Stiglitz: The Fall of Wall Street Is to Market Fundamentalism What the Fall of the Berlin Wall Was to Communism
Joseph Stiglitz was awarded the Nobel Prize for Economics in 2001. I spoke with him Tuesday about the Wall Street meltdown.
Nathan Gardels: Barack Obama has said the Wall Street meltdown is the greatest financial crisis since the Great Depression. John McCain says the economy is threatened, but fundamentally strong. Which is it?
Joseph Stiglitz: Obama is much closer to the mark. Yes, America has talented people, great universities and a good hi-tech sector. But the financial markets have played a very important role, accounting for 30 percent of corporate profits in the last few years.
Those who run the financial markets have garnered those profits on the argument they were helping manage risk and efficiently allocating capital, which is why, they said, they "deserved" those high returns.
That's been shown to be not true. They've managed it all badly. Now it has come back to bite them and now the rest of the economy will pay as the wheels of commerce slow because of the credit crunch. No modern economy can function well without a vibrant financial sector.
So, Obama's diagnosis that our financial sector is in desperate shape is correct. And if it is in desperate shape, that means our economy is in desperate shape.
Even if we weren't looking at the financial turmoil, but at the level of household, national and federal debt there is a major problem. We are drowning. If we look at inequality, which is the greatest since the Great Depression, there is a major problem. If we look at stagnating wages, there is a major problem.
Most of the economic growth we've had in the past five years was based on the housing bubble, which has now burst. And the fruits of that growth have not been shared widely. In short, the fundamentals are not strong.
Gardels: What ought to be the policy response to the Wall Street meltdown?
Stiglitz: Clearly, we need not only re-regulation, but a redesign of the regulatory system. During his reign as head of the Federal Reserve in which this mortgage and financial bubble grew, Alan Greenspan had plenty of instruments to use to curb it, but failed. He was chosen by Ronald Reagan, after all, because of his anti-regulation attitudes.
Paul Volcker, the previous Fed Chairman known for keeping inflation under control, was fired because the Reagan administration didn't believe he was an adequate de-regulator. Our country has thus suffered from the consequences of choosing as regulator-in-chief of the economy someone who didn't believe in regulation.
So, first, to correct the problem we need political leaders and policymakers who believe in regulation. Beyond that, we need to put in place a new system that can cope with the expansion of finance and financial instruments beyond traditional banks.
For example, we need to regulate incentives. Bonuses need to be paid on multiyear performance instead of one year, which is an encouragement to gambling. Stock options encourage dishonest accounting and need to be curbed. In short, we built incentives for bad behavior in the system, and we got it.
We also need "speed bumps." Every financial crisis historically has been associated with the very rapid expansion of particular kinds of assets, from tulips to mortgages. If you dampen that, you can stop the bubbles from getting out of control. The world wouldn't disappear if we expanded mortgages at 10 percent a year instead of 25 percent a year. We know the pattern so well we ought to be able to do something to curtail it.
Above all, we need a financial product safety commission just like we have for consumer goods. The financiers were inventing products not intended to manage risk but to create risk.
Of course, I believe strongly in greater transparency. Yet, in terms of regulatory standards, these products were transparent in a technical sense. They were just so complex no one could understand them. If every provision in these contracts were made public, it wouldn't have added any useful information about the risk to any mortal person.
Too much information is no information. In this sense, those calling for more disclosure as the solution to the problem don't understand information.
If you are buying a product, you want to know the risk, pure and simple. That is the issue.
Gardels: The mortgage-backed securities behind the meltdown are held across the world by banks or sovereign funds in China, Japan, Europe and the Gulf. What impact will this crisis have on them?
Stiglitz: That is true. The losses of European financial institutions over sub-prime mortgages have been greater than in the U.S.
The fact that the U.S. diversified these mortgage-backed securities to holders around the world -- thanks to globalization of markets -- has actually softened the impact on the U.S. itself. If we hadn't spread the risk around the whole world, the downturn in the U.S. would be much worse.
One thing that is now being understood as a result of this crisis is the information asymmetries of globalization. In Europe, for example, it was little understood that U.S. mortgages are non-recourse mortgages -- if the value of the house becomes less than the value of the mortgage, you can turn the key over to the bank and walk away. In Europe, the house is collateral, but the borrower remains on the hook for the amount he borrowed no matter what.
This is a danger of globalization: Knowledge is local because you know far more about your own society than others.
Gardels: What, then, is the ultimate impact of the Wall Street meltdown of market-driven globalization?
Stiglitz: The globalization agenda has been closely linked with the market fundamentalists -- the ideology of free markets and financial liberalization. In this crisis, we see the most market-oriented institutions in the most market-oriented economy failing and running to the government for help. Everyone in the world will say now that this is the end of market fundamentalism.
In this sense, the fall of Wall Street is for market fundamentalism what the fall of the Berlin Wall was for communism -- it tells the world that this way of economic organization turns out not to be sustainable. In the end, everyone says, that model doesn't work. This moment is a marker that the claims of financial market liberalization were bogus.
The hypocrisy between the way the U.S. Treasury, the IMF and the World Bank handled the Asian crisis of 1997 and the way this is being handled has heightened this intellectual reaction. The Asians now say, "Wait a minute, you told us to imitate you in the U.S. You are the model. Had we followed your example we would be in the same mess. You may be able to afford it. We can't".
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"The Fall of Wall Street Is to Market Fundamentalism What the Fall of the Berlin Wall Was to Communism"
Exactly!
Oh well, I guess we better go Socialist.
Nah. We just need new regulation in the financial sector--and that's not Socialist, Robster, that's Realist. You know, your remark reminds me of nostalgia for the Old West. The Old West was a whole lot closer to HBO's Deadwood than James Arness' Gunsmoke. Lawlessness is a romantic kind of drug...unt
Pretty sexy ain't it, downright Sarah sexy, huh?
Very well put comment. Thank you.
Robster, you are much too late. With this huge financial bailout of the system, we have already gone socialist. And It was you free market, no regulation guys that led us there.
Why not? Its done remarkably well at reducing poverty in industrialized nations.
Let's revisit the old Andy Hardy series:
1938:
Judy Garland: "Gee, Andy, how we will get out of this mess?"
Mickey Rooney (portraying Andy Hardy): "I know! We'll put on a show!"
2008:
Sarah Palin: "Gee, Senator, how can we get people to believe we know anything about fixing this economic mess?"
John McCain (portraying serious presidential candidate): "I know! I'll appoint a commission!"
ahh, where's The Judge when we need him?
This is all inevitable.
The whole phony house of cards that is the Capitalist economy MUST unravel. We're just "lucky enought" to be witnessing the middle stages of that unraveling.
Money as Debt...
http://vid
Story of Stuff
http://www
"It's the End of the World as we know it, and I feel fine!"
Movie "Being There" with Peter Sellers. We can all benefit from this positively Lao Tzu-esque analysis
below:
President "Bobby": Mr. Gardner, do you agree with Ben, or do you think that we can stimulate growth through temporary incentives?
[Long pause]
Chance the Gardener: As long as the roots are not severed, all is well. And all will be well in the garden.
Yes. In the garden, growth has it seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again.
President "Bobby": Spring and summer.
Chance the Gardener: Yes.
President "Bobby": Then fall and winter.
Chance the Gardener: Yes.
Benjamin Rand: I think what our insightful young friend is saying is that we welcome the inevitable seasons of nature, but we're upset by the seasons of our economy.
Chance the Gardener: Yes! There will be growth in the spring!
Benjamin Rand: Hmm!
Chance the Gardener: Hmm!
Both American parties are bought and paid for by dominant financial interests. ANY serious analysis must begin from this premise. Everything else is political propaganda.
I started thinking last year that - much like the get everyone into a home and tell them it wil go up in value ' pyramid scheme, all of these Anyone Can Do It brokers are exactly the same scheme- Come on in! the waters fine.....
They (the ones who can buy and sell at whim) set everyone up. The stock market is a horse race, with no rhyme or reason whatsoever. Sure anyone can make money if they have enough to say Boo (sell off millions of shares on some cooked up press release of "bad" news,) to create a selloff, then buy it all back at bargain price tomorrow. (that works especially well if you own media)
And do you think, if you have a hundred grand, or even a few hundred, that your broker is going to give you advice that will help you? Or will they be using your account to prop up "the ones that really matter"?
Think about it.
Utter pyramid scheme, horse race, its worse than bad gambling, cause the house is under no obligation whatsoever. The odds are entirely up to the 'haves'.
Bingo!
It must be carefully regulated
to have it's true value for the economy.
It should be based on the value of the underlying companies.
Look... the stock markets are far from perfect. But they are not totally corrupt, and they serve an important purpose. If regulated correctly, the should function well and provide a benefit to society.
The problem, as always, lies with the common man or the common investor. Yes, we need some regulation from the top, but we also need it from the bottom as well. People have a responsability to educate themselves, be aware, and respond if necessary.
What if, in the midst of the housing boom, people started to voluntarily cut back on their housing purchaes. What if they only bought what they could afford? What if people stoped investing in companies that were profiting from the mortgage investments? Sure it isn't easy, but far from impossible.
Yes, we need government regulation and help... but the average citizen has to play his/her part as well. You can't let the gov't do everything for you.
Maybe I missed the legislation proposed by Obama that would fix what he believes is wrong.
The trauma of the banking heist should be a blanket refutation of Milton Friedman's unfettered capitalism philosophy. This has been pushed for 35 years, and caused untold suffering among the working classes around the world. Proven time and again in places like Poland and post-Soviet Russia, unregulated capitalism is not compatible with any reasonable version of democracy. Out with the neo-conservative, Reagan era voodoo trickle-down, tax cuts for the corporate and the rich bullshit. IT JUST DON"T WORK!
How about an unreasonable version of democracy?
Agreed surfer. THE primary reason for current Russian economic and social successes is rejection of American style predatory capitalism models tried during Yeltsin era. Belarus is a stable economy SOLELY because of adaptation of socialist economic model, despite utter lack of resources and good trade. There are NO signs that present two financial elite- beholden candidates would be willing ( or capable) to modify American capitalist model. There's a need for a third vote, a populist voice. May be one day.
if media can find out who behind the fall of Wall street,they will find a lot of democrats.
Was Phil Graham a Democrat?
Lehman Brothers=whiners
AIG- Whiners
Merrill Lynch= Whiners
at least according to Phil Gramm(ps)
Right. Don't you just love the redistribution of wealth rhetoric of the democrats. There are as many rich democrats as rich republicans. The Congress has been controlled by the democrats for two years now. How many exclamations of concern about a pending economic problem have you heard from Pelosi and Reid? They are too busy politicking.
This Republican congress has used more fillibusters than any other minority congress--ever.
This election is presenting the next president with a historic opportunity to re-shape the nation.
The Republicans, ironically, are nationalizing -- or at least socializing -- the nation's financial industry.
The precedent is being set that the government has the authority and even obligation to regulate and even supervise such critical parts of the economy. That means, for example, the healthcare industry, the oil companies and other energy companies, the defense industries, automobiles, heavy industry and the like.
If Obama and the Democrats take control, a system of governmental oversight and planning -- a national economic plan -- could be put into effect. All of these leading industries' leading minds could voluntarily help design the plan -- or face a kind of "draft." Help or find yourself unable to find work.
Time to get tough, and screw these people out of power, yank them out of their gated communities, drain off their unreal financial gains and make them work for a living.
Plus, the Obama administration could cherry-pick among the Bush-enabled "security" measures to keep tabs on those business renegades who'd try to undermine the system, while freeing most Americans from unwarranted scrutiny.
Electing McCain means that the same cowboys will ride roughshod over the rest of us, under the guise of some toothless "reforms." That will lead to chaos and possibly martial law, imposed by a neofascist government.
That's our choice.
Time for a five year plan, comrade.
Mature countries have economic plans.
Cowboys have little but the seat of their pants. Time for the grownups and honest people to take control from these bandits. Our choice are -- a sensible national planning process, intelligent regulation -- or chaos, social breakdown and worse.
You're confusing a 21st century national planning process, industrial guidance and restoration of law and order with the failures of the USSR and Red China.
I worked for a major corporation for most of my life, and let me tell you, they plan. Sometimes it works, sometimes it's flawed, but no corporate executive would last five minutes by saying "lets let the marketplace determine this." Thats a line for Dittoheads and others who imagine that these markets are "free and frictionle
I thought that was the Surge strategy.
Pure unrestrained Capitlaism is the same as pure unrestrained Communism. When you let the dog run off the leash long enough it's gonna trample your neighbor's flower garden and piss in the flowerpots. Moderation people, moderation.
Calling for checks and balances is sound- because when you let the players make the rules, the ref can't call the game.
bunch a knee-jerkers.
You have been in control of Congress for two years and have done nothing. Money bills and oversight is from Congress. What have you done? Nothing.
No, bush and a minority in the Senate have been in control of Congress. That's why nothing good ever passes -- between the veto and the filibuster and the lack of courage of the corporate Dems, the repubs have been successful as their usual obstructionist selves.
The repubs work for the rich. Any substantive change that would help the 99.9% of the community that doesn't earn the republican minimum for consideration of $5million is verboten and blocked by the repubs and their fellow travelers the blue-dog, corporate Dems.
U.S.A. Inc. is running on a maxed out, multi-trillion dollar credit card in the hands of the most corrupt
CEO in this nation's history.
Now with only a few months to go and knowing they will never have to personally pay back this
debt, they take out more credit cards co-signed by the Amercian people to bail out those who
brought them to power.
Sorry to burst your bubble, but Wall Street is not akin to the Berlin Wall nor is it down and out. I know this is great news for Obama and the Democrats when our financial institutions are in crisis and they can make hay out of it, but in the real world, the market will (as it ALWAYS DOES) come back. Even after World Wars I & II, the Depression, assasinations, 9/11, etc. Captialism works and communism doesn't. Obama may get a boost from this crisis (there's a word for that) but it won't last. I can't wait for November!
Yeah, the market really responds to taxing corporations and the rich small businesses who employ about 80% of americans.
We are paying the price of greed and democrats have as much responsibility as republicans. Anyone seen any books by Pelosi or Reid about how poor the economy is? Wonder why not.
Probably because they aren't Nobel prize winners for economics, FS.
The numbers in most all reports of debt, assets, long term, short term, obligations, etc, etc do not support your optimism. For that matter neither do the many management people who now are running scared. Time will tell.
You can tell me that capitalism works when middle income wages aren't stagnant.
That's proof that it works great -- for the capitalists. It'll really be working when the middle class is gone entirely, wages fall further, and nuisances like democracy are swept away for good.
A strong argument that we should scrutinize very very carefully the ideology of candidates and make sure they have a fairly sound acquaintance with reality, facts and logic.
There has been a belief that free markets offer some kind of utopia. Just like all belief systems, they are absurd when they are carried to their extreme.
What has happened here is that the freedom paradigm was followed to its logical extreme.
Competing theories need to be balanced - there is not one theory or paradigm that is perfect. Only trade-offs.
We need to stop with the socialism vs. capitalism dichotomy and recognize that we need both in proper balance. What you are seeing recently is how the Government is a transcendent good for society. We need to treat it with proper respect. If it isn't there when we need it, chaos ensues.
Government is not reason; it is not eloquent; it is force. Like fire, it is a dangerous servant and a fearful master.
George Washington
Free markets aren't a utopia but regulating how many extra large jeans you will produce like russian communists did is also specious reasoning. Economic idealists always fail to acknowledge that every plan is implemented by human beings affected by greed and sometimes poor judgement.
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