Book review: Freefall, by Joseph Stiglitz

Off-beam advice has made the US president too lenient on Wall Street, says Joseph Stiglitz' polemic.

by Howard Davies
Last Updated: 25 Oct 2010

To many on this side of the Atlantic, American politics are a puzzle. Both US parties seem to be coalitions of interest that do not easily reflect the usual European divisions between social democrats and conservatives/Christian democrats. Eccentric characters such as Sarah Palin on the right and Howard Dean on the left flit across the sky and (in Dean's case, at least) disappear into the obscurity from which they were untimely ripped.

Stiglitz throws some light on this mystery for the British reader, because he thinks about politics in a more European way. He is firmly a man of the left. He is not a socialist, exactly, but his views on the role of the state would resonate with many European social democrats.

His political analysis of Obama is therefore of some interest to us. He claims that his administration has already gone badly wrong in its economic and financial policies, and that these mistakes arise because of the nature of the team that Obama has assembled. Stiglitz contrasts it unfavourably with the Clintonistas. Bill Clinton deliberately assembled a team of economic advisers that covered a broad spectrum of views. So he had Bob Rubin of Goldman Sachs on the right, Laura Tyson (who later ran London Business School) in the centre, and Bob Reich, a strong supporter of organised labour, on the left. Clinton held the ring between these different factions.

Obama has not performed the same balancing act. Economic and financial policy is in the hands of Tim Geithner, who, of course, was president of the New York Federal Reserve under George W Bush, and Larry Summers, who is not, shall we say, one of Stiglitz's heroes. Paul Volcker, who now seems to be on the left of Democrat politics - an unusual transformation for a former chairman of the Federal Reserve - has a role, but not a central one. Stiglitz himself, of course, is right outside the White House tent, which clearly rankles.

The thesis of Freefall is that, as a result, the administration's response to the crisis has been far too favourable to Wall Street, and has bailed out the banks without reforming them. The actions of both Bush and Obama (and, on this score, Stiglitz cannot see much difference between them) may have prevented the world economy from slipping from recession into depression, but have in some ways made the system more difficult to reform - and the wrong lessons have been drawn from the crisis.

Stiglitz presents his alternative diagnosis and a comprehensive set of recommendations, which amount to a much more radical response. He tries to cover the waterfront: from the future relations between countries, through the changed understanding of the role of the state in markets, to more detailed prescriptions on the regulation of credit derivatives. Inevitably, therefore, much of what he writes is in shorthand, but, given the plethora of lengthy post-crisis publications, that is no bad thing.

Much that he recommends comes from a report that Stiglitz produced for the United Nations and another piece of work he was involved in for president Sarkozy of France. The latter gets us into the area of happiness. Stiglitz is convinced that the blind pursuit of growth in GDP per head has led us astray, and he flirts with notions of gross national happiness (GNH), as adopted in Bhutan.

In the financial arena, Stiglitz would like to see a new global reserve currency. He thinks it inconceivable that the dollar can remain at the centre of the global financial system indefinitely. He is not the only person advancing that proposition. The governor of the Chinese central bank has done so, though the central view would seem to be that the time is not quite right for such a dramatic change.

On the regulatory front, we find ourselves on familiar territory. Banks should hold more capital. There should be greater regulation of financial innovation and further standardisation of derivatives. And Stiglitz is supportive of the arguments put by Volcker and Mervyn King to the effect that if banks are too big to fail they are too big to survive, and should be broken up.

This is a beguiling thesis, albeit one that has yet to be articulated in a way that would allow it to become regulatory policy. And Stiglitz does not go into devilish detail here.

Freefall is not a dispassionate analysis of the crisis. You will not find charts and graphs and the usual paraphernalia of academic publication. It is an unashamed polemic: Stiglitz wears his heart on his sleeve. But if you want to know where the left is to be found in the US and what it thinks, this is just the book for you.

You may be surprised by the level of disappointment already felt in Obama, but that's a useful corrective to the still adulatory press coverage that his administration receives away from home.

Freefall: Free markets and the sinking of the global economy

Joseph Stiglitz

Allen Lane £25.00.

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