{"id":222974,"date":"2010-01-24T17:00:26","date_gmt":"2010-01-24T22:00:26","guid":{"rendered":"http:\/\/firedoglake.com\/?p=63361"},"modified":"2010-01-24T17:00:26","modified_gmt":"2010-01-24T22:00:26","slug":"fdl-book-salon-welcomes-joseph-stiglitz-freefall-america-free-markets-and-the-sinking-of-the-world-economy","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/222974","title":{"rendered":"FDL Book Salon Welcomes Joseph Stiglitz, Freefall: America, Free Markets, and the Sinking of the World Economy"},"content":{"rendered":"<p><em>[Welcome <a href=\"http:\/\/en.wikipedia.org\/wiki\/Joseph_Stiglitz\">Joseph Stiglitz<\/a>, and Host <a href=\"http:\/\/www.law.umkc.edu\/faculty\/black.htm\">William Black<\/a>.] [As a courtesy to our guests, please keep comments to the book. \u00a0Please take other conversations to a previous thread. &#8211; bev]<\/em><\/p>\n<p><em><a href=\"https:\/\/www.amazon.com\/dp\/0393075966?tag=firedoglake-20&amp;camp=0&amp;creative=0&amp;linkCode=as1&amp;creativeASIN=0393075966&amp;adid=0G6Q9Q212WBAXTR14VYC&amp;\"><strong>Freefall:America,  Free Markets, and the Sinking of the World Economy<\/strong><\/a><a href=\"https:\/\/www.amazon.com\/dp\/0393075966?tag=firedoglake-20&amp;camp=0&amp;creative=0&amp;linkCode=as1&amp;creativeASIN=0393075966&amp;adid=0G6Q9Q212WBAXTR14VYC&amp;\"><img loading=\"lazy\" decoding=\"async\" class=\"alignright size-medium wp-image-63364\" title=\"Joseph E Stiglitz - FREEFALL\" src=\"http:\/\/static1.firedoglake.com\/1\/files\/2010\/01\/Joseph-E-Stiglitz-FREEFALL--197x300.jpg\" alt=\"Joseph E Stiglitz - FREEFALL\" width=\"197\" height=\"300\" \/><\/a><\/em><\/p>\n<p>By Joseph E.  Stiglitz (Nobel Laureate, Economics 2001)<\/p>\n<p>William K.  Black, Associate Professor of Economics and Law, University of Missouri  \u2013 Kansas City<\/p>\n<p>This book is about a battle  of ideas, about the ideas that led to the failed policies that precipitated  the crisis and about the lessons we take away from it (p. xii).<\/p>\n<p>Anyone seeking to explain this  \u201cbattle of ideas\u201d must address three questions:<\/p>\n<ol type=\"1\">\n<li>What \u201cideas\u201d    are producing environments in so many nations that create the perverse    incentives that have led to recurrent intensifying crises in many nations?<\/li>\n<li>Why did these ideas    become dominant in so many nations?<\/li>\n<li>Why have these ideas    become more dominant even as they have produced greater crises?<\/li>\n<\/ol>\n<p>Stiglitz\u2019 answers to these  questions are: <span id=\"more-63361\"><\/span><\/p>\n<ol type=\"1\">\n<li>Neoclassical economics    has become ferociously anti-governmental.\u00a0 Financial markets, absent    effective regulation, generate perverse incentives that cause crises.<\/li>\n<li>The United States,    through our universities and through institutions such as the International    Monetary Fund (IMF), exports neoclassical economics and economists to    the world and gives them the power to set policy in most nations.<\/li>\n<li>Stiglitz suggests    several reasons why economists have become ever more married to their    models as they fail spectacularly.\u00a0 Self-interest and power are    part of the answer (p. 42).\u00a0 Neoclassical economists are useful    to big finance because they are willing to give the wrong answers.\u00a0    The more that reality falsifies their models, the more valuable neoclassical    economists are to big finance in fending off regulation, in creating    models that overvalue assets (allowing huge bonus payments), and in    claiming that the prices their own models generate after the crisis    should be disregarded because the problem isn\u2019t asset quality, but    rather liquidity and market confidence (p. 48).\u00a0 Economists have    become financial holocaust creators and deniers.<\/li>\n<\/ol>\n<ul>But Stiglitz\u2019s primary  argument is that anti-regulatory economists have remained intellectually  dishonest for the saddest of reasons \u2013 they lack the courage to admit  that their theories have been falsified and that the policies they have  championed caused the crises (p. 48).<\/ul>\n<p>Stiglitz documents America  (and much of the world\u2019s) descent into crony capitalism (pp. 41-42,  122).\u00a0 He explains that while other bankrupt firms settle claims  on credit default swaps (CDS) at 13 cents on the dollar, Paulson and  the Fed pressured AIG to pay favored systemically dangerous institutions  (SDIs) such as Goldman Sachs 100 cents on the dollar \u2013 with the public  bearing the cost of this secret subsidy (p. 49).\u00a0 His broader point  is that the neoclassical triumph in the battle of ideas (and its triumphalism  about winning the battle) led not to the promised utopia of efficient,  stable markets and growth, but rather to economic stagnation for the  middle class, a catastrophic fall for the working class, and recurrent  crises.<\/p>\n<p>Stiglitz emphasizes that none  of this is due to bad luck.\u00a0 The Great Recession was not analogous  to the \u201c100 year flood.\u201d\u00a0 Crises have happened in a broad range  of nations because when finance becomes unregulated it becomes vastly  too large and too powerful and uses its power to corrupt or evade restraints  on its power.\u00a0 This means that crony capitalism is a severe danger  and will often occur.<\/p>\n<ul>Their victory over America  was total.\u00a0 Each victory gave them more money with which to influence  the political process.\u00a0 They even had an argument:\u00a0 deregulation  had led them to make more money, and money was the mark of success.\u00a0  Q.E.D. (p. 10).<\/ul>\n<p>Stiglitz emphasizes that finance  can become hyper-dominant in a broad range of political settings throughout  the world.\u00a0 One of his most candid themes is that the Obama administration  continued Bush\u2019s policy of crony capitalism (pp. 46-49).<\/p>\n<p>This book is weakest in providing  a concrete explanation of the mechanism that caused this, and prior,  crises.\u00a0 Stiglitz appropriately identifies three aspects of why  the ideas he criticizes produce an environment that causes crises:<\/p>\n<ul type=\"DISC\">\n<li>Deregulation, (and, even more, desupervision)<\/li>\n<li>Modern compensation (executive and \u201cagents\u201d, e.g., outside auditors, rating agencies, and appraisers)<\/li>\n<li>Accounting.\u00a0    Criminologists recognize that accounting is the \u201cweapon of choice\u201d    for financial frauds and that the first two elements interact to optimize    an environment for accounting fraud.<\/li>\n<\/ul>\n<p>The tension is that Stiglitz  refers primarily to \u201crisk\u201d and views the difference between \u201cgambling\u201d  and fraud as being a \u201cfine line\u201d (p. 125), using the S&amp;L debacle  as his example (p. 125) and citing Ed Kane and George Akerlof and Paul  Romer, respectively, for this proposition.\u00a0 But this misreads what  Akerlof &amp; Romer wrote and it misses the fact that they wrote later  than Kane with the benefit of dramatically better data that disproved  Kane\u2019s hypothesis that the debacle was primarily caused by (honest)  \u201cgambling for resurrection\u201d by already insolvent S&amp;Ls (Black  2005).\u00a0\u00a0 As the national commission into the causes of the  S&amp;L debacle found, at \u201cthe typical large failure\u201d \u201cfraud was  invariably present.\u201d\u00a0 (\u201cTraditional\u201d S&amp;Ls did engage  in honest gambles for resurrection by only moderately reducing their  exposure to interest rate risk in 1983-86.\u00a0 They won those gambles  when interest rates fell sharply, which sharply reduced the cost of  resolving the debacle.\u00a0 Note that they reduced rather than expanded  their risk exposure \u2013 contrary to the \u201cgambling\u201d hypothesis.)<\/p>\n<p>Akerlof &amp; Romer\u2019s title  says it all:\u00a0 \u201cLooting:\u00a0 Bankruptcy for Profit.\u201d\u00a0  They agreed with the insight that regulators and criminologists had  reached about the debacle \u2013 fraud is a \u201csure thing.\u201d\u00a0 A lending  institution that follows the classic four-part strategy for optimizing  accounting fraud is mathematically guaranteed to report record profits:<\/p>\n<ol type=\"1\">\n<li>Grow rapidly<\/li>\n<li>Make loans regardless of the borrower\u2019s ability to repay (this is essential to being able to grow rapidly while charging a premium yield)<\/li>\n<li>Extreme leverage<\/li>\n<li>Grossly inadequate loss reserves<\/li>\n<\/ol>\n<p>The \u201ctypical\u201d large nonprime  lender failure during this crisis fits this pattern.\u00a0 The first  three parts of the strategy are well known, but loss reserves have been  ignored in discussions of the crisis.\u00a0 Overall, loss reserves fell  to \u201crecord lows\u201d for four straight years even as (1) the FBI warned  in September 2004 that there was an \u201cepidemic\u201d of mortgage fraud  (and predicted that it would produce an economic crisis if it were not  contained), (2) underwriting standards disappeared (which is deliberate  and essential to part two of the optimization strategy), and (3) warnings  of the housing bubble became common and strident.\u00a0 Each of these  factors should have led to far larger loss reserves, collectively they  should have led to loss reserves so large that the lenders would have  had to report that nonprime lending was (in economic reality) unprofitable.\u00a0  Instead, loss reserves virtually disappeared.\u00a0 Again, this is not  an issue of a \u201cfine line.\u201d\u00a0 We are talking about loss reserves  that were two orders of magnitude too small.<\/p>\n<p>So I would add another reason  why economists have been so blind to the causes of these crises \u2013  they have been taught from their freshman year that accounting doesn\u2019t  matter (efficient markets must \u201csee through\u201d accounting) and that  no rational person would base a business decision on accounting.\u00a0  In reality, accounting fraud routinely cons financial markets and accounting  is the primary driver of decisions by financial firms.<\/p>\n<p>The biggest story in the bailout  is barely known because it is an accounting story.\u00a0 The big banks,  with Bernanke\u2019s support, used their political muscle to cause Congress  to extort FASB to gut the accounting rules so that lenders did not have  to recognize their loan losses.\u00a0 Absent that rule change, the banking  \u201cprofits\u201d would have been losses and they would not have been able  to pay themselves over a$100 billion in executive bonuses.<\/p>\n<p class=\"akst_link\"><img decoding=\"async\" src=\"http:\/\/firedoglake.com\/wp-content\/plugins\/share-this\/share-icon-16x16.gif\" alt=\"Share This icon\" \/><a href=\"http:\/\/firedoglake.com\/?p=63361&amp;akst_action=share-this\"  title=\"Email, post to del.icio.us, etc.\" id=\"akst_link_63361\" class=\"akst_share_link\" rel=\"noindex nofollow\">&nbsp;<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>[Welcome Joseph Stiglitz, and Host William Black.] [As a courtesy to our guests, please keep comments to the book. \u00a0Please take other conversations to a previous thread. &#8211; bev] Freefall:America, Free Markets, and the Sinking of the World Economy By Joseph E. Stiglitz (Nobel Laureate, Economics 2001) William K. Black, Associate Professor of Economics and [&hellip;]<\/p>\n","protected":false},"author":4426,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-222974","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/222974","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/4426"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=222974"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/222974\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=222974"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=222974"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=222974"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}