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 troubled homeowners by offering loans at low interest rates (say 2 percent), as the government was borrowing at zero percent interest rate. He criticized how the government made the cheap money available to banks, who lent it to Americans at an interest rate of 6 percent, therefore making 4 percent profit off the government’s cheap money.
The government should also take into consideration the ratio of multipliers (i.e. the return on each dollar it spends), and should invest in long term projects that would certainly update America and make it more competitive – in the world – for the coming century, according to Siglitz.
“Other aspects of Obama’s economic policy have been decidedly movements in the right direction,” Stiglitz wrote.