Freefall: Free Markets and the Sinking of the Global Economy

Freefall: Free Markets and the Sinking of the Global Economy
Joseph Stiglitz (2010)

Why Read It?

• Describes the course of the global financial crisis, which began in 2007, and the underlying causes.

• Argues that much more radical reforms are needed than those currently being implemented, if the world is to avoid similar systemic crises in the future.

• Shows why the bailout has been only marginally effective and explains how it could have had a much more positive impact.

Getting Started

Freefall describes how the United States’ addiction to consumption rather than saving caused the global financial crisis. Stiglitz argues that the crisis originated in an overheated housing market, which was stimulated by politicians’ desire to encourage lending and keep the economy growing, despite the obvious risks involved. The author is highly critical of the US government’s policy responses, which he describes as a series of disasters. Consequently, Stiglitz believes that the United States’ failure to address the problems of excess borrowing, high consumption, and low wages means that the country will experience a Japanese style
recovery.

Author

Joseph Stiglitz (b. 1943) was Chief Economist at the World Bank until 2000. He is currently University Professor of the Columbia Business School and Chair of the Management Board and Director of Graduate Summer Programs, Brooks World Poverty Institute, University of Manchester. He won the Nobel Prize for Economics in 2001 and is the author of various best-selling books including: Globalization and Its
Discontents; The Roaring Nineties; Making Globalization Work; and The Three Trillion Dollar War.

Context

• Following the Asian financial crisis of 1997, Stiglitz warned that free-market ideologues at the US Treasury and the International Monetary Fund had botched the policy response to the crisis.

• He forecast that unless these institutions entered into a dialog with their critics, further crises would
follow.

• Explains in a lucid, easily digestible style how the crisis was inevitable, given that the United States’ deregulated financial markets were awash in liquidity as a result of low interest rates.

• Argues that these factors, when combined with a global real-estate bubble and skyrocketing subprime lending, created a toxic bubble.

• Attacks the Federal Reserve Chairman Alan Greenspan and his successor Ben Bernanke for failing to indentify and prevent the housing bubble from developing.

• Argues that the problems that the United States and the world face entail more than a small adjustment to the financial system.

• Calls for the authorities to seize the opportunity created by the crisis to establish a new financial and economic system that will generate meaningful jobs and narrow inequalities in society.

Impact

• Stiglitz’s long-standing record as a critic of unfettered free-market capitalism, and his constant warnings of the dangers posed by deregulated financial markets, give added credibility to the book.

• However, there is also a sense that Stiglitz is settling scores with his critics, and the book is undermined by the fact that a sustainable global economic recovery now appears to be underway.

Freefall: Free Markets and the Sinking of the Global Economy