Freefall: America, Free Markets, and the Sinking of the World Economy

This is an excellent book because it is very broad and comprehensive in its treatment of the recent 2007-2008 financial crisis but also because Stiglitz discusses the international consequences and the impact such a financial disaster should have on the field and study of economics. Stiglitz discusses the five primary underlying causes of the 2007-2008 financial crisis as bad lending practices, fees and incentives allowed mortgage originators and others to ignore the weaknesses of the underlying mortgages, the collateral was inflated in a housing bubble, the financial institutions were over-leveraged, and a wilderness of new derivatives gave the impression that risks were under control when in fact they had become unsustainable. Stiglitz does not look for villains or try to blame the crisis on moral or personal failures. Rather, he indicates and supports his contention that this was a systemic failure put into place by failure to correctly estimate the dangers of deregulation and to manage the incentive systems so that moral hazard was controlled rather than increased. Stiglitz is a structuralist who does not wallow in terms like ‘greed’ which is so evident in the popular press. In Stiglitz’s view, greed cannot be addressed but incentives and opportunities for greed can be. He takes a systemic structural view to how the crisis came about and how the crisis should be addressed. Stiglitz also is able to contextualize the crisis by pointing out data regarding how wages for the middle and lower-middle classes has stagnated since around 1981. More women entered the workforce which allowed families to maintain a stable standard of living but this required two wage earners for each household rather than one. As wages and standards of living stagnated for almost 25 years, home equity increased and equity withdrawals allowed middle income homes to maintain their standard of living. Stiglitz is an extremely well organized writer. For example he outlines the content of a good mortgage product: low interest rates, low transaction fees, predictable payments, no hidden costs, and protection against value loss or job loss. Stiglitz points out that financial markets should serve a societal good, like hospitals or schools or utility companies. Financial markets should optimally allocate under used capital for production and innovation while managing risks and maintaining low reasonable transaction fees. Stiglitz thinks these financial markets failed. There should be cause for concern around the financial health of the United States when in 2007 41% of all corporate profit was generated by financial firms. Support for innovations weakened in a market environment in which innovations that circumvented regulation and oversight gathered the focus of the financial industry. Stiglitz builds the case that efforts to blame the government for the 2007-2008 financial crises are insubstantial. Ironically the financial instruments used against the lower working classes eventually brought down the financial institutions themselves. Efforts to deregulate and weaken government oversight resulted in the United States owning the largest automobile and insurance companies in the world. Stiglitz points out those subsidies to financial corporations make the economic system less efficient and these subsidies when to financial firms which had gone to great lengths to avoid paying their fair share of taxes. Another irony pointed out by Stiglitz was that executive contracts at AIG were fully honored despite huge losses because the case was made that the government should not undermine contracts, whereas the union contracts at GM were undermined and had to be re-negotiated. One sentence from the book summarizes this: The 7 largest financial firms had losses of 100 billion dollars, were bailed out by the government with 175 billion dollars, and then gave the very executives that created the crisis 33 billion in bonuses. This book spends a reasonable amount of time on the financial crisis but then analyzes the recovery and stimulus strategies. Stiglitz points out that a crisis does not destroy the underlying assets of an economy- physical plants, natural resources, the knowledge and skills of the workforce, technical knowledge and technologies are all still there. He points out the necessary ingredients for a successful stimulus package which would include: fast action and implementation, use of the multiplier effect to spread the impact of the stimulus, address long term infrastructural problems, invest in the future through research and innovation, should be fair to the middle class working families not just the affluent, should provide relief for short term hardships and should target job loss. Stiglitz makes the case that the stimulus package after the 2007-2008 crisis was too small and only spread out the pain of a slow recovery. Stiglitz is also critical of the lack-luster efforts to restructure financial markets by stopping casino type risks in derivative markets that result in little if any larger societal good. Further, Stiglitz spends considerable effort to explain multiple strategies that could have been undertaken for homeowners other than foreclosures, none of which were pursued. There was a clear tendency to blame the financially illiterate lower middle classes for the crisis when responsibility lay with the financial industry infrastructure and its perverse incentives. Mortgage originators and banks engaged in poor risk assessments and predatory lending practices – yet most government rescue efforts went to those who perpetuated the crisis. Stiglitz points out that capitalism is an extremely robust economic model. It defeated feudalism during the middle ages. It can withstand high levels of inequality but eventually if private rewards are inverse to societal needs, then the entire system is in jeopardy. Stiglitz has studied the impact of unequal knowledge in market transactions and finds that imperfect and asymmetric information challenges the concept of transparent equitable market transactions. Therefore the interest of the consumer should be a government responsibility. Financial markets, in Stiglitz’s view, should benefit society as a whole by better allocation of capital to the most productive enterprise and to better manage risks. The financial crisis of 2007-2008 demonstrates that these markets failed. Their executives were rewarded with astronomical salaries and bonuses because they were supposed to know how to manage risks and they failed. Stiglitz points out that if these major financial firms were too big to fail, then they were too expensive to save and too big to manage. In fact, the failure of Lehman Brothers demonstrated these firms were unable to calculate their own worth. Lehman Brothers was showing 26 billion in assets on their books when in fact they had over 200 billion in losses. Stiglitz finds the argument that TARP was necessary to strengthen the firms that managed most of American’s pension funds. He points out those retired and retiring tax payers would benefit more if the TARP money had been used to strengthen Social Security. I found the book to be fascinating and far reaching with sections on how stock options for executives dilute share owner equity, the use of off-shore money havens that help support terrorist activities, and the Glass-Stegall act of 1933 that built a firewall between commercial and investment banking. Like Kaynes, Galbraith, and Krugman, Stiglitz does not think markets are self correcting. He points out that the irony of the Reagan-Thatcher approach to less government regulation led to more government control.

Generally, Joseph Stiglitz does a good, but tortuous job, of dissecting the problem and puncturing the arguments of the free market proponents. The first third of this book dwells on the many factors at play that precipitated the crises. Milton Friedman and the 'Chicago Boys', are particularly singled out for their part in creating the intellectual environment that nurtured and fed the build-up to the crises over the last 30 years or so. In the end, it's clear that special interests, an unhealthy and incestuous relationship between Washington (both Republican and Democrat) and Wall street, and the blind belief of the right in the ability of markets to self govern and self correct combined to create a dangerous cocktail that culminated in the collapse of the financial system and misery for millions across the globe. The shocking amounts of tax payer money both in America and the UK thrown at rescuing the fat cat investment banks are contrasted clearly by Stiglitz with America's handling of the Asian financial crises of the late 90's and developing nations at large, leading him to correctly question the fundamental morality of American Free Market Capitalism. His conclusion is damning to say the least. Throughout the book, Stiglitz is at pains to emphasize the impact of the banking crises on the lives or ordinary people, and how they will bare the financial burden in the long run. I also found this book very depressing. Stiglitz outlines the seemingly intractable problems America faces in the next twenty years that require serious thought and action. The depressing part is that the Right continues to propose the very medicine that will make the problems even worse, making the wealthier richer, and average Joe poorer and ultimately sinking America. Does America have the sense to see through the key issues of special interests, the rise of the corporate welfare state, the decline of the middle class and the issues of its corrupted economic and political system? Stiglitz, like Robert Reich in 'Super Capitalism', shows how lobbyists, at the behest of Wall Street and big business in general, have inveigled their way into the very fabric of American democracy to subvert it to the cause of big business, and in the process disenfranchising ordinary Americans, taking from them their chance of a better life. The American dream is no more. It has to be rebuilt. Period. The tragedy is, if the warnings in this book are not heeded, and an enlightened approach to government (read: curbing or outlawing of Government lobbying), economic management (read: capitalism within a strong and proactive regulatory regime), and an end is put to corporate `welfarism', America will continue on the path of long term economic and social decline. The last quarter of the book discusses in layman's terms the debates raging within the economics profession. It seems that the Keynesian view of how the economy functions slipped out of vogue in the early 70's to be replaced by monetarism which found its expression in the policies of Ronald Reagan and Margaret Thatcher and ultimately led to where we find ourselves as a society now. In terms of writing style, this book is heavy going, and could have been better organized in my view. Many Centrists and enlightened thinkers will no doubt look to Stiglitz to provide a moral and intellectual compass with which to argue their case, so I feel an opportunity to present a more structured argument to support them has been lost because of the way this book is organized. I also feel Stiglitz should have used more graphs, tables and illustrations to make his point. Having said that, the reference section at the rear of the book is quite comprehensive, and for those inclined, provides a valuable resource for further research. An extremely important book.

Freefall is a fantastic overview of the crisis from both the multitude of causes to the social fabric that created the backdrop. Stiglitz in a fairly concise book, manages to discuss a lot of issues with a lot of clarity. It describes incentive misalignment, the abuse of barganing power by those who had it during the crisis under asymmetric informaiton, the failure of prices to reflect true costs, the abundance of negative externalities and market failures that inherintly exist and even the degredation of our social contract in promoting general well being. The book is not written in two parts but the contents of the book are sort of split into two categories. The first part of the book is really a description of the causes of the crisis. It describes some of the specific actions taken by bankers, the incentives to take fees irrespective of the value add of the underlying contracts, and how that evolved into model "arbitrage" abuse in mortgage repackaging. It discusses the change in the distribution of wealth in the country and the stagnation of wages for most of the country despite general GDP growth that hides that fact, in particular the transfer of wealth from "main street to wall street". It discusses the failure of central bankers to address the bubbles of the economy and how their economic principles were too often based on faulty neo-classical principles. It then goes into how the crisis was used as an opportunity to hold the taxpayer "hostage" in the same way that one can price gouge a pedestrian for a ride in a hurricane. This part of the book prepares the unfamiliar reader with the much needed backdrop to understand most of the crisis. The second part of the book starts off where the current events end and tries to set the scene for the steps we need to take for the future. This was the best part of the book for me. Stiglitz outlines many of the important principles that are violated in the neo-classical world that makes it apparant, desire for incremental benefit does not imply an aggregate improvement for the economy. Stiglitz makes a strong effort to show market failures are rife, the cost of a crisis as an example far exceeded the profit generated by fees, and as a result leaning on - "the market is better than regulators in forming solutions", clearly needs to be re-thought. It is hard to disagree... Stiglitz also discusses less in depthly but importantly nonetheless, the ecological economic principles that we are missing today- in particular the true "cost" of consumption as a tax on the future with resource scarcity as well as environmental damage. I dont think these are particularly contentious but they are often forgotten. Aspects of behavioural finance are brought up and the cognitive dissonance of financiers responses are described. Stiglitz ends with a call to action society at large to take the recent failure as an opportunity to ammend our social contracts and revitalize our trust and institutional arrangements. The need for better regulation he believes is truly clear and the recent crisis needs to be taken as a reason to fundamentally change the way our economy is structured, from capital/labour distribution to consumption investment balance (investment in both fixed assets as well as human capital). This book is so far one of the most insightful I have read. I agree with a lot of the commentary but let me quickly go into why I dont think its quite five stars. The author is often a bit unbalanced in the criticism, of both central bankers as well as those in finance. Most of the book goes on about the almost inherent total disregard for any other people's interests by the bankers involved, but then later it contextualises their actions and describes their actions as a function of their environment and incentive set- making them more a time and place phenomenon than the bad people they are painted as elsewhere. Central bankers too are berated, but they arent incentivised by the pay. Hindsight is 20/20 and although some were very impressive with their foresight of the problems, it is hard to uniformly make out as though central bankers are all fools. The end goal of this book is to try to argue for a change in social architecture and institutional arrangement. Currently incentives are misaligned, the markets fail and we deal with things after rather than pre-emptively. If this is the goal then this book should have been written inclusively for all readers. I find it quite exclusionary for most in finance and many in politics. That is not that sensible given the goal is to convince. That being said, some scolding is in order, but the magnitude and the one-sidedness is a bit frustrating, predatory lending was a real phenomenon, but assuming away the responsibility by the many individuals speculating on property is not a fair evaluation. All in all the economics of the crisis are evaluated excellently, the conclusions can be debated, but in my opinion they are extremely valuable and provide an important framework to consider for the future. Alot is accomplished in this book and most of it is convincingly argued, this book is a very valuable addition to our recent crises's literature.

Even if one disagrees with Stiglitz's ideological biases, this exposition of recent economic events is excellent, both accurate and fair in its criticisms. Stiglitz also provides a good discussion of the trade imbalances that afflict the world economy, as globalization is his specialty. Best is the challenges he presents to his fellow economists. But it's not without its blemishes. Since I have given the book five stars I will skip over the kudos and address its weaknesses. Stiglitz sets up a weak strawman in market "fundamentalism," as most serious free market advocates eschew dogma and see a limited role for government, especially to insure open and competitive markets. Stiglitz himself admits the dominant role of markets and only argues for a subjective "balance" between govt regulation and markets. This continuum can be freely debated, as many of the recent market failures stemmed from circumventing free market principles. Most of the violations Stiglitz cites boil down to inside actors using political or economic power to secure "heads we win, tails you lose" outcomes. This is what happened across the banking system as we privatized the returns and socialized the risks with bailouts. A functioning market economy relies on trust and must prevent blatant violations of the rules of voluntary exchange. Thus the crisis was not a repudiation of free markets, it was both a failure of risk management and a warning regarding the abuse of market principles. The policy debate over govt regulation too often slips into the idea of the regulatory bureaucrat rather than the dynamics of self-regulation based upon competing interests. Our political democracy relies on competing interests and a governing structure for checks and balances, with minimal monitoring. Our market structures should strive to do the same with competitors policing each other. Stiglitz mostly steers clear of this distinction while conceding that much of the blame for the financial crisis was the agency problem that befell not only the private sector, but also the public sector. Regulatory "capture" is a serious concern for regulating the financial sector. Stiglitz correctly castigates the Bush and Obama administrations for laxness and ineptness in managing the crisis, but whitewashes the Clinton years, when much of the financial deregulation was enacted. The Clinton regime was instrumental to the Democratic courtship of Wall Street and Stiglitz himself was a prominent Clinton economic advisor. Obama has picked up where Clinton left off, reappointing many from his team. (Hope and change turned out to be more of the same.) For its part, Wall Street is an equal opportunity player in Washington. The most controversial issue is probably Stiglitz's unwavering support of Keynesian demand stimulus. There is reason to suspect this cure-all for a deflating economy, but Stiglitz dismisses all doubts. However, the effectiveness of demand stimulus depends on the Keynesian multiplier, which in turn depends on a healthy banking system extending credit in response to credit demand from the private sector. In the aftermath of a debt deflation, both of these conditions fail in robustness. With a balance sheet recession, it may well be that the Keynesian multiplier is closer to zero than the hoped for 1.5. Another way to look at this is that Keynesian policies may be appropriate AFTER a collapse in prices due to massive deleveraging but much less effective in PREVENTING that collapse. The Japanese experience suggests that propping up a zombie banking system can dangerously prolong the post-bust correction. In this context the Fed's policy of reflation is likely to yield more crippling asset bubbles. The most productive discussion is when Stiglitz turns on his fellow economists. His criticism of the dominant neoclassical paradigm is spot on, especially when it comes to macroeconomic theory. Our current macropolicies are so confused because our theoretical tools are less useful in a nonlinear world and this is especially true in the world of finance. Rational actor assumptions have limited value in a real world where people are loss averse, heterogeneous and adaptable in their preferences, and show a tendency to herd behavior. Our most intractable policy problems are those of skewed or maldistributions, whether they be income and wealth inequality, global warming, health care, hunger or energy. Mathematical models based on fixed preferences, simultaneous equations, and equilibrium conditions are not amenable to distributional dynamics. Thus, the solution to inequality always regresses back to initial conditions, like education or material endowments. Instead, our policies should be addressing the access and distribution of financial capital and the dynamics of our financial markets. The rich are getting richer off their leveraged capital and political influence, not their good looks or brains. Given that managing uncertainty may be the best we can do in public policy, Stiglitz correctly argues for the dominant role of risk management. But he also fails to consider how risk and uncertainty is most effectively managed through decentralization and diversification. This is accomplished through wide and deep markets. Social insurance pooling may be an important corollary to private risk management where private markets are incomplete, but is far less efficient and prone to unmanageable moral hazard costs. Think how many would choose to cash in their 401(k) or private pension for Social Security promises, or their private health insurance for Medicare? The bottom line is that health care and retirement funding are private goods and forcing them into the public goods model only hampers their production and distribution. We may need a safety net, but that's as much as the empirical data supports. Entitlement reform will require private substitutes and this makes it critical we insure that markets function as intended. This may be the best argument for financial market reform. I suppose one could write a book instead of a review, but Stiglitz has already written one that offers the reader much food for thought. I suggest not taking anything for granted, as Stiglitz has his own ideological agenda to hoe. But he does a very commendable job in debunking much of the partisan-motivated bloviating.

At this point, I have read so much about the breakdown of the global financial system that started in this country in 2007 and hit the fan in 2008 and that we are still recovering from. I have read books, magazines, newspapers, and internet articles from all over the spectrum about the causes and consequences. Some are better than others. Matt Taibbi and Nomi Prins are compelling writers in their books, but they bring too much animus to their analysis. Freefall, while not a breezy read, shows the overall competency of the author (They gave him a Nobel, but those in Economics are handed out like candy). Stiglitz brings to the issue the full force of his intellect, and he does his research: a quarter of the book is end-notes. I'm not going to give him a prize for that, but what he deserves a prize for is his relatively objective, sober analysis of the crash, whatever it will be called in history books (I realize that it is hard to be objective in a politicized discourse such as macroeconomics, but since I agree with him more than I disagree, I will allow myself to call it objective). While the work is fairly exhaustive, I will not praise him point-by-point. He can be a bit 'wonky' at times, but if you are briefed in the subject, you should be just fine as a general-interest reader. The key thing here is that he looks at the failure to have a structural plan. In the text, written in 2009, he warned about muddling through politically -- not having a plan would hurt both the party in power and the economy as a whole. In the additional matter prepared more recently for the paperback publication, he allowed himself a little faint self-praise for his prescience. However, what he was right about was something we both wanted the administration to prove us wrong about. The lack of direction may be politically expedient but is harmful for so many. Just when we can't be muddling through, we are. (Assuming right-wing talking points on the benefice of 'austerity' is no help either, but that is outside of the current review.)

The author presents a very readable summary of events. He traces the origins of the crisis back to the thinking of the Reagan and Thatcher era, when Government was the problem and the free market was the solution, which eventually led to the repeal in 1999 of the Glass-Steagall Act. Seeing an opportunity, and knowing they were too big to be allowed to fail, investment banks began making risky investments on mortgages, sometimes holding them, but often packaging them for sale in a way that concealed their true risks. The excessive monetary stimulus following the dot.com bust added fuel to the fire, but the Federal Reserve was reluctant to act to inhibit the ever growing housing bubble. The response to the crisis which eventually emerged resulted in the largest public-to-private transfer of wealth ever seen, as employees, shareholders and bond holders were rescued. One can hope better regulation will prevent a recurrence, but the harmful effects of what has already happened will be felt for years if not decades.

Much of this book is what one would expect. It describes the conditions that caused the financial crisis of 2008, and then it analyzes the measures taken by the United States to address the crisis. There is little debate among reasonable people about the cause of the crisis. That the response was unfair, irresponsible and misguided is also not subject to much debate. Stiglitz has a unique perspective, however, because as an economist at the World Bank and a student of world economics he has seen many crises in other countries over the years as well as responses to said crises. Despite coming from one of the top economic geniuses of our time, the book is an easy read. In addition to the same-old same-old, the author delves into other issues that warrant discussions after the crisis. One area of discussion is the author's challenge of basic economic principles and assumptions commonly held by conservatives. Stiglitz challenges the assumption of an efficient market, citing externalities, imperfect information and the fact that market participants are not always rational (in some cases extremely irrational). He does not throw out the idea of the market; instead he argues for government policies to correct market failures. Let's face it; if requirements of higher down payments on homes and higher margins for stock trading had been in effect, there would have been no financial crisis at all. His main concern is that other countries will, to their detriment, throw out the market concept because of its imperfections rather than seeking policy to overcome its limitations. Stiglitz offers a challenge to using GDP as the primary measure of the economy. He describes the limitations of GDP and offers other measures. This is where his unique experience is most evident. During his time at the World Bank reducing world poverty was one of the top priorities. While GDP is the be-all and end-all of many economists and politicians, things like life expectancy, health, infant mortality, income distribution and even leisure time were concepts that Stiglitz considered. In one area Stiglitz seems to be unreasonable. One of his five reasons for poor performance of the nation's financial system is that "bankers forgot that they should be responsible citizens." I think it's unreasonable of Stiglitz to expect a banker or anyone to be a responsible citizen. It's like saying that terrorists should stop terrorizing and then declaring that you've found a way to stop terrorism. It's not going to happen. If there is a way to legally gain wealth, then someone is going to take it. To assume otherwise is just plain unreasonable. But Stiglitz is ahead of the curve with respect to the future: what is to become of the world economy after the crisis. Listening to the political discussions some people seem to think that little more than a tax cut is all that is needed for the economy to get back on the track it was before. Stiglitz argues that we can't go back to the way it was before and that trying to will only delay and worsen the inevitable. When the nation should have been saving for the baby boomers' retirement, we went on a spending spree consuming beyond our means for decades. Given that for decades the U.S. economy has been consuming more than it produces and much of the world has been producing in excess of its consumption, Stiglitz argues that this can't continue indefinitely. The economy has changed. As we move forward we must realize that we can't continue to borrow to fund the appearance of prosperity as we have the past few decades. Trying to continue that will only make the situation worse. A new dynamic is going to form, and our public and private institutions are going to be directing this. The scary thing is that the same people who through their ignorance screwed things up so bad are still in control.

"As the United States entered the first Gulf War in 1990, General Colin Powell articulated what came to be called the Powell Doctrine, one element of which included attacking with decisive force. There should be something analogous in economics, perhaps the Krugman-Stiglitz doctrine." Yes, Joseph Stiglitz, the author of Freefall: America, Free Markets, and the Sinking of the World Economy, has a fan. This ardent devotee is not, as one might suspect, a fellow academic scrawling her mark of approval onto the book's cover, nor a book reviewer writing for a newspaper or magazine. It's not even Paul Krugman, although presumably he too has fallen victim to the spell of his fellow Nobel laureate. No, the fan is Joseph Stiglitz himself, the author of both the book Freefall and the above quote, found in its second chapter. And as self-aggrandizing as he can tend to be -- he joins the litany of economists, politicians, and pundits who vociferously trumpet their early predictions of the current financial crisis -- his words are bolstered by an undeniably credible resumé. As the former chairman of President Clinton's Council of Economic Advisers, the senior vice president and chief economist at the World Bank, and the 2001 Nobel Prize winner in economics, Stiglitz has combined his enviable pedigree as a top-notch economist with the political savvy gained through spending many years in the halls of power. In the course of reading Freefall, it soon becomes abundantly clear that Stiglitz is not especially fond of deregulation. However, in a departure from the current American zeitgeist, he does not embrace populist rhetoric or condemn bankers unduly for their greed. (In writing this last sentence, I vacillated between enclosing greed in quotes or not; either choice seems equally prejudiced, so I arbitrarily chose not to.) "Bankers acted greedily because they had incentives and opportunities to do so, and that is what has to be changed," Stiglitz writes. "Besides, the basis of capitalism is the pursuit of profit: should we blame the bankers for doing (perhaps a little better) what everyone in the market economy is supposed to be doing?" This is an interesting question, and one that is not normally asked in today's politically charged environment. And yet Stiglitz is just about the furthest thing from an apologist for the banking industry. Responding to central bankers' claims that allowing inflation hurts those with low incomes, Stiglitz deadpans, "One should be suspicious when one hears bankers take up the cause of the poor." Elsewhere, he states that "there is an obvious solution to the too-big-to-fail banks: break them up. If they are too big to fail, they are too big to exist." Obviously, large-scale problems in the financial sector led to the collapse of the markets and the economy at large, but Freefall is not content to stop at causes. The responses by both the Bush and Obama administrations come under heavy fire too: the former for not recognizing the severity of the crisis or forming a coherent rescue, and the latter for choosing the politically safest responses (tellingly, the author dubs this the "muddling through" approach). A key problem, if Stiglitz is to be believed, is the misalignment of private and social benefits. When banking executives' compensation is based upon short-term stock price gains instead of long-term profitability, when regulators and top government officials at the Federal Reserve and the Treasury turn a blind eye to the mounting risks in the housing bubble to avoid slowing perceived economic growth, when financial innovations that produce high fees and low efficiency are encouraged instead of fined or prohibited, eventually there will be hell to pay, and we as taxpayers will be the ones paying it. Indeed, this is exactly what we're doing right now. Regardless of one's feelings on Stiglitz's policy prescriptions -- some of which, not unlike those of his earlier book, Making Globalization Work, appear more grounded in political idealism than in reality -- the fact remains that it has fallen to the taxpaying public to bear the risk created by the masterminds of Big Finance's increasingly complex securities and other derivatives. To Stiglitz, this is ample reason to hit the reset button on the American financial industry -- or perhaps more accurately, the reformat button. His vision is of a world of free markets, yes, but not completely unfettered and left to their own whimsies. Instead, President Stiglitz would beef up the regulatory framework: ensuring that banks' leverage ratios do not stray too high, that conflicts of interest (such as banks running their own real estate appraisal subdivisions) cannot occur, that predatory lending is prohibited (or at least heavily restricted), etc. Furthermore, Keynesian economics would experience a renaissance. (Stiglitz has little patience with the Chicago school, which he finds too theoretical and based on fallacious assumptions anyway. In one of the author's weakest moments, he shamelessly deconstructs a straw man only vaguely resembling actual conservative ideology.) A global reserve currency would be created, similar (but not identical) to the International Monetary Fund's Special Drawing Rights (SDR), to prevent the contagion of a worldwide crisis started by one currency's downward spiral. By the time one has finished this book, it seems that there is not much to look forward to in Joseph Stiglitz's version of world events. He sees a financial market in disarray, being slowly rebuilt by the same hands that led to its destruction and leading inevitably to another instance of the same shortsightedness followed by more devastation. This is a hard pill to swallow, but it sheds light on why Joseph Stiglitz chose to write this book so soon after the financial earthquake. An undesirable future can be prevented, and we're in the ideal scenario to start again from the rubble. By the time the economy begins showing serious signs of recovery, all resolve to change course will have evaporated. And so the gods of irony may be leaving us a silver lining after all in this prolonged economic massacre: the longer we suffer from the effects of past miscalculations and neglect, the more time we have to formulate a new, healthy, and safe framework to avoid a recurrence. [...]