Wednesday, September 15, 2010

Yet another anniversary of upheaval

We've just been reminded that on 9/11/2001, "everything changed." But Joseph Stiglitz makes the case that 9/15/2008 is the date that really will seem pivotal when historians look back at this decade. On that date, the collapse of Lehman Brothers signaled that the organization of the world economy as we had known it wasn't working anymore.

Among all the books I've read describing the mistakes, misdeeds and malarkey that got us into the current Great Recession, Stiglitz' Freefall: America, Free Markets, and the Sinking of the World Economy is the most ambitious and comprehensive. The 2001 Nobel economics prize recipient, former World Bank economist and professor at Columbia takes an very expansive look at what's wrong and what might be done about it. This book is too big for a quick summary (and I'm underqualified to write such a thing) but I can share what I found so appealing about it, in addition to the fact that it is written to be read by general readers.
  • Stiglitz starts with a thorough description of the subprime mortgage bubble, highlighting fraud and predation on poor people by bankers and financial whiz kids. He writes as if it matters that ordinary people ended up fleeced of their savings and without a home so Wall Street could inflate profits. He wonders repeatedly why the U.S. government didn't act more creatively to keep people in their homes after the bubble burst.
  • He writes descriptively about what it means that we've had nearly 10 percent official unemployment for well over one year. In particular, he digs into one of the long lasting consequences of the lack of jobs that I had not seen explained elsewhere: unemployed people who might have held on in the working economy despite major disabilities have been forced to struggle their way into the permanent disability category of Social Security. Officials estimate that by the end of 2011, one million will have applied for disability and 500000 will get it, for the rest of their lives.
  • Stiglitz asks questions that are so obvious to "little people" tossed around in these hard times, but are largely invisible to folks who are still prospering. Questions like: what's an economy for? -- he think it might include stability and leisure as well as vast wealth for a few. Or why do we need a financial sector? He suggests finance's reason for being is to move capital around to where it will serve the larger economy, not to act as a handy casino for the filthy rich.
  • He is caustic on the limits of unregulated and under-regulated markets.
  • He is critical not only of the Bush administration, but also of Obama's response to the crisis, despite having been an Obama booster in 2008. He uses the language "muddled through" and "moving the deck chairs on the Titanic" of the current adminstration.

    While the Obama administration had avoided the conservatorship route, what it did was far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. The perception, and reality, that the rescue packages were "unfair" -- unfairly generous to the bankers, unfairly costly to ordinary citizens -- has made dealing with the crisis all the more difficult. It has become commonplace to say that underlying the crisis is the loss of confidence in the financial system. But the failure of government to undertake a fair rescue contributed to a loss of confidence in government.

    Written last fall, that seems a prescient description of our present moment.
  • We might expect from a former World Bank economist, he puts his entire discussion in the context of the world economy at large. The Great Recession proceeds in the context of technological shifts, climate change, and emerging new economies; the U.S.A. is not the unchallenged top gun anymore. We cannot restore the illusory economic and political bubble that existed in 2000. We have to accomodate to a new reality.
Stiglitz hopes we can make the country work again, though doing so will require applying old ideals within a new economic reality. And ultimately our problems are political. Here's how he summarizes this:

Every game has rules and referees, and so does the economic game. One of the key roles of the government is to write the rules and provide the referees. The rules are the laws that govern the market economy. The referees include the regulators and the judges who help. enforce and interpret the laws. The old rules, whether they worked well in the past, are not the right rules for the twenty-first century. Society has to have confidence that the rules are set fairly and that the referees are fair. In America, too many of the rules were set by and or those from finance, and the referees were one-sided. That the outcomes have been one-sided should not come as a surprise.

... In the end, the only check on these abuses is through democratic processes.

... Dealing with this crisis -- and preventing future crises -- is as much a matter of politics as it is economics. If we as a country don't make these reforms, we risk political paralysis, given the inconsistent demands of special interests and the country at large.

...we have no choice: if we are to restore sustained prosperity, we need a new set of social contracts based on trust between all the elements of our society, between citizens and government, between this generation and the future.

Highly recommended.

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