AS the world gasped in horror and disbelief, the dreaded financial inferno called recession raged, bringing down one institution after another in its flame. There was utter shock at this collapse of institutions in the western hemisphere as these were once at the vanguard of the global economic boom. Now that the fire has slowed down, from among the embers the world economists are trying to put pieces together to decipher the nightmare.
Joseph E. Stiglitz has always stood out as an unpleasant soothsayer, warning of an impending disaster. In his latest book ‘Freefall’ he has revealed how the writing was on the wall and all those who ought to have seen it ignored it and even laughed at it. Freefall is the unfolding of the story of the great boom and bust of the 2000s, based on the American style market capitalism, its treacherous pitfalls into which several nations fell, with the blind faith that America could not go wrong.
Stiglitz writes how the economists, the senior officials in the US, right up to the President refused to acknowledge that there was recession, even till the late 2000s, till it stared into their faces. “In 2008, the Bush administration at first denied there was any serious problem. We had just built a few too many houses, the President suggested.” The Time magazine had called the Federal Reserve Chairman Alan Greenspan and the Treasury Secretary Robert Rubin “Committee to Save the World.” Men like these were given the status of demigods.
But the author is not out on head-hunting. He is not listing individuals who were the villains in the piece or highlight those who stemmed the rate of the freefall. The author has sought to raise fundamental questions on the policies advocated and pursued by men at the helm, with little thought to the cascading impact they would have on the long run, especially on the poor world over. The men who were there happened to be there as a result of the policies being adopted by the government. For instance, he says, when Reagan appointed Greenspan as Federal Reserve Chairman in 1987, he was looking for someone committed to deregulation. If he had not been available, there were hundred others who would have got the job, says Stiglitz. “Whenever one sees problems as persistent and pervasive as those that have plagued the US financial system, there is only one conclusion to reach: the problems are systemic.”
The malaise in the US economy is deep-rooted. As the book points out, the incomes had stagnated for even those in the middle for a decade, a society marked by increasing inequality, a society where average performance in standardised education test was middling at best. Several of the key economic sectors other than finance were in trouble, including health, energy and manufacturing.
“Figuring out what happened is like “peeling an onion”: each explanation raises a new question. In peeling back the onion, we need to ask, Why did the financial sector fail so badly, not only in performing its critical social functions, but even in serving shareholders and bondholders well? Only executives in financial institutions seem to have walked away with their pockets lined – less lined than if there had been no crash, but still better off than, say the poor Citibank shareholders who saw their investment virtually disappear.” In fact, this charge recurs in the book, the author repeatedly pointing out how the whole system was working for the benefit of a select few at the cost of the poor, honest hardworking citizens.
Every conceivable financial instrument was deregulated, with nothing put in place for a check and verification mechanism. It was believed that the free market will work and correct itself. Only it didn’t and it was not going to. But then, the people at the helm were not willing to listen. And when the crash happened the same free market believers wailed and demanded government help and assistance and huge bailouts. International institutions like the IMF fall in this category.
The stories of the US mortgages and derivatives read like ridiculous imagination of a fertile mind. Only, these are things that happened and were supported and encouraged by the US government and the system. The book breaks down the events shot by shot as if in a video freeze.
“Iceland is a wonderful example of what can go wrong when a small and open economy adopts the deregulation mantra blindly. Its well-educated people worked hard and were at the forefront of modern technology. They overcame the disadvantages of a remote location, harsh weather, and depletion of fish stocks – another traditional source of income – to generate per capita income of $40,000. Today, the reckless behavior of their banks has put the country’s future in jeopardy.” The story could have been India’s but for the fact that our people’s faith in old school economics did not make deregulation easy and the crash happened just at about the ‘right’ time for us, before the Manmohan Singhs, Chidambarams and Ahluwalias pushed us the American capitalist way whole hog.
Stiglitz discusses how the American government reacted. The outgoing Bush administration hardly took any initiatives; it left the legacy for the next President. Barack Obama who came with much promise has been constantly stymied by the system, from going full steam on undoing the damage. To begin with, according to Stiglitz, the team he put together for working out the solution was largely a change of chairs for several people. Those who were at the helm during the crisis were given important position in the solution team and there was an ideological divide in the group – those wanting to continue with the existing system with cosmetic changes and huge government bailouts and those believed in deeper cleansing. “Keeping so much of the old team in place also exposed the President to blame for decisions that were taken by the Fed – or at least seemed to be. The Fed and the Treasury seemed to be acting in tandem under Bush, and the coziness continued with Obama. No one was really sure who was making the calls; the seamlessness of the transition suggested nothing has changed.”
The figures in the mortgage scam are staggering. By one estimate, 2.3 million Americans (mostly poor) lost their homes in 2008 alone. Millions more have been added to the count after that. The story of how the greedy American banks prodded and encouraged poor people to live beyond their means and finally robbed them of their homes is a cruel fascinating story in legalised stealing. Millions have lost their dreams of a better life, enhanced education for their children and the hope of a modestly comfortable life after retirement. And the bankers who got the country into this mess, instead of paying the price walked away with millions of dollars as rescue from Washington.
The Nobel laureate author has dissected the American economy vertically and horizontally to expose the lack of morality, conscience and accountability in the system. He has suggested remedial measures like taxing more at the top and less at the bottom for a better redistribution of wealth, a new global reserve system so that the developing countries can spend more and save less, without the fear of the rainy day, putting some set of regulations in place to avoid a future shock like this.
The book concludes that America has altered not only its institution – encouraging ever increased concentration in finance – but the very rules of capitalism. “We have announced that for favoured institutions there is to be little or no market discipline.” Stiglitz has predicted that the recovery is going to be hard and long. Is anyone listening in Washington is the moot question. Freefall is a must read book for students of economics, the economists and the policymakers. It tells a lot about how not to manage the economy and that economics is much beyond finance and the jargons. It is about the life and livelihood of people.
(Penguin Books India Pvt Ltd, 11 Community Centre, Panchsheel Park, New Delhi-110 017; www.penguinbookindia.com)