Freefall: America, Free Markets, and the Sinking of the World Economy
$16.49
Product Description
Nobel Prize winner Joseph E. Stiglitz explains the current financial crisis—and the coming global economic order…. More >>
Home Books
Freefall: America, Free Markets, and the Sinking of the World Economy
I bought this book because I really wanted to better understand all of the parts of the puzzle that is the housing bubble and its aftermath. This book is a confusingly written politically motivated harangue against greedy bankers, enabled by rating agencies. It basically absolves all of the other players. Fannie Mae and Freddie Mac, according to Stiglitz, just decided to “join in the fun” late in the game and were blameless. He fails to mention that they were only partly “privatized” in that both enjoyed implicit credit guarantees of the US Government and that Congress declined to check them when they “joined in the fun”. Maybe the book got better, I was not able to finish it because the style of writing was rambling and confusing.
Rating: 1 / 5
This book is poorly organized, and tediously repeats what is today common knowledge about the incompetent, often unqualified, and always selfish private and public sector individuals who created the disastrous economic circumstances that led to the current recession. The author expresses little moral outrage, and in the end neither demands nor offers a schedule of solutions or punishments. The scope of the problems described require an activist, not a recording secretary.
Rating: 1 / 5
In response to the shock caused by the atrocities of September 11, 2001, the Federal Reserve lowered short term interest rates to historic low levels and kept them at absurdly low levels long after the shock had passed. This action pushed the entire Treasury yield curve along with bank lending rates down including prime lending rates upon which most mortgage rates are keyed. This led to an orgy of mortgage refinancing and fueled a housing boom that caused housing prices to soar far beyond levels that underlying economic rationale could possibly justify. Unscrupulous practices by predatory lenders coupled with unwise borrowing on the part of home buyers accelerated the inherent risks. But it was the Federal Reserve ¯ government ¯ that was the proximate cause of the ensuing housing bubble.
For more than a dozen years prior to the 2008 financial crisis, influential Capitol Hill Democrats like Christopher Dodd, Ted Kennedy, Paul Sarbanes, Charles Schumer, Joseph P. Kennedy II and others made a fetish out of keel-hauling officials from banks, the Federal Reserve, the Treasury Department, the FDIC and so on in front of televised hearings hectoring them about insufficient mortgage lending to “underserved communities” or ¯ in a more accurate rendering ¯ non credit-worthy borrowers. The predictable result was a flood of sub-prime lending where traditional benchmarks of credit-worthiness were abandoned in an effort to smooth Congressional relations. Again, aggressive lending practices and unwise borrowing by home buyers accelerated the problem. But it was Congressional committees ¯ government again ¯ that initiated and sustained the problem.
In its 2002 Annual Report, the Federal National Mortgage Association (or Fannie Mae) boasted that it had shoveled up to $1.3 trillion into its American Dream Commitment program to provide massive increases in mortgage loans to “underserved” communities that traditionally contained higher percentages of non-credit worthy borrowers than society at large. For decades, Fannie Mae and Freddie Mac maintained an incestuous relationship with key Congressional committee members pouring a torrent of campaign contributions into the coffers of influential members in exchange for lax oversight, contributions that benefitted Democrats by a 15-1 advantage over their Republican counterparts. Primary recipients included Senators Christopher Dodd who received $165,000, Barack Obama who raked in $125,000 in contributions and Hillary Clinton who collected $75,000. In exchange, Democrats, on a pure party-line vote, killed S.190 in 2005, a measure that had already passed in the Senate Banking Committee that would have created a super-regulator with real power to crack down on excessive risk taking and would have outlawed investments by the government-sponsored enterprises in the riskiest investments. The tight relationship between GSEs and government was bolstered by a revolving door between government office holders and the boards of these GSEs that included names like Rahm Emanuel, Jamie Gorelick, Louis Freeh, Kenneth Duberstein, Thomas Donilon, Ralph Boyd, Joan Donoghue, and many others. Lax oversight led directly to accounting scandals that, by 2005, had destroyed the careers of Fannie’s previously high-flying and now disgraced chairman Franklin Raines.
The all too predictable result was that Fannie and Freddie assumed, all at taxpayer expense, massive mortgage default risks that were far in excess of what was reported in their financial statements or allowed by law. It is true that financial institutions elevated systemic risk levels by creating and trading derivative securities based upon the packaged mortgage-backed securities guaranteed by Fannie and Freddie. But it was these GSEs themselves ¯ quasi-government entities ¯ that accounted for the failures of mortgage-backed securities by becoming the primary customer of AAA-rated subprime mortgage pools composed of mortgages that were sure to default and which held a massive portfolio of subprime mortgages for their own account.
The SEC had a heavy hand in the financial collapse in the fall of 2007. Using its regulatory authority, the agency relied upon a FASB 157 ruling issued in July 2007 and forced banks, insurance companies and other financial firms to adhere to “mark-to-market” accounting rules that required them to write down the value of large portions of their asset portfolios. By the fall of 2007, the market prices for mortgage-backed securities had collapsed even while most of these securities maintained a cash flow valuation far in excess of their exchange-traded or marketability value. In many cases, financial institutions held substantial portfolios of credit derivatives like credit default swaps that are non exchange-traded private contracts between two private parties and whose market value was essentially impossible to determine but whose underlying cash flow values remained intact. As a result of its inflexibility, by early Spring of 2009 the SEC had forced financial firms to write down over $700 billion in book-related accounting adjustments that did not represent cash losses. In response to the sudden balance sheet deterioration caused by SEC’s adherence to mark-to-market accounting, financial firms initiated a mad scramble to boost liquidity to replace “lost” capital that resulted in waves of selling in stocks and other marketable assets, driving down the stock and mutual fund holdings of average investors who were suddenly in the cross-hairs of a government agency’s myopic policy position. Industrial corporations can carry assets on their balance sheets at book value but, says government’s SEC, banks cannot, even if the assets are credit-worthy.
But the SEC was not done yet. Another blunder was its elimination in July 2007 of the so-called “up-tick rule” that prevented short sellers from executing a short sale unless and until the stock registered an increase, or uptick, in value. In addition, the SEC abandoned its enforcement of “naked short selling” that prevented traders from executing sell orders on shares they did not possess. Elimination of the uptick rule that had been in place since 1938 together with relaxation of naked short selling enforcement caused an explosion in market volatility that sent the volatility index (or VIX index) soaring nearly 550% between the first week of July 2007 and late October 2008 when markets were crumbling. Yet again, it was chiefly the handiwork of government that brought about the now familiar scene of market collapse and catastrophe.
Lastly, the overseers themselves on Capitol Hill like Christopher Dodd received below-market rates on their own mortgages from mortgage lenders like Countrywide in exchange for preferential treatment in the form of Congressional intervention with government agencies on their lending practices that would have otherwise landed these predatory lenders in regulatory hot water. So, in many cases, it was actually those who were entrusted with Congressional oversight who were running interference for the worst of the worst among mortgage loan originators. Few people, even his most ardent admirers, were shocked when Senator Dodd announced his “retirement” from the Senate after his term expires in January 2011.
What does all this have to do with the book Freefall: America, Free Markets, and the Sinking of the World Economy by Joseph Stiglitz? In this book, Stiglitz attempts to lay the blame for the financial meltdown of recent years on the doorstep of financial deregulation that began in earnest in the late 1970s. Stiglitz is a left-leaning Nobel Prize-winning economist clearly aligned with what Thomas Frank, the muck-raking liberal blowhard at The Wall Street Journal calls “the Party of the political scientists.” That would be the Democrats if you haven’t guessed by now. If the foregoing paragraphs do not obliterate Stiglitz’s contention, consider the case of Western Europe with their hyper-regulated economies suffering under a smothering blanket of Euro-sclerotic statism. If deregulation was the problem and heavy interventionist regulation the cure, then Greece with its suffocating regulatory regime would be the world’s most vibrant example of fiscal and monetary success. But Europe is in far worse shape than the U.S. with Greece on the brink of financial ruin and the other PIIGS countries of Portugal, Italy, Ireland and Spain teetering on the precipice. Yet, Stiglitz urges more government regulatory involvement of the kind that brought about this catastrophe in the first place.
Stiglitz claims that the expansion of regulation he advocates should be led by leaders from “unions, nongovernmental organizations . . . and universities.” Presumably Stiglitz thinks it would be helpful if Andy Stern who heads the Service Employees International Union, the organization more responsible than any other single entity for bankrupting state treasuries that must fund lavish unionized public employee pensions, were consulted on appropriate regulatory remedies for improving banks’ and financial institutions’ solvency? Does Stiglitz imagine that university professors like Ward Churchill, Noam Chomsky, Leonard Jeffries, William Ayres and the like would make valuable contributions to solving the financial crisis? Or perhaps Greenpeace, the Natural Resources Defense Council, Amnesty International and other NGOs like these should be invited to establish credit-worthiness standards for global bank lending.
In 2002, Stiglitz co-authored a paper along with Obama’s OMB chief Peter Orszag entitled “Implications of the New Fannie Mae and Freddie Mac Risk-Based Capital Standard” that examined the default risk to Fannie Mae and Freddie Mac. The authors constructed a model to measure the likelihood of default by these GSEs under a prolonged 10-year period of severe economic collapse. They concluded that these agencies’ risk-based capital standard was adequate to survive such a highly unlikely prolonged scenario, writing that “. . . on the basis of historical experience, the risk to the government from a potential default on GSE debt is effectively zero.” Of course, it took less than two years to disprove these claims and under conditions far less onerous than those assumed by Stiglitz et. al. Oddly, in 361 pages of his book Freefall, Stiglitz was unable to find space to recount these findings. It should give one pause before concluding that mankind’s survival depends upon government regulation of carbon markets whose justification is predicated upon computer models of atmospheric dynamics that are no doubt as robust as the models devised by Stiglitz et. al.
But most unsettling is his final chapter where Stiglitz attempts to rewrite the Declaration of Independence and the Constitution in a single stroke by revoking the concept of God-given, unalienable rights. The title of this chapter, “Toward a New Society”, is highly instructive. In it, he asserts that political and economic rights “. . . are not God given. They are social constructs. We can think of them as part of the social contract that governs how we live together as a community.” Here Stiglitz lines up behind some of history’s other visionaries like Vladmir I. Lenin and Mao Zedong who sought to establish a “new society” based upon revocation of unalienable, God-given human rights in favor of government-conferred rights in order to bring about the perfection of mankind.
Stiglitz, perhaps, is to be congratulated for stating so unabashedly the animating principle that governs leftist political thought in Western nations and which highlights the deep philosophical divide between liberalism and conservatism. Here, in bright shining prose, the author loudly proclaims inoperative the concept that humans are endowed by their creator with certain unalienable rights and instead enjoy only those rights which the government and society, at any given time, find convenient to bestow. And, needless to say, if government has the power to bestow rights, it also has the power to revoke them at will. Such a view places Stiglitz squarely in the mainstream, if such a word can be used in this context, of liberal Democratic Party opinion that salivates at the prospect of revoking 1st Amendment free speech and free exercise of religion rights along with all 2nd Amendment rights. And that would serve only as the appetizer course.
Readers are urged to keep this thought uppermost in mind on all future visits to the voting booth.
Joseph Toomey
Rating: 1 / 5
With due respect, it is easy to follow someone that got the Nobel Prize in Economics.
The author presented all types of issues: Americans living standards are getting lower; students have poor math/science skills; climate changes and global warming; US trade deficits with China, Japan and many other countries; manufacturing sector losing jobs; $800 billion borrowing from the rest of the world; global inequality between the rich and poor Africa countries; advocating the Swedish high-tax model; and the US government taking a more central role, etc.
What is he talking about? None of the above is anything new. It has been covered, dissected, analyzed, published, blogged, twittered, YouTubed, Facebooked, at Davos World Economic Forum, TED conference, and in media every day.
He merely presented these well-known problems, but offer no solution. Clearly government should not and will not play a more central role. The TARP fund, lending $250 billion to nine US banks, was a good experiment. Guess what, many of these banks cannot wait to return the loans to US government. Otherwise, these banks cannot pay their best performers millions. Bank CEOs are getting lower salaries, just to fool the media. In reality, they get more stock shares.
Definitely you do not need government to meddle in finance, or other business. Free market system is still the best.
What do you do when companies are in trouble? Let them close. With global competition, if GM is about to close, other companies will step up to bid GM. That is the right way to do it.
Rating: 1 / 5
SadlyCHUCK full of superbly detailed ANALYSIS and detailed remedial Suggestions too late to save us from the
Gross financial deficiencies and blunders
of our severely dissfunctial financial banking system
Rating: 5 / 5