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Fixing the Financial Crisis

Joseph Stiglitz examines how America broke the world economy.

Even before it became fashionable to write about economic calamities or publicly decry reckless behavior by bankers and borrowers, economist Joseph Stiglitz, PhD ‘67, had been chronicling the perils and excesses of unfettered free markets. Exploitative trade policies, dangerous deregulation, predatory lending, and shoddy accounting had all been targets of his rebukes.

Freefall: America, Free Markets, and the Sinking of the World Economy
By Joseph E. Stiglitz, PhD ‘67
W. W. Norton, 2010, $27.95

“People say I’ve been arguing ‘the emperor has no clothes’ for some time,” says Stiglitz, who holds a University Chair at Columbia University and received the Nobel Prize in economics in 2001 for his work on information asymmetries.

This story is part of the May/June 2010 Issue of the MIT News magazine
See the rest of the issue

In Freefall: America, Free Markets, and the Sinking of the World Economy, his sixth book for a general audience, Stiglitz delivers a trenchant and readable analysis of a U.S. economy marked by excessive risk-taking and borrowing, rising unemployment and mortgage defaults, falling standards of living, and diminished global power. The current crisis, he says, signals an end to “American triumphalism.”

Skeptical of any theory that treats markets as efficient, self-correcting, or perfectly competitive, Stiglitz has built a 40-year career arguing for the visible hand of government as a necessary stabilizer and regulator. Since his days as a graduate student at MIT, he has consistently–some might say doggedly–modeled how imperfect information can affect the function of markets. Economic theories based on the assumption of perfect information, he says, are “flawed ideas that have had disastrous consequences.”

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Like much of his work, Freefall is part policy prescription, part jeremiad. Stiglitz lays blame for the Great Recession of 2008 in some familiar places–with Wall Street bankers, central bankers, mortgage lenders, rating agencies, regulators, academic economists, and Washington policy makers. But he finds culpability in other quarters, too–such as the Obama administration, which the liberal Keynesian economist might have been expected to spare. Stiglitz faults Obama for “muddling through” instead of enacting firm regulatory reforms and passing a more investment-oriented stimulus package.

“The measures we have taken to save us from going over the brink into the abyss may, at the same time, inhibit our return to robust growth,” he writes. “Just as the banks were shortsighted in their lending, we have been shortsighted in our rescue.”

Given the current political discontent, the book, which dispenses as much advice as blame, may win a broad audience in Washington. “Many of us knew the stimulus was too small,” explains Stiglitz, who testified before Congress in January. “We knew there would be dissatisfaction. Now, with recent election results [for Ted Kennedy’s U.S. Senate seat], there’s been a sudden desire in Washington to look for a different course.”

Stiglitz sees Freefall as “providing the intellectual armor” for political reformers willing to enact tougher regulations. “There’s going to be a battle in Washington,” he says. “I’m hoping my book will help shape and inform that debate.”

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