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Gravity kills

The strongest voice of economic dissent in the land of hyper-free markets on the 2008 crash, writes Gautam Chikermane.

books Updated: Feb 13, 2010 01:08 IST
Gautam Chikermane

With more than 400 papers and a dozen books on different aspects of the ongoing financial crisis behind us, if there is one I can recommend to readers with a faint interest in the now-fallen field of economics as well as policymakers trying to fight this financial catastrophe, this is it. Nobel Prize winner Joseph Stiglitz’ fifth book Freefall is insightful, instructive — and gripping.

The self-styled crisis veteran, or ‘crisologist’, cuts to the chase, where the bad guy is really a belief system. Freefall — the crash of the global markets following the Lehman Brothers bankruptcy in September 2008 — he says, is a battle of ideas. It is his argument against “market fundamentalism” that claims unfettered markets can ensure economic prosperity for all.

“The only surprise about the economic crisis of 2008 was that it came as a surprise for so many,” he says, firing his first salvo. “A deregulated market awash in liquidity and low interest rates, a global real estate bubble, and skyrocketing subprime lending were a toxic combination.” In themselves, low interest rates are not bad, he says, taking a dig at and exposing the shallowness of bankers who blamed low-interest rates for the debacle. It is when low interest rates merge with lax regulation that they turn deadly.

Unlike many other scholars who have jumped on to this greatest financial crisis since the Great Depression post-facto, Stiglitz, like Nouriel Roubini, has been predicting doom much earlier. A Keynesian, Stiglitz is today the strongest voice of economic dissent in the land of hyper-free markets, arguing that private entrepreneurs don’t always act according to traditional economic theory.

And even while looking beyond finance, rebellion underlines analysis. Innovation, for instance, a much ignored field until the Austrian economist Joseph Schumpeter threw light on it, has its own wastelands. “Wouldn’t monopolists take actions to deter the entry of new rivals?” Stiglitz asks. “Would innovators direct their attention at trying to capture the market share of an incumbent, rather than developing a really new idea?”

Stiglitz is cynical about the current solutions to the crisis. Some regulation, reducing excessive leverage, may improve. But the “too-big-to-fail banks will be allowed to continue much as before, derivatives that cost taxpayers so much will continue almost unabated, and finance executives will continue to receive outsized bonuses.”

The future he sees is dark. We have changed the rules of capitalism by introducing an “ersatz capitalism with unclear rules — but with a predictable outcome: future crises; undue risk-taking at public expense, no matter what the promise of a new regulatory regime; and greater inefficiency.”

But the future he seeks is bright. “Will we,” he asks, “seize the opportunity to create a new financial system that will do what human beings need a financial system to do; to create a new economic system that will create meaningful jobs, decent work for all those who want it, one in which

the divide between the haves and the have-nots is narrowing rather than widening; and to create a new society in which each individual is able to fulfil his aspirations?”

The question we’re left with is: will our leaders have a strong intellectual framework and the right morals to use global institutions, the G20 or IMF for instance, to get finance to serve humans? This book provides the ammunition of ideas for the former. But it doesn’t seem like world leaders are going to load their guns — yet.