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

I admit that economics confuses me, so when I read a book written in lucid easy to understand language I can begin to understand a compound-complex idea a little more clearly. Nothing in economics is as it seems because politics can often obfuscate with ideological explanations that are neither simple or even partially true when based on politics. Stiglitz doesn't say that the free market can't work, but that it isn't the entire answer. Regulations, as the banking meltdown of 2009 demonstrates, are necessary to prevent greed from becoming the dominating motivation for Wall Street and big banks, especially investment banks that measure success only in terms of how big their next bonus will be. "Freefall" doesn't give us all the answers, and again I admit that I still have questions, but for a basic understanding of the markets as they played out in the past couple of years and how deregulation merely increased the problems for most of Main sreet this is a very good place to start. Some critics have already panned this book as a call to socialism, but those critics obviously lack even a basic understanding of what socialism really is and are only looking for a buzz word to sustain the belief that a totally "Free Market" system is the only good thing, when in fact it increases the chances of boom and bust cycles coming even closer together in the future. To begin, modest regulations are all that might be needed, and if bankers once again act trustworthy and preform ethically it could be enough. If greed continues unabated, then the middle class will disappear and only the wealthiest will profit.

Professor Stiglitz has repeatedly spoken truth to power. He wrote about the perils of unchecked globalization, the disaster of the Federal Reserves policies in the 90s and 00s, the wrong-footed solutions to the Asia crisis, and the cost of the Iraq War. Here he lays out in simple, straightforward jargon-free language, what happened to cause the worst economic crisis since the Depression and what steps we need to take to prevent it from happening again. Highly recommended.

Nobel aureate Joseph Stiglitz produces one of his best books, in which he interprets the reasons leading to, and the possible ways out, of the Great Recession that started in October 2008. Stiglitz wrote: "Growth (in America over the past decade) was based on a mountain of debt." By 2008, Americans had to suffer from their "unsustainable levels of consumption," and the economy crashed. Sitglitz, a Keynesian economist, had predicted looming problems for the economy in Davos 2006, and according to this book, he felt embarrassed in 2007. He therefore told skeptics that either his theory was wrong, or crisis would hit harder. His second guess proved to be the right asnwer. In Freefall, Stiglitz blamed most the greedy bank managers, brokers, lenders, rating agencies for what he described as "preying on" what they knew was destined to inevitably collapse: Subprime mortgages, or high risk people who borrowed beyond their means to buy houses. He argued that many wrong assumptions led to the housing bubble, the first and foremost amongst them being that housing prices would keep on rising. American home owners were therefore engaged in further debt, often borrowing against their houses. Stiglitz also blamed deregulation that started in 1987 under President Ronald Reagan. "Interests, ideas, and ideologies" were the main drive behind such deregulation. The Nobel aureate showed some bias, and rightly so, toward former Fed Chairman, Paul Volker, who brought down America's inflation from 11.3 percent in 1979 to 3.6 in 1987, mainly through regulation, before Reagan replaced him with Alan Greenspan in order to reverse the regulation process. And for those who call him socialist, Stiglitz wrote that he is a staunch capitalist, except that sometimes there are "flaws in the capitalist system," especially in the "American version of capitalism that emerged in the second half of the twentieth century." According to Stiglitz, America exported its flawed version of capitalism to the world, thus leading to a global crisis that should to be rectified. To do so, "it may be difficult to have a strong global economy do long as part of the world continues to produce far more than it consumes and another part - a part which should be saving to meet the needs of its aging population - continues to consume far more than it produces," he wrote. On the way President Barack Obama handled the 2008 Great Recession, Stiglitz wrote: "Hope with Obama was only partially fulfilled as the financial system remains less competitive... the too-big-to-fail-banks problem persists, and the [bailout] money to restructure economy was spent to save old and failed firms." Stiglitz argued that the bailout was too small, and that it was mainly designed by people from the George Bush administration, who led the economy into its current crisis. These include Treasury Secretary Timothy Geithner and Chief Economist Larry Summers. Stigliz believes that the government should have stepped in to rescue

Stiglitz accurately reflects on the mistakes made by the US government to prevent and address the financial crisis. The book is a must reader for those who want to understand the the economics and politics behind the crisis. This is an enlightening piece of work from one of the world's best economist.

Stiglitz believes that markets lie at the heart of every successful economy, but do not work well without government regulation. In "Freefall" he explains how flawed perspectives and incentives lead to the 'Great Recession' of 2008, and brought mistakes that will prolong the downturn. Between 1996-2006, Americans used over $2 trillion in home equity (HELOC) to pay for home improvements, cars, medical bills, etc., largely because real income had been stagnant since the early 1990s. Economic recovery requires that we repay the remainder of these amounts, overcome stock market losses (10% between 2000-2009), the loss of some 10 million jobs, and reductions in credit card balances, and find an equivalent amount to the former home-equity sourced financing ($975 billion in 2006 alone - about 7% of GDP) to finance another consumer-driven GDP upturn - without the prior boom in housing and commercial building. Stiglitz also points out that the Great Depression coincided with the decline of U.S. agriculture (crop prices were falling before the 1929 crash), and economic growth resumed only after the New Deal and WWII. Similarly, today's recovery from the Great Recession is also hampered by the concomitant shift from manufacturing to services, continued automation and globalization, taxes that have become less progressive (shifting money from those who would spend to those who haven't), and new accounting regulations that discourage mortgage renegotiation. Stiglitz is particularly critical of the U.S. finance industry - its size (41% of corporate profits in 2007), avarice (maximizing revenues through repeated high fees generated by over-eager and over-sold homeowners needing to refinance adjustable-rate mortgages that repeatedly reset), and 'sophisticated ignorance' (using complex computer models to evaluate risk that failed to account for high correlation within and between housing markets; 'eliminating risk' through buying credit default swaps from AIG - blind to the likelihood AIG could not make good in a housing downturn), and excessive risk (banks leveraged up to 40:1 with increasingly risky mortgage assets - 'liar's loans,' 2nd mortgages, ARMs, no-down-payments; taking advantage of the 'too-big-to-fail' and 'Greenspan/Bernanke put' phenomena). Much of this behavior was driven by lopsided personal financial incentives (bonuses) - if bankers win, they walk off with the proceeds, and if they lose, taxpayers pick up the tab. However, to be fair, any firm that failed to take advantage of every opportunity to boost its earnings and stock price faced the threat of a hostile takeover. The impact of mortgage defaults is greater than one would otherwise expect because financial wizards found that the highest tranches of securitized mortgages would still earn a AAA rating if some income was provided to the lowest tranches in the 'highly unlikely' event of eg. a 50% overall default, thus boosting the ratings and saleability of lower tranches. (Fortunately f