Freefall: Free Markets and the Sinking of the Global Economy by Joseph Stiglitz
by Larry Elliott
[reposted from The Guardian]
No one can say they weren't warned. A decade ago, newly sacked from his job as chief economist at the World Bank, Joseph Stiglitz laid bare how the free-market ideologues at the US Treasury and the International Monetary Fund had botched the Asian financial crisis of the late 1990s. It was a full-on attack from a Washington insider and it hurt, especially when Stiglitz said many of those responsible for forcing countries such as Thailand and Indonesia into deeper, longer recessions were "third-rate graduates from first-rate universities".
He concluded his essay in the New Republic by warning the IMF and the US Treasury that unless they began a dialogue with their critics "things will continue to go very, very wrong".
Now they have. The Asian crisis of 1997-98 was merely the warm-up act for the events of the past two and a half years. Problems that first surfaced on the periphery of the global economy gradually worked their way to its core – the United States. The warnings of Stiglitz and a handful of other dissident voices were ignored, as a naïve belief in the self-correcting nature of markets allowed the conditions to develop for the biggest financial and economic shock since the great depression in the 1930s.
In the circumstances, it is hardly surprising that Freefall reeks of "I told you so". Stiglitz has waited a long time for his views to be vindicated and was not going to spurn the opportunity to settle some scores. Some of the targets are obvious enough – corporate welfare for Wall Street, George Bush's tax breaks for the rich, the failed nostrums from the Chicago school of free-market economists. But he also finds time for some personal revenge.
Larry Summers, formerly Bill Clinton's treasury secretary and now chief economic adviser to Barack Obama, is a particular hate figure. Stiglitz says Summers was too accommodating to the demands of Wall Street in the 90s and is making the same mistake now. It was Summers, incensed by the constant criticism of the Washington consensus, who orchestrated Stiglitz's departure from the World Bank.
There is more, though, to Freefall than sheer gloating – however justified. Stiglitz's argument is simple; the period of unchallenged American economic hegemony lasted a mere 19 years, from the demolition of the Berlin wall in the autumn of 1989 to the collapse of Lehman Brothers in September 2008. Swift action by governments – forced to abandon a hands-off approach to economic management by the scale of the crisis – has prevented a great recession from turning into a second great depression. Lessons need to be learned from this near-death experience; if they are not, if the warnings go unheeded as they did a decade ago, the future will be punctuated by systemic crises.
The chances of that happening are quite high. Already, there is a whiff of business as usual as a receding sense of danger blunts the appetite for radical reform. Obama soft-pedalled on reform of Wall Street until goaded into action this month by the loss of the Senate seat in Massachusetts; in Britain the imminent election will be dominated not by which party has the right policies to cut the City down to size but which can be trusted to cut the budget deficit. Revisionist versions of the crisis, suggesting the problem was too much government rather than too little, are doing the rounds.
In that respect, Freefall is the wrong title for this book. It was clearly commissioned and conceived about a year ago, when the charts showed industrial production and trade collapsing at the same pace as they had in the early 30s. But conditions have improved since the panic of late 2008 and early 2009; by pursuing policies that were diametrically opposite to those foisted on struggling Asian countries by the IMF and the US Treasury in the late 90s, growth has returned far more quickly than expected. China is booming, while Europe, Japan and the United States all started growing again by the third quarter of 2009.
Having dished it out, Stiglitz can expect to cop it from his opponents if, as looks entirely possible, 2010 is a year of recovery. But his underlying analysis is correct. The global economy was – and remains – seriously unbalanced between debtor and creditor nations. Corporate welfare has reached fresh heights with the billions of dollars ladled out to commercial banks, investment banks and America's biggest insurance company, AIG. America, as the book rightly notes, has lived off one bubble after another for years.
Stiglitz wants this to be a moment of "reckoning and reflection" – a reassessment of the sort of economy in which financiers enriched themselves by selling over-priced and risky products to some of the most vulnerable citizens in America. Materialism has outweighed moral commitment, the needs of the environment have been ignored, and there has been a catastrophic break down in trust.
He concludes the book by asking: "Will we seize the opportunity to restore our sense of balance between the market and the state, between individualism and the community, between man and nature, between means and ends?" Faced with a similar set of circumstances in the 30s, the New Deal generation of Roosevelt proved ready to meet the challenge. Stiglitz clearly doubts whether Obama is made of the same stern stuff.
Larry Elliott is co-author, with Dan Atkinson, of The Gods That Failed: How the Financial Elite Have Gambled Away Our Futures (Vintage).