books economics

Freefall, by Joseph Stiglitz

I have a lot of respect for Joseph Stiglitz. He is one of the world’s most cited economists, a Nobel winner and an advisor at the highest level. What sets him apart from his peers is that he is unafraid to blow the whistle on his own profession. He has a habit of telling people hard truths. He took his former employer the World Bank to task in Globalization and its Discontents, tackled the Iraq War, and in this latest book he disects the financial crisis.

He is well placed to do so.  Stiglitz has been one of the few economists who saw the financial crisis coming, and did everything he could to sound a warning. Freefall is subtitled Free markets and the sinking of the global economy, but it could legitimately be called ‘I told you so’.

Freefall tells the story of the financial crisis in 2008, what led up to it, and what the various responses were. It strips back the layers “like an onion”, from the failure of banks to the property bubble, to the unsustainable culture of consumption that drove US growth over the past decade. When it went wrong, all the effort went back into propping up or restoring the system, and nobody wanted to recognize that the system itself needed to change.

It’s not surprising the bailouts didn’t work. George Bush denied that there was a recession for a long time, and then appointed a team of economists and advisors who were all responsible for making the mess in the first place – Ben Bernanke at the Federal Reserve, or Tim Geithner, the man who failed to regulate the New York banks. Hank Paulson had been chief of Goldman Sachs, and with advisors from a Wall Street background, it’s almost inevitable that the bailouts would seek to preserve the status quo and protect the banks before the citizens. It should have been obvious from the start that the  bailouts wouldn’t work, but the incoming Obama administration kept the same team, reluctant to risk a change of direction when the economy was so fragile.

I doubt there’s a better analysis of the crisis and the subsequent response than the one in Freefall. It is comprehensive and doesn’t mince its words. It unpacks the economics in layman’s terms, until you see the 100% mortgages, the derivatives, the bonus culture, and you can’t help but agree with Stiglitz that “the only surprise about the economic crisis of 2008 was that it came as a surprise to so many.”

There’s some great material here on the failures of ‘trickle-up economics’, a pretty much final critique of the neo-classical school that has argued for so much deregulation. There’s a useful section on how a bailout should work, and a dummies guide to stimulating an economy without undermining the government’s bottom line – investment, in other words, rather than underwriting bad debt. The book was written before the crisis leapt from finance to government, but Stiglitz correctly predicts that if the stimulus was mishandled we would see the rise of ‘deficit hawks’ and a long period of stagnant growth.

The scope of the book is important too. Stiglitz doesn’t lay the blame on the steps of Wall Street. He shows how the culture of consumption naturally led to unsustainable debt, and how growing inequality has been covered up by a system that allowed the middle classes to consume beyond their means. The longer term consequences of this remain to be seen, but Stiglitz argues that the Washington Consensus is discredited beyond repair, and America’s role in the world is severely diminished.

The weaknesses of the book lie with the bigger solutions. Stiglitz peels back the onion back to the debt that drives economic growth, but doesn’t go that one layer further and hold the idea of growth itself up to scrutiny. He believes “the real problems remain unemployment and a lack of aggregate demand”, but stimulating demand puts us back on an unsustainable path, environmentally and economically. And he’s an unrepentant Keynesian. “Unless we go back to the basic principles of Keynesian economics,” he warns, “the world is doomed to a protracted downturn.”

That’s not good enough. The problem is deeper, and Keynesian and Monetarist economics are not our only choices. They’re categories from a previous era, like left and right in politics. It’s just not that simple any more. Taking the economy in the broader picture of resource depletion and climate change, as well as debt, we need a much more substantial re-invention.

Still, it may not have the ultimate answers, but if you want to understand what happened in 2008 and why, and why we haven’t bounced straight back to business as usual, Freefall is essential reading.


  1. It always is dangerous to oversimplify things, but I am somehow thinking of my Grandfather, who was vice director at the Banque Franco Polonaise in Gdansk before the war. After the war he never managed to rise beyond simple clerk again, but, as far as I can tell, led a happy and contented life. His essential wisdom for private financial householding was this:

    “Never spend money you don’t have – unless it is a matter of life and death.”

    Of course this is a bit of post-war finance ethics, but it is clear in principle. Don’t buy what you cannot afford and don’t buy what you do not need. Period. Since most people seems to be unable to do the math and all to easily fall for the rhetorics of sales people, it can be useful to have such over-simplified guidelines. If everyone would have followed these simple principles, the crisis might not have come about – or not in this form.

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