Freefall

I’m a fan of Joseph Stiglitz. I like his books as the ideas inside are very critical and insightful. This one is no exception.

In this book, Stiglitz attempts to address several big questions:

(1)   How and why did we let the financial crisis happen again (after East Asian crisis that happened a decade ago), and on such a scale?

(2) Why is the developed countries consistently follow countercyclical monetary and fiscal policies (the bailouts and the running of huge fiscal deficit), but developing countries are forced to follow pro-cyclical policies (cutting expenditures, raising taxes and interest rates)?

(3) Why the rescue plans that adopted by the U.S. government were doomed to fail?

(4) What would replace the unbridled consumption of Americans that had sustained the economy in the years before the bubble broke?

(5) What is New Capitalism? How does it different from the traditional Capitalism?

Stiglitz first gives a very detailed explanation on how and why the financial crisis took place in the United States. He lays out the underlying causes that dated back to about a decade ago under George Bush’s administration, such as the tax cut, the war in the Middle East in 2003, the stagnated income growth of Americans, the insufficient world demand, the low interest rate, the increase in the official reserve of developing countries as well as the ideology of deregulation. The emergence of financial innovation and creative (or deceive) accounting make the situation worse by providing flawed incentive and asymmetric information that in turns stimulates irrational behaviours in both local and global markets.

He then lists out seven principles of a well-designed stimulus program. Like, it should be fast, fair, focus on investment, targeted on the area of job loss, deal with the short-run exigencies and address the country’s long-term problems (p.61 -62). Base on these principles, readers can make their own judgments on the effectiveness of the stimulus packages that offered by different countries.

Stiglitz also comments critically on the packages that put forward by the Bush and Obama governments and points out directly that the bailouts have been only marginally effective. Last but not least, he recommends alternatives policies, such as specializing on American’s long-run competitive advantage in providing higher-education services and the advances technology as well as supporting “green” industries.

Striking a fine balance between the role of market and the role of government becomes one of the main issues that not only in academic debate, but also as a matter of live and death in developing countries. Endorsing New Capitalism seems to be a new direction to achieving global recovery.

I totally agree with the statement that printed in the book jacket, “Freefall … allows the author to present an understanding of the way economies and societies work which is not only convincing and coherent, but humane [in particular to the deprived].”

Stiglitz, Joseph. (2010). Freefall. NY: Allen Lane.

N.B.

There are other books that related to the financial tsunami:

原來金融知識也可以很有趣

How does a baby-sitting co-op explain the economic depress?

There is another book that written by Joseph Stiglitz: 

The conscience of an economist (Laureate in Economics 2001)