influential people in the world in Time. Freefall is a book concentrated at the financial crisis of 2007-2009. It is also a book about a battle of ideas, essentially the ideas that led to failed policies that precipitated the crisis. Nobel laureate, Joseph Stiglitz uncovers the fundamental causes of the crisis and the flawed policies taken by the financial institutions as well as the Federal Reserve in a historical, political and comparative context. The financial system may have exacerbated the collapse but the crisis instead as he argued, originated in an overblown housing market, which pushed the creation of America’s addiction to consumption when it should be saving. He argues about the market imperfections and misaligned incentives that distorted the decisions made by everyone from mortgage originators to credit-rating agencies. He mentions about regulators making the mistaken judgment that markets worked well and no regulations were needed. Under this misjudgment, banks were able to transform risky subprime mortgages into AAA-rated products and encouraged the uninformed poor people to take out variable-rate mortgages which resulted people rushing to get what seemed like ‘free lunch’. Stiglitz then mentions the policies made by both the Bush and Obama administrations at that time. He sees the little change from the Republican, far-right days of Obama’s predecessor, George W. Bush. Despite Obama was elected on the promise of ‘hope’ and ‘change’ and was forced into the midst of the economic crisis from the first days in office, Stiglitz claims the restorative actions taken were done in a ‘muddle through’ way and describes how the Obama administration has shown a disturbing ongoing complacency towards bankers and continued to bail out ‘too big to fail’ banks that were prohibited by the Glass-Steagal Act in the earlier era. As a result, the government injected taxpayers’ money into the banks which allowed resumption of the culture of paying out outsized bonuses and taking high-risk transactions. He also criticized Obama refusing to formulate a vision by stating the entire electoral appeal was solely based on feel-good vagueness and argued that the lack of vision would put the ‘reform’ p rocess in halt which leave the country more fragile. He argues the state should have forced the banks to restructure financially at the height of the crisis, wiping out shareholders and instead handing out ownership to bondholders. Furthermore, he argues the need for a second round of stimulation plan beyond 2009’s $789 billion package as unemployment stood at around 10% and university graduates were lost in the harsh economic climate under the drastic cut in entry-level jobs. In the final chapters, Stiglitz emphasizes the need for regulations and argues the developed world must need a reformed financial system which performs core functions namely sound risk management and efficient payments mechanism. Whilst Stiglitz advocates for a forcible break-up of top banks together with statutory protection for the financial products such as derivatives, he argues that citizens, policymakers, government leaders and the private sector needs to rethink on how they value outputs in the economy so that it will narrow the inequalities in the society.

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