Freefall: America, Free Markets, and the Sinking of the World Economy, by Joseph E. Stiglitz (Norton, 361 pp., $27.95)
Joseph Stiglitz, Nobel Prize winner in economics, has created a new literary genrecall it pop economics. In his new book, Freefall, he narrates the 2008 financial crisis as a struggle to the end between good and evil. The forces of evil are greedy Wall Street bankers who try to impose not just on the U.S. but on the world the satanic ideology of market fundamentalism. Their god is Milton Friedman and their chief propagandist is George W. Bush.
Scholars usually consider economics a complex field: not Stiglitz. Scorning details and nuance, he doesnt hesitate to distort the facts to prove his point. On one page, he writes that the real-estate market crumbled because new owners could obtain 100 percent mortgage credit, putting nothing down; on the next page, he commiserates with the millions of home owners who have lost the savings of their life when they could not repay their loans. But they had no savings to start with, as Stiglitz has just explained!
Economists disagree among themselves, of course, but Stiglitz goes beyond mere disagreement. He raves against all free-market economists because they failed to predict the recession. But economists dont tend to make predictions; prophets and media pundits do. Most economists consider making predictions an expression of the fatal conceit that Hayek warned against. Scholarly economists tend to express their disagreements by opposing one theory against another, using facts, figures, and statisticsreality, in other words. Stiglitz hovers above these vulgar debates. He is guided only by his own strong opinions and personal experiences, reminding the skeptical reader (if any will read him) that he has travelled everywhere, seen everything, and occupied very important positions at the World Bank.
Stiglitz makes bizarre recommendations: the U.S. should look to the example of Trinidad, which tends to the well-being of its people without becoming obsessed by the quantitative measure of its GDP. He praises Ethiopia, one of the poorest countries on earth, for its new freeways, which he hopes will inspire public infrastructure programs in the United States.
Stiglitz must be seeking popularity with a left-leaning audience. One can hardly find any other rationale for the book. Freefall is of no help in understanding the origins of the current crisis or in determining how to remedy it. When Stiglitz attacks market fundamentalism as the cause of all evil, he does not stop to consider how such a regime led the world into unprecedented economic growth from 1983 to 2008. He overlooks the 2007 oil and commodity price spikes, which may have started the recession. Most free-market economists today perceive the 2008 financial crisis as a consequence of the recession and not the cause of it. Inflated real-estate prices, and the financial derivatives based on them, made the crisis global and severe. But such complexity would not fit with Stiglitzs black-and-white plot. To build his case, such as it is, he mixes up causes and consequences. When he lays responsibility for the 2008 crash on deregulators, he fails to explain why some heavily regulated banks had to be bailed out, while others were able to evaluate their financial risk responsibly and avoid bankruptcy. Perhaps some were better managed than others? Stiglitz shows no interest in such mundane considerations. Some regulated banks did not take excessive risks; others did and had to be bailed out
Markets are highly imperfect, free-market economists agree, and some regulation is necessary, but Stiglitz makes no distinction between good and bad regulation. All regulation, in his pop economics, is good by definition, while all deregulation is evil. No proofs are needed.
Lehman Brothers was undoubtedly a poorly managed, probably unethical, and possibly lawless company. None of that justifies Stiglitzs outlandish contention that the fall of Lehman Brothers on September 15, 2008, is the equivalent of the Fall of the Berlin Wall: the end of market fundamentalism after the end of communism. How dare Stiglitz write that Eastern Europeans have been the victims of the Washington consensus imposed by market fundamentalists, when the free market has drawn Eastern Europe out of poverty? How does he explain Poland, the most free-market country in Europe and one not dramatically affected by the crisis?
Stiglitz feels compelled to remind the reader that he is not a socialist: he only advocates a better world. His utopia would replace the failed market fundamentalism by striking the right balance between market and state. What would such an arrangement look like? Stiglitz doesnt elaborate, but he hints repeatedly that the world would be a better and more ethical place if he were in charge. For those who already fear the Obama administrations anti-market bias, think how much worse it could be: Stiglitz could be working there! We better keep him writing fiction and basking in the cheers of Greek audiences, to whom he recommends that their country not repay its debt.
One receives the Nobel Prize in economics for research in a specific area, Milton Friedman used to say, but prize winners then tend to believe that theyve been implicitly granted the right to express their personal, nonscientific opinions about everything. Stiglitzs Nobel Prize on market asymmetry was well deserved. His opinions on everything else are just opinions and deserve to be treated as such.