February 17, 2013

• The one book on economics everyone should read

  JDN 2456341 EDT 15:44.

   

  In Freefall, Joseph Stiglitz, one of the great economists of our time (Krugman called him “an insanely great economist”), outlines what caused the crisis in 2008, the depression from which we are still recovering today. He saw it coming at the time, and tried to warn regulators, but they wouldn’t listen. (If you’re reminded of Keynes in the Great Depression, the comparison is apt on many levels.)

  He describes himself as a centrist, and he basically agrees with Eisenhower or maybe Nixon; as you can imagine, he is derided as a far-left socialist by Republicans and Libertarians. That’s how far right we have shifted in this country; the mere suggestion that markets sometimes fail and need to be corrected by careful taxation and regulation is now considered radical socialism.

  Stiglitz believes in capitalism; he just doesn’t believe in it blindly. He understands that it has faults and limitations, and understands that government and nonprofits have important roles to play. One role he’d like to see more of: Academics and nonprofit leaders in regulatory agencies. For too long, there has been a revolving door between Wall Street and the people who are supposed to be regulating it. The fox guards the henhouse, and has for decades.

  Indeed, Stiglitz shows us a striking fact about the 2008 crisis: It wasn’t really capitalist at all. It wasn’t socialist either; no, it was something else, some terrible third alternative. Corporatism, corporatocracy, maybe even crypto-fascism. The government refused to help homeowners and the unemployed, because that would be socialist; but doling out trillions of dollars in free loans to banks? That was just fine. Moral hazard was considered a grave concern when it came to saving people’s jobs and homes (I mean, my god, what if someone got a nice home and didn’t quite deserve it? It would be the end of the free world, I’m sure), but not when it came to writing a blank check to the banks whose insane risks had toppled the world economy. Government became, not a regulatory framework for markets, not a safety net for the helpless, but an ATM for business executives. We did install some new regulations (some very long and complicated new regulations that I don’t think anyone fully understands), but on the whole we put the same people back in charge who had caused the crisis in the first place.

  Stiglitz chronicles abuse after abuse, actions that range from unethical to criminal. Securities were packaged without anyone having the faintest idea what risk they contained. Accounting rules were fudged to make failing banks look solvent. Financial products were sold as the highest quality when the people selling them knew they were destined to fail. Exorbitant fees were charged at every level. Some banks even spent their entire bailout funds paying “retention bonuses” to their executives. Our entire system of banks, credit rating agencies, and regulators failed on a catastrophic scale. A few people became spectacularly rich while the rest of us suffered.

  Stiglitz is highly critical of Republicans, but he is also critical of Obama for failing to stand up to Republicans. Where America needed a unified Keynesian response, our leaders faltered, succumbing to the demands of far-right radicals (Why would you want deficit reduction in the middle of a depression!?), and muddling through with far too many compromises. As Stiglitz rightly points out, a larger, more regulated stimulus would have seemed like a big expenditure; but in fact, the route we took will be far more costly in the long run.

  Everyone should especially read chapter 4, “The Mortgage Scam”. This one hit close to home for me (literally, I suppose), because my parents are still facing foreclosure as a result of the unethical and fraudulent practices of too-big-to-fail banks. Our equity has gone under water, our interest rate has exploded, now we’re waiting for our foreclosure hearing with some unknown investor we’ve never met who apparently somehow owns our loan (or the majority share or something; it’s all so complicated I’m not sure anyone understands it really). When we financed, we were promised that we were taking a low-risk plan, that the market for homes was rising steadily and we would never have to worry about losing our equity. We fell for it; and of course, so did millions of other people, including most economists.

  It all started when HSBC bought our mortgage, and I want you to think about that phrase, “bought our mortgage”; a mortgage is not a thing, it is a promise. How can you buy a promise? We never signed a contract with HSBC, and would not have if they had offered one. Instead, we signed a contract with another bank, who went behind our backs and signed a contract with HSBC, and yet… somehow we are the ones who have to pay HSBC, not the bank we originally signed up with. How is that a free market?

  Many people said at the time that “we had no choice” but to bail out the banks with trillions of dollars in unsecured debt that may never be repaid. Stiglitz does an excellent job of debunking this claim, pointing out all sorts of alternative policies that could have worked better, faster, cheaper, and with less moral hazard. One of his proposals is one that always made sense to me: Why not have the government refinance every mortgage in America at 3%? (Funded by the Fed discount window at a profit, or by selling Treasury bonds at break-even. Honestly, don’t a 30-year T-bill and a 30-year mortgage seem like they’re made for each other?) Would that be “socialist”? No, it really wouldn’t, seeing as people are still paying for things and getting what they pay for. It’s just a fair interest rate without excessive middlemen, and apparently unfair rates and middlemen have come to define what we think of as “capitalism”. Indeed, what we actually did involved an unprecedented level of government intervention into the financial system, costing taxpayers hundreds of billions of dollars for very little gain.

  I even felt some personal connection as he discussed the rise of brokerage fees; I currently have a stock portfolio that has made money, but not for me. All my stocks have risen in price, but not enough to pay back the ridiculous fees my online broker charges me. (And I’ve looked it up; my broker is actually one of the cheapest available, charging $10 per trade where most charge $20; of course, most trades actually cost something like $0.00001…) It actually acts like a regressive tax; the larger amounts you trade, the less you feel the fees (often they even waive them for large accounts!). So basically, it’s a good way of keeping the middle class from meddling in the stock market, which obviously belongs to rich people. It’s also a good way for brokers to make money regardless of how the market goes. (If $10 doesn’t sound like a lot to you, I want you to think about the fact that a 1% gain on a stock in a month is pretty good. So that $10 gets wiped out if your trade is for any less than $1000.)

  I shared his exasperation at the concept of “high-frequency trading”, in which computer algorithms execute trades on the order of microseconds, to the point where speed-of-light limitations are becoming a problem. Why do we need that? What could it possibly do, except distort our market and make it unstable? Well, I suppose it does do one other thing: It skims off money for those who own the computers. It’s a good way to get rich, in much the same way as bank robbery.

  I like so many things about this book–seriously, go read it–that it’s hard to pick my favorite, but if I had to, it would be the final chapter, in which talks about the “moral deficit”, the way that our market has been taken over by corrupt psychopaths whose sole goal in existence is making more money for themselves. We’ve lost our way as a society; we’ve forgotten that our lives have a purpose besides narrow self-interest. You want to talk about moral hazard? That’s our moral hazard.

  • 4:41 pm
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