Joseph Stiglitz on Capitalist Fools: How We Crashed the Economy

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Joseph Stiglitz won the Nobel Prize for economics in 2001.  He was Chairman of the President’s Council of Economic Advisors from 1995 to 1997 for Bill Clinton.  He is also the former Senior Vice President and Chief Economist of the World Bank.  He opposed financial industry deregulation under Clinton, fought with Larry Summers, who is now Obama’s chielf economic advisor, over regulating derivatives (Stiglitz wanted to, but Summers won and that wrong decision contributed to the mess we are in.)  Stiglitz, while favoring trade, has questioned some of the faith-based beliefs of the free trade fundamentalists.    

Stiglitz has an excellent article in Vanity Fair on how we got to the worst economic times since the 1930s.  He points to five key mistakes-under Reagan, Clinton, and Bush II-and one national delusion.

The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal.

Joesph Stiglitz, Capitalist Fools, in Vanity Fair

Free market fundamentalism is the God that failed.  More, after the fold.

The article is two pages and I encourage everyone to read it.  It’s a relatively quick read, and well worth reading.  Here, I will just provide a quick summary.

Stiglitz identifies five key moments of system failure:

No. 1: Reagan Fires Fed Chairman Volcker and Replaces Him With Greenspan in 1987:

Volcker also understood that financial markets need to be regulated. Reagan wanted someone who did not believe any such thing, and he found him in a devotee of the objectivist philosopher and free-market zealot Ayn Rand.

snip

If you appoint an anti-regulator as your enforcer, you know what kind of enforcement you’ll get. A flood of liquidity combined with the failed levees of regulation proved disastrous.

Greenspan presided over not one but two financial bubbles.

Joesph Stiglitz, Capitalist Fools, in Vanity Fair

2.  Congress repealed the Glass-Steagall Act in 1999 under Bill Clinton  (Glass-Steagall was a depression-era reform that separated commerical and investment banks)

I had opposed repeal of Glass-Steagall. The proponents said, in effect, Trust us: we will create Chinese walls to make sure that the problems of the past do not recur. As an economist, I certainly possessed a healthy degree of trust, trust in the power of economic incentives to bend human behavior toward self-interest-toward short-term self-interest, at any rate, rather than Tocqueville’s “self interest rightly understood.”

Joesph Stiglitz, Capitalist Fools, in Vanity Fair

Stiglitz also refers to a 2004 decision by the SEC “to allow big investment banks to increase their debt-to-capital ratio (from 12:1 to 30:1, or higher) so that they could buy more mortgage-backed securities, inflating the housing bubble in the process.”

Once more, it was deregulation run amuck, and few even noticed.  

3.    The Bush tax cuts, both on income and capital gains

The Bush administration was providing an open invitation to excessive borrowing and lending-not that American consumers needed any more encouragement.

Joesph Stiglitz, Capitalist Fools, in Vanity Fair

4.  Faking the Numbers

Here he refers to bad accounting, the failure to address problems with stock options, and the incentive structures of ratings agencies like Moodys that led them to give high ratings to toxic assets. See Page 2 of Joseph Stiglitz, Capitalist Fools

5.  Paulson and the Flawed Bailout

Valuable time was wasted as Paulson pushed his own plan, “cash for trash,” buying up the bad assets and putting the risk onto American taxpayers. When he finally abandoned it, providing banks with money they needed, he did it in a way that not only cheated America’s taxpayers but failed to ensure that the banks would use the money to re-start lending. He even allowed the banks to pour out money to their shareholders as taxpayers were pouring money into the banks.

Page 2 of Joseph Stiglitz, Capitalist Fools

Stiglitz concludes:

The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal.  Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, “I have found a flaw.” Congressman Henry Waxman pushed him, responding, “In other words, you found that your view of the world, your ideology, was not right; it was not working.” “Absolutely, precisely,” Greenspan said. The embrace by America-and much of the rest of the world-of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.

The flawed economic philosophy brought by Reagan and embraced by so many, brought us to this day.  Ideas have consequences, especially when we stop empirically testing them.  Republican economics have created great pain to America and harmed our national interest.  

The flaw that Greenspan found was always there.  Self regulation does not work.  As Stiglitz said:

As an economist, I certainly possessed a healthy degree of trust, trust in the power of economic incentives to bend human behavior toward self-interest-toward short-term self-interest

Yes, for all their claims to science, the premise conflicts with tendencies of people.

This is the real legacy of Ronald Reagan and Alan Greenspan:

The whole scheme was kick-started under Ronald Reagan. Between his tax cuts for the rich and the Greenspan Commission’s orchestrated Social Security heist, working Americans lost out in a generational wealth transfer shift now exceeding $1 trillion annually from 90 million working class households to for-profit corporations and the richest 1% of the population. It created an unprecedented wealth disparity that continues to grow, shames the nation and is destroying the bedrock middle class without which democracy can’t survive.

Greenspan helped orchestrate it with economist Ravi Batra calling his economics “Greenomics” in his 2005 book “Greenspan’s Fraud.” It “turns out to be Greedomics” advocating anti-trust laws, regulations and social services be ended so “nothing….interfere(s) with business greed and the pursuit of profits.”

Greenspan’s Dark Legacy Unmasked

And now it failed completely.  

It’s time to rebuild America that sees people to be at least as valuable as profits, if not more so.  

29 comments

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    • TomP on December 10, 2008 at 14:29
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    for real economic change

    • Edger on December 10, 2008 at 18:32

    The climate is collapsing. The Atlantic Conveyor may stop, or even reverse. The Greenland ice sheet is melting. Sea levels will rise about seven meters,  wiping out coastal cities – all the worlds financial and cultural centers.

    James Lovelock is convinced from a lifetime of climatological research and study that we have long passed the point of no return and that nothing can stop it now, and that by maybe 20 years at the outside the climate will have changed so much that we’ll be heading for a world in which the only habitable areas left on earth will be the poles. And that maybe 200 million of the earth’s 6 billion inhabitants will survive.

    I imagine some of the richest people on earth have concluded that since they cannot stop these developments that they must “selflessly” ensure the survival of the human race, and they are cleaning out the world economy of as much of it’s valuables as they can, since of course only “the most valuable people”, those “willing to make the tough choices for all” can be saved….

  1. that Edger cited in his comment up-thread.  To me, this is the healing positive of Lovelock’s thinking…

    We should be the heart and mind of the Earth, not its malady. So let us be brave and cease thinking of human needs and rights alone, and see that we have harmed the living Earth and need to make our peace with Gaia. We must do it while we are still strong enough to negotiate, and not a broken rabble led by brutal war lords. Most of all, we should remember that we are a part of it, and it is indeed our home.

    Could it be that the failure to understand this is what leads to the greed or self-interest Stiglitz refers to?  It seems that this failure to understand leads to the nihilism which is willing to rip everyone and everything off.  I think it is related.

    • Temmoku on December 12, 2008 at 05:05

    This is also mentioned in The Shock Doctrine….Greenspan, Reagan and Ayn Rand …oh and don’t forget “Uncle” Milton Friedman and his visions for a more “perfect” world!

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