Freefall: Free Markets and the Sinking of the Global Economy
By Joseph Stiglitz
A Nobel Prize-winning American economist and a cynical English novelist agree on one thing – it’s ti
If anybody is going to get it, it's going to be Joe, right? Joseph Stiglitz has been on the case of free-market capitalism since the Asian financial crisis of 1997. He predicted that the mortgage bubble would burst, and even managed to persuade the economic coelacanths in Oslo to give him a Nobel Prize for pointing out that - as we all now know after Enron, AIG and the Greek public finances - access to information in markets is asymmetric, and the central tenets of free-market ideology are therefore wrong.
What's more, Stiglitz is the only freethinking critic of the neoliberal elite who still gets invited to their parties. He was on the inside of the Clinton administration, trying in vain to nurture the president's inner radical as he ripped up financial regulation. He was on the inside while the IMF and World Bank systematically mishandled developing Asia in the late 1990s, making the crisis worse, he believes, and - as he now points out - foreshadowing the global disgrace of US economic doctrines.
During the present crisis, he has stalked around the edges of the G20 summits, proposing fierce global curbs on capital, a break with Wall Street and a much bigger rethink than anybody in power is prepared to countenance. So, if anyone is going to produce a bold new economic theory and vision to guide the centre left beyond the financial crisis, it's going to be Joe. Unfortunately, Freefall fails to provide such a vision.
Freefall is about politics, hubris and the perceived failure of the Obama administration. It is a manual for action in the coming 12 to 18 months, and also a plea for a more thorough rethinking of power structures and values in modern capitalist societies. But it is also a vivid illustration of the limits of the doctrine Stiglitz helped create: the Third Way.
The book begins with the story of the meltdown and what caused it. Stiglitz's account places him firmly in the camp of those who identify the sphere of consumption, and not finance, as the source of the problem. The financial system may have exacerbated the collapse, but, he argues, the crisis originated in an overblown housing market, which was itself the creation of America's addiction to consumption (when it should be saving) and its politicians' determination to stimulate lending when they shouldn't have.
The core of this book lies in Stiglitz's account of the US policy response, which he believes has been a string of disasters. Disaster number one, he says, was Barack Obama's instinctive conservatism. He chose a "muddle-through" strategy, which, though it may have seemed low-risk politically, has turned out to be highly risky for the 16 million Americans who have no job, and the two million families whose homes have been repossessed. And, crucially, "no-drama Obama" refused to formulate a vision because, Stiglitz says, his whole electoral appeal was based on feel-good vagueness: "While the risks of formulating a vision were clear, so were those of not having one. Without a vision the whole 'reform' process might be seized by those in the financial sector, leaving the country with a financial system that was even more fragile than the one that had failed."
And so it came to pass. Disaster number two, he believes, was the decision to maintain most of the personnel of the very Bush administration that had fuelled the cycle of boom and bust, supplementing them with a team of right-wingers from the Clinton years.
Ben Bernanke, who for all his culpability is at least held in the polite circles of Davos and Jackson Hole to be a serious economist, comes in for some back-handed excoriation:
Perhaps he took [Alan] Greenspan's rhetoric seriously, perhaps he really believed there was no bubble . . .
Perhaps he believed, with Greenspan,
that the Fed didn't have the instruments
to deflate the bubble gradually and
that it would be easier to fix after
it popped. Still, it's hard to see how
any serious economist wouldn't be worried - so worried that he would have to blow the whistle. In either case it isn't
a pretty picture.
Disaster number three was the way Obama maintained the revolving door between Wall Street and Washington, which put former bankers in charge of regulating for the future and overseeing quid pro quo from America's bailed-out billionaires. Disaster number four was the meagre scale of the fiscal stimulus, which, the author argues, is failing to make an impact and will require a second stimulus.
It is to Stiglitz's lasting credit that, while other economists have already moved back into the realm of algebra and Greek letters, he has remained in the trenches of policy. He predicts a Japanese-style recovery in the United States, with the economy facing a prolonged period of below-potential output and problems such as excess borrowing, high consumption and low wages still not sorted out.
At the centre of the policy response Stiglitz advocates is the state. The state should have forced the banks to restructure financially at the height of the crisis, wiping out their shareholders, and handing ownership and control to those who held their debts, a large portion of which would in any case have been state-owned. Stiglitz does not argue for outright nationalisation: his is a market-based solution that involves properly applying the rules of the market to the banks. He correctly identifies what stopped Obama doing this, over and above the influence of leading Wall Street personnel: the belief that the banks were too big to fail, or to restructure - or, to put it another way, that the state was too small.
With the chance for that now gone, Stiglitz advocates a forcible break-up of the top banks, a comprehensive set of regulations, and statutory protection for the consumers of financial products. This, he argues, has to be done within the framework of a much bigger restructuring of the US economy, and a rethinking of America's role in the world.
America, in his view, saves too little, consumes too much and has institutions that will not allow it to address a number of long-term problems - ageing, climate change and the shambolic sectoral and regional mismatches that allow the country to maintain a $46bn pet animal industry, while a city such as Gary, Indiana, Joe's home town, has entire neighbourhoods that are depopulated and burnt out.
“The big question in the 21st-century global economy," he writes, " is what should be the role of the state. Achieving the restructuring . . . will require government taking a greater role . . . If we are to restore sustained prosperity we need a new set of social contracts based on the trust between all elements of society, between citizens and government, between this generation and the future."
The problem for Stiglitz - as for all Third Way economists and politicians - is how this should be achieved. And it is here that he runs into the same barrier his intellect has been running into, and bouncing off, for the best part of two decades: the unchallengeable assumption that state ownership must lead to stagnation and can never work better than the regulated market economy.
Thus, although the question of the state's role is boldly posed, it is only tentatively answered. For instance, he suggests that the state "may have to become more central" in shaping research priorities, or regulating to achieve macroeconomic stability. The tone throughout is apologetic. With America's resurgent right he can only plead: "There is no choice but to have some forms of collective action."
Because Stiglitz's intellectual framework is bounded by the belief that there is no alternative to an essentially market-driven economy, his critics - on both left and right - have noticed the existence of "two Joes". One is a fiery critic of modern capitalism; the other teaches students at Columbia University that capitalism could be made to work if only the institutions it created were more effective.
Freefall, though written in haste and fury by Joe Number One, comes to the same conclusion as Joe Number Two always does: reform the institutions, moderate the excesses and leave behind economic fundamentalisms in favour of a middle way. What it lacks is an explanation of why the market system keeps producing these abuses: why mismanagement of banks is endemic, why regulation always seems to stoke the boom and reward failure, and why the course to the boom-bust cycle was actually plotted by Third Way politicians - Clinton in America, Blair-Brown in the UK.
In an impressive final chapter, Stiglitz takes apart the theorists of market fundamentalism - for their abstractness, their failure to see where economics should stop and sociology begin. But his own economics seem shorn of a social and political dimension: whether you choose Foucault, Marx or C Wright Mills, if you are a critic of the capitalist system you must have some explanation of why it goes on producing power elites who stand in the way of attempts to control it. This is the crucial element missing from Stiglitz's analytical framework.
So, in the end, despite Freefall's brilliance, Joe doesn't quite get it. He remains locked in a doctrine that says the market will always be more dynamic than the state-led economy. Yet he intuits - far more clearly than in his work in the 1990s on the Russian transition or the Asian crisis - that the state-led economy is exactly what we're about to get.
Whoops!, John Lanchester's contribution to the instant history of boom and bust, is welcome for a different reason. Lanchester, a novelist and columnist, belongs to that small band of commentators who managed to predict the collapse was coming. No small achievement, because, as he admits: "I began working on the subject as part of the background to a novel, and soon realised that I had stumbled across the most interesting story I've ever found."
Lanchester guides us, with all the narrative flair one would expect from a novelist, through the concepts essential to understanding the crisis and collapse of autumn 2008. Like a modern Hazlitt, his prose leaps off the tramlines and crashes through the barriers of polite expression, mowing down bystanders where necessary, in order to reach the truth. And it does not stop at economics.
“Here's a way of thinking about the change since the fall of the Wall," he writes. "One of the most vivid consequences was the abolition of the ban on torture . . . The same goes for the way in which the financial sector was allowed to run out of control. It was a series of events which took place not in a vacuum but a climate. That climate was one of unchallenged victory of the capitalist system."
The problem with his book is that we are now 18 months into the "instant book" cycle following the Lehman collapse - and not just books, either: there has been a plethora of plays and television dramas, and the media discourse on the crisis is incessant. Any addition to this overload - even one written so lucidly - has to contribute something new. And his conclusion turns out to be not all that different from that of Stiglitz: it is time for capitalism to slow down, take stock and adjust its priorities to lower consumption and environmental imperatives.
Lanchester's real contribution lies not in his analysis, but in the vantage point he takes. With America's hubris mill now back working at full capacity, the need for the perpetually raised eyebrow of the English cynic has never been greater. As the Americans en route to Davos file through the bookstores at JFK and Dulles, it would be nice to think that Lanchester and Stiglitz were recommended reading - if only as antidotes to all those books telling us what Jesus would have done if he were a CEO and why Obama is really a crypto-Marxist.
Freefall: Free Markets and the Sinking of the Global Economy
Allen Lane, 400pp, £25
Whoops! Why Everyone Owes Everyone and No One Can Pay
Allen Lane, 240pp, £20
Paul Mason is economics editor of BBC2's "Newsnight". His most recent book is "Meltdown: the End of the Age of Greed" (Verso, £7.99)