There's been a bit of a stir set up by recent interviews and speeches given by Columbia University economist and Nobel prize winner Joseph Stiglitz, who seems to be out and around promoting the paperback version of his most recent book, Freefall. The comments that have drawn the most attention involve the argument that many of the practices that prevailed (he would say still prevail) in mortgage lending in the approach to the bubble, might not be technically illegal, but should be. And he takes a view, most often associated with MIT's Simon Johnson (like Stiglitz, an alum of the World Bank) that a kind of crony capitalism, led by Wall Street and the big banks, has shaped both law and regulation to its own "exploitative" ends.
So none of these ideas are particularly new. In fact, they're also not particularly recent: Late last week, Business Insider's Clusterstock picked up some snippets from a video interview with Stiglitz on AOL's Daily Finance (not Yahoo!'s Daily Finance as Clusterstock suggested) on Oct. 22 and slapped on the incendiary headline, "STIGLITZ: We Have to Throw Bankers in Jail or the Economy Won't Recover." I watched the Daily Finance video and while Stiglitz covers a lot of ground, some of which I agree with, much of which I don't, I can't see that he communicated that statement exactly. It's also interesting that a site, Business Insider, owned by Henry Blodget would clamor for white-collar miscreants like, well, Blodget himself, to go to jail. Blodget famously settled and never saw the inside of a cell.
Still, it's worth pondering what Stiglitz did say. The heart of it really had very little to do with economics, and a lot to do with the law and politics, as Stiglitz himself admits. When Daily Finance asks Stiglitz where he would separate illegalities from mere exploitative practices, he admits, "It's very hard to draw the line," then proceeds to draw away. "That's almost a lawyer's issue, rather than an economist's," he says. "What we can say is that a considerable amount of what was done should have been illegal if it wasn't. This is a really important point to understand. The legal system in our society is supposed to be the codification of our norms, our beliefs, things that we need to make our system work. If the legal system is seen as exploitative, then confidence in our whole system starts to erode."
There are several points here worth noting, particularly about the place of law in the society. Stiglitz' notion is that the law should serve not as a vehicle for abstract "justice," whatever that is, but as a reflections of some "norms" in society. And why are those norms important? Because "we need to make the system work." In short, he's expressing a view of the law that makes it a kind of enabler of smooth economic functioning. We can't regain our confidence unless we banish the sense that the law is exploitative. Another far broader way to say this is what Clusterstock offered up: We can't recover, we can't regain our health, unless we toss bankers in jail. At the very least, the law, according to Stiglitz, should resemble some community norm. What is that norm? Can we arrive at it by polling, by voting, by the wisdom of politicians, judges or academics? Will we know it when we see it, like pornography? Will we change it when those norms shift?
You don't have to believe in legal absolutes -- an eye for an eye, forever and ever -- to get nervous about this kind of legal relativism. Stiglitz articulates a kind of approach that resembles, in some ways, the tenets of critical legal studies, which first stormed legal academia in the 1970s. Stiglitz argues several things, which are gospel to the critical legal studies crowd. First, that powerful corporations and banks and wealthy individuals have shaped the legal system in the U.S. to advance their own interests. Second, that the system thus feeds on the poor, the uneducated and the credulous, who need protection. Third, that the system must be reshaped with certain social and economic goals in mind. This in fact is Stiglitz's argument not just for the mortgage crisis and the resulting financial mess but for the failure to throw those who were clearly guilty of predatory lending in jail: The legal system not only may lack the laws to eliminate exploitative behavior but lacks the will to enforce the laws that exist. It's not that parsing out guilt and innocence, victimizer and victimized, is difficult; it's that the law was designed to allow predators to hunt freely and escape blame.
That doesn't mean he's always wrong about that -- like any human construct, the law always reflects powerful interests -- although it's remarkable how sweeping and simplistic his statements are, and how they've been broadly interpreted and reinterpreted across the blogosphere. And that's where the problems begin. Clusterstock clearly views Stiglitz's argument as enough reason not only to change the rules for future practices, but also to go back and seek retroactive persecutions. Who might be brought down? Well, obviously not just the folks who sold those mortgages. Stiglitz himself seems convinced that the S&L crisis is a good prosecutorial model -- though he ignores the fact that S&L prosecutions may have created the false confidence in lending to lead us to the mortgage mess. A number of CEOs of busted S&Ls did go to jail for fraud, though of course many did not. "I think we ought to do what we did in the S&L [crisis] and actually put these guys in prison," he tells Daily Finance. "Absolutely. These are not just white-collar crimes or little accidents. There were victims. That's the point. There were victims all over the world."
Let's save the parallels and differences between the S&L crisis and the mortgage meltdown for another day, except to note that both exist. But what is Stiglitz really suggesting? By what standards should this fraud be determined? Is there a legal standard that involves the number of victims? How do you determine a victim, past the poor soul who clearly got taken by a fast-talking mortgage peddler? Is a victim someone who lost a job or home in the recession? Or can someone gain victimhood because of larger economic forces, like globalization or technological development? How far up the chain do you proceed when you decide you need to punish perpetrators of economic breakdown? Is he referring to the Dick Fulds or Jimmy Caynes of this world? To Lloyd Blankfein, or anyone else at Goldman, Sachs & Co. in a position of responsibility? How deeply in the organization should you go? And what of political and regulatory enablers like Alan Greenspan, Phil Gramm or Robert Rubin? What, in short, are the standards not just for guilt or innocence, but of white-collar crime and criminality?
The truth is, Stiglitz isn't a lawyer but claims to know justice when he sees it. Of course, it's justice for victims not for anyone else hauled into the dock, not only because it's vague and retrospective, but because it's based on community "norms," which may be different tomorrow. Indeed, buried in Stiglitz's argument lurks a contradiction. He clearly believes democracy has been shanghaied by the interests of an overmighty finance sector. And yet he is arguing that the law should be shaped, perhaps retroactively, by community norms. But what if that community norm favors the interests of large banks or M.B.A.s or entrepreneurs? What if those norms decide to do away with norms? Stiglitz's view of the law here drives him inexorably to restrict certain sectors -- in this case, finance, though more broadly he would also limit corporations, which he believes are run strictly for their CEOs who engage in "theft" -- in order that others can have their say. Who might that be? A group he calls "the people" and later narrows to "families."
"When you say the Pledge of Allegiance, you say, with 'justice for all,' " he says. "People aren't sure that we have justice for all. Somebody is caught for a minor drug offense, they are sent to prison for a very long time. And yet, these so-called white-collar crimes, which are not victimless, almost none of these guys, almost none of them, go to prison."
Of course Stiglitz's "people" are not necessarily the "people" who make up the Tea Party or who recently voted in Republican candidates. Now clearly much of what Stiglitz has to say on law and illegality gets a favorable reaction in some circles, just as much of what the Tea Party offers does in other circles. But as a sophisticated argument for how to deal with the social and legal fallout of a financial crisis, both offer up toxic varieties of hash. In both cases, they are driven to the unsettling place that says in order to protect democracy someone -- we or me -- must make undemocratic decisions. You can easily fear the power of corporations with vast campaign-spending plans, but still hesitate to completely disenfranchise them from political participation. But in a few minutes conversation, Stiglitz seems more than willing to cut a legal swath through finance, at best segregate high-paid CEOs, and generally determine who is a member of "the people" and who is not. What's the difference between Stiglitz's notion of a retrospective jihad against "bankers" and the Tea Party rejection of immigration and immigrants, or for that matter, Muslims?
All this is not to say that the law and regulation should not change, or that corporate political activities should not be curtailed, that stakeholder rights should be boosted and CEO pay hammered down. Predatory lending should be more aggressively regulated and prosecuted (Stiglitz says little about regulation, probably because he views it as hopeless). Income inequality is a problem. It would be nice to see more manufacturing -- but that's probably a pipe dream. On the subject of economics, from his analysis of market breakdowns to his views on the Asian Model, many of Stiglitz's notions have proved valid, and his stubborn opposition to the Washington Consensus has been heroic. But Stiglitz displays here the temptation of many economists in this uncertain era: His economic insights may be remarkable (though our confidence in the "science" of economics isn't what it used to be), but that's no reason to believe he has a grasp of matters beyond economics. The real American faith, left and right, continues to be a primitive belief in economic progress that hinges on crime and punishment, that operates in black and white, and that occasionally devolves into a witch-hunt.
Robert Teitelman is editor in chief of The Deal.