Freefall (Initial Entry)
Prepared by Michael Marien, Director, Global Foresight Books
A Predictable and Predicted Recession
Former World Bank Chief Economist and winner of the 2001 Nobel Prize in economics declares that The Great Recession that began in 2008 has led to joblessness and shattered dreams for “tens of millions” worldwide, and “forces us to rethink” long-cherished views. “The only surprise about the economic crisis of 2008 was that it came as a surprise to so many. For a few observers, it was a textbook case that was not only predictable but also predicted.”
“How and Why Did We Let This Happen Again?”
Stiglitz explains how flawed perspectives led to the crisis and made it difficult to see the festering problems, the mistakes already made that have made the downturn longer and deeper than it otherwise would have been, and why the length of the crisis will depend on policies pursued. “We won’t and can’t go back to the world as it was before.” What is striking is that this man-made crisis appears similar to many that have gone before it, both in the US and abroad. The big question is “How and why did we let this happen again, and on such a scale?” Among the long list of those to blame for the crisis is the economics profession, which provided the special interests with arguments about efficient and self-regulating markets—even though advances in economics in the past two decades show the limited conditions under which that theory held true.
Specific Topics Discussed:
The Crisis as a Distraction from Long-Term Problems
The crisis has distracted the US and much of the world from longer-term problems that must be addressed: climate change, energy, health care, education, aging populations, trade and fiscal deficits, etc. “The resources that are available to deal with them may have been substantially reduced because of the way the government mismanaged the crisis—in particular, by the money it squandered on bailing out the financial system.”
The State and the Economy in a New Capitalist Order
We now have to reconstruct a society with a better balance between the role of government and the role of the market, in turn required for a more efficient and a more stable economy. Creating a “a new capitalist order” requires:
Needed: A New Global Financial Order
“If no action is taken to manage the global financial and global economic system better, there will be more, and possibly worse, crises in the future.” The US will still remain the largest economy, but the way the world views America has changed, and China’s influence will grow. With the ballooning of America’s debt and deficit, and the unremitting printing of money by the Fed, confidence has eroded further. This will have a long-term impact on America and its standing, but it has already generated a demand for “a new global financial order,” including a new global reserve system (an idea pushed by Keynes some 75 years ago) and, more broadly, new frameworks for governing the global economic system. The new frameworks for the global economic system include:
Lack of Coordination: Potential Impacts
Without such coordination, many countries may conclude that unfettered American-style capitalism has failed; a variety of forms of excessive market intervention will return, and these will also fail. The poor suffered under market fundamentalism and trickle-down economics, and “they may suffer again if new regimes get the balance wrong…There has been no successful economy that has not relied heavily on markets.” As for a new global reserve system, “the world is likely to move out of the dollar and into a multiple-currency reserve system, producing global financial instability in the short term and a regime more unstable than the current system in the long term.”
What the US Should Do
The US should also do what it can to strengthen multilateralism, which means democratizing, reforming, and funding the IMF and the World Bank so that developing countries find less need to turn to bilateral support.
Among the several dozen recent books on The Great Recession, Freefall is one of the best if not the best. It is authoritative, future-oriented, clearly written for a general audience, and takes a necessary global perspective on what must be done to create a new financial order after the “near-death experience” of the global economy. It is sharply critical of governments, financial institutions, and the economics profession. The casual opening estimate of “tens of millions” seriously harmed worldwide is probably understated, while the hope that this event “forces us to rethink long-cherished views” is probably overstated. Offers 63 pages of footnotes, but, unfortunately, no index.