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

I decided to read Freefall (by Joseph Stiglitz) after seeing a talk by the author. In the book Stiglitz promises to peel back the layers of causes responsible for the recent financial market collapse. When asked why the collapse happened most people will respond by saying banks were giving out mortgages to people who could not pay back. But Why? Because the incentives of the mortgage originators and bankers were flawed. But then the question is why did the market not respond to those flawed incentives and encourage firms that had the right incentive structure. Stiglitz frames the economic collapse in context of larger debate between Keynesian's and Monetarist's. His central claim is that since late 1970's Monetarist thought has been gaining the upper hand and the current crisis is the result.

The book starts off very crisply. Stiglitz invites you to listen to the story of the crisis and keeps you engaged even while going over parts of the story that you have already heard. He gives a comprehensive account of the crisis and I learned many things even though I considered my self well aware of the events. He castigates the political administrations starting from Regan's for dismantling the regulatory system which was ultimately responsible for the crisis.

While he is extremely critical of the bankers, regulators and politicians he seems to give the homeowners who took mortgages they could not afford a free pass. He never quite gets around to explaining how the american family who took the zero percent down, non recourse mortgage was the victim when they could just walk away from the home that they had no business owning in the first place. He seems to see no difference between the hardworking Americans who save for a down-payment and only buy homes they can afford and those who get the biggest house they can with nary a thought to finances.

He also latches on to ARM's as unequivocally bad and predatory which is not really true. He mentions them multiple times and faults Greenspan for encouraging them in a lecture. In an otherwise crisp and insightful narrative I felt a dissonance reading the simple minded rhetoric on ARM's. In an ARM the borrower takes on the interest rate risk and in return gets a lower cost for the loan. These mortgages are pretty common in many countries (like Canada) and they work as well as the fixed rate mortgages used to in America.

The above faults aside Stiglitz is spot on in his criticisms on how the stimulus has played out. Banks and their shareholders got too sweet a deal. He explains how all the reasons given on why banks and their shareholders are entitled the the tax payer largess are flawed. The Obama administration policies have failed to stop a crisis like this from recurring. The banks are still too big to fail, and thus enjoy the implicit government guarantees.

The only problem with the book is its length. After about half way through, I started feeling that the arguments and examples got repetitive. It felt like someone who has been ignored for years has finally been vindicated and now cannot stop saying "I told you so".

Overall, I would highly recommend the book to anyone who is interested in the financial crisis. It pairs really well with The Big Shot