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| Joseph Stiglitz |
This is a
clear and level-headed book on the causes of the American financial crash and
the botched solutions to it. Joseph Stiglitz is a winner of the Nobel
Prize in Economics, and a former head of the World Bank: hardly a political
firebrand, but his book is deeply critical of the malfunctioning of the
financial institutions and regulators which led to the crash, and the lack of
truly systemic solutions since then. I have summed up key points from the book
below.
- The
flaky mortgage lending was aimed at exploiting the lower classes - he
would say, deliberately.
- There
is a need for better measures of individual wellbeing - there is one
created by the UNDP.
- The
US has limited individual security benefits, for fear of rewarding
laziness or incompetence, yet in effect it has increased corporate
security benefits (bailouts etc.)
- "Rugged
individualism combined with rampant materialism has led to an undermining
of trust".
- "Securitization"
removed any personal relationship between borrowers and lenders, and hence
any scope to adjust or restructure problem loans.
- "This
crisis has exposed fissures in our society, between Wall Street and Main
Street".
- We
have seen an increasing short-termism, on the part of individuals, firms
and government".
- He
sees part of the role of government as to have a vision, to think
longer-term. The system of campaign contributions and lobbyists makes this
very difficult.
- In
2010 "the total gap between what American homeowners owed and the
value of their homes (was) between $700 and $900 billion."
- Commercial
real estate also has a big "underwater" problem, i.e. the value
of loans exceeds total value of property.
- The
way the Obama Government intervened to 'rescue' the banking sector has not
restored lending to small/medium businesses, which is well below pre-2008
levels.
- He
cites evidence that the US treasury is overly identified with the
interests of the building sector.
- he
talks of 'Keynesian' versus Hooverite approaches to recession, the first
being that Government must increase spending, the latter that deficits
must be cut to restore confidence. He gives many examples where this
hasn't worked.
The Dodd Frank Act of 2010, aimed at reforming
financial regulation, is described by Stiglitz as "a Swiss cheese
bill - seemingly strong, but with large holes". Key elements are:
- Creation
of an independent Consumer Financial Protection Bureau - a hopeful step.
- A
systematic regulator - merely a council who advise the Fed.
- Curbs
on excessive risk taking: pretty weak in actuality.
- Carbon
derivatives: pretty weak in actuality.
He believes that the US "faces the risk of another major crisis
within the next fifteen years" - most of the problems have barely been
addressed. Trust remains low, and the global credibility of the US has been
much weakened.
