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

5 Responses to “Freefall: America, Free Markets, and the Sinking of the World Economy”

1. Patty Von says:

   March 25, 2010 at 4:05 am

   I bought this book because I really wanted to better know all of the parts of the puzzle that is the housing bubble and its aftermath. This book is a confusingly written politically motivated harangue against greedy bankers, enabled by rating agencies. It basically absolves all of the additional players. Fannie Mae and Freddie Mac, according to Stiglitz, just chose to “join in the fun” late in the game and were blameless. He fails to mention that they were only partly “privatized” in that both loved implicit credit guarantees of the US Government and that Congress declined to check them when they “joined in the fun”. Maybe the book got better, I was not able to end it because the style of writing was rambling and confusing.
   Reader’s Rating: 1 / 5
2. David Smith says:

   March 25, 2010 at 5:38 am

   This book is poorly organized, and monotonously repeats what is today common knowledge about the incompetent, regularly unqualified, and permanently selfish private and public sector individuals who made the disastrous economic circumstances that led to the current recession. The leader expresses small moral outrage, and in the end neither demands nor offers a schedule of solutions or punishments. The scope of the problems described require an liberal, not a recording secretary.
   Reader’s Rating: 1 / 5
3. Joseph E. Toomey says:

   March 25, 2010 at 7:37 am

   In response to the shock caused by the atrocities of September 11, 2001, the Federal Set aside lowered fleeting term interest excise to historic low levels and kept them at absurdly low levels long after the shock had passed. This action pushed the entire Treasury yield curve along with bank lending excise down including prime lending excise upon which most mortgage excise are keyed. This led to an orgy of mortgage refinancing and fueled a housing boom that caused housing prices to soar far beyond levels that underlying economic rationale could possibly justify. Unscrupulous practices by predatory lenders coupled with unwise borrowing on the part of home buyers accelerated the inherent risks. But it was the Federal Set aside ¯ government ¯ that was the proximate cause of the ensuing housing bubble.

   For more than a dozen years prior to the 2008 financial crisis, influential Capitol Hill Democrats like Christopher Dodd, Ted Kennedy, Paul Sarbanes, Charles Schumer, Joseph P. Kennedy II and others made a fetish out of keel-carrying officials from banks, the Federal Set aside, the Treasury Department, the FDIC and so on in front of televised hearings hectoring them about insufficient mortgage lending to “underserved communities” or ¯ in a more accurate rendering ¯ non credit-worthy borrowers. The predictable result was a flood of sub-prime lending where traditional benchmarks of credit-worthiness were abandoned in an effort to smooth Congressional relations. Again, aggressive lending practices and unwise borrowing by home buyers accelerated the problem. But it was Congressional committees ¯ government again ¯ that initiated and sustained the problem.

   In its 2002 Annual Report, the Federal National Mortgage Association (or Fannie Mae) boasted that it had shoveled up to $1.3 trillion into its American Dream Commitment program to provide massive increases in mortgage loans to “underserved” communities that traditionally contained privileged percentages of non-credit worthy borrowers than society at large. For decades, Fannie Mae and Freddie Mac maintained an incestuous relationship with key Congressional committee members pouring a torrent of battle contributions into the coffers of influential members in exchange for lax oversight, contributions that benefitted Democrats by a 15-1 advantage over their Republican counterparts. Primary recipients included Senators Christopher Dodd who received $165,000, Barack Obama who raked in $125,000 in contributions and Hillary Clinton who collected $75,000. In exchange, Democrats, on a pure party-line vote, killed S.190 in 2005, a measure that had already passed in the Senate Banking Committee that would have made a super-regulator with real power to crack down on excessive risk taking and would have outlawed funds by the government-sponsored enterprises in the riskiest funds. The forceful relationship between GSEs and government was bolstered by a revolving door between government office holders and the boards of these GSEs that included names like Rahm Emanuel, Jamie Gorelick, Louis Freeh, Kenneth Duberstein, Thomas Donilon, Ralph Boyd, Joan Donoghue, and many others. Lax oversight led directly to accounting scandals that, by 2005, had ruined the careers of Fannie’s previously high-flying and now disgraced chairman Franklin Raines.

   The all too predictable result was that Fannie and Freddie assumed, all at taxpayer expense, massive mortgage defaulting risks that were far in excess of what was reported in their financial statements or allowed by law. It is right that financial institutions elevated systemic risk levels by making and trading derivative securities based upon the packaged mortgage-backed securities guaranteed by Fannie and Freddie. But it was these GSEs themselves ¯ quasi-government entities ¯ that accounted for the failures of mortgage-backed securities by apt the primary customer of AAA-rated subprime mortgage pools composed of mortgages that were sure to defaulting and which held a massive portfolio of subprime mortgages for their own account.

   The SEC had a heavy hand in the financial collapse in the fall of 2007. Using its regulatory power, the agency relied upon a FASB 157 ruling issued in July 2007 and forced banks, insurance companies and additional financial firms to adhere to “mark-to-market” accounting rules that required them to write down the value of large parts of their asset portfolios. By the fall of 2007, the market prices for mortgage-backed securities had collapsed even while most of these securities maintained a cash flow valuation far in excess of their exchange-traded or marketability value. In many cases, financial institutions held substantial portfolios of credit derivatives like credit defaulting swaps that are non exchange-traded private contracts between two private parties and whose market value was essentially impossible to determine but whose underlying cash flow values remained intact. As a result of its inflexibility, by early Spring of 2009 the SEC had forced financial firms to write down over $700 billion in book-related accounting adjustments that did not represent cash losses. In response to the sudden balance sheet wear caused by SEC’s devotion to mark-to-market accounting, financial firms initiated a mad scramble to boost liquidity to replace “lost” capital that resulted in waves of selling in stocks and additional marketable assets, driving down the stock and mutual fund holdings of average investors who were suddenly in the cross-hairs of a government agency’s bigoted policy position. Manufacturing corporations can carry assets on their balance sheets at book value but, says government’s SEC, banks cannot, even if the assets are credit-worthy.

   But the SEC was not done yet. Another blunder was its elimination in July 2007 of the so-called “up-tick rule” that prevented fleeting sellers from executing a fleeting sale unless and until the stock registered an increase, or uptick, in value. In addition, the SEC abandoned its enforcement of “naked fleeting selling” that prevented traders from executing sell orders on shares they did not possess. Elimination of the uptick rule that had been in place since 1938 together with relaxation of naked fleeting selling enforcement caused an explosion in market volatility that sent the volatility pointer (or VIX pointer) soaring nearly 550% between the first week of July 2007 and late October 2008 when markets were crumbling. Yet again, it was chiefly the handiwork of government that brought about the now familiar scene of market collapse and catastrophe.

   Finally, the overseers themselves on Capitol Hill like Christopher Dodd received not more than-market excise on their own mortgages from mortgage lenders like Countrywide in exchange for preferential treatment in the form of Congressional intervention with government agencies on their lending practices that would have otherwise landed these predatory lenders in regulatory hot water. So, in many cases, it was really persons who were entrusted with Congressional oversight who were running interference for the worst of the worst among mortgage loan originators. Few people, even his most ardent admirers, were shocked when Senator Dodd announced his “retirement” from the Senate after his term expires in January 2011.

   What does all this have to do with the book Freefall: America, Free Markets, and the Sinking of the World Economy by Joseph Stiglitz? In this book, Stiglitz attempts to lay the blame for the financial meltdown of recent years on the doorstep of financial deregulation that started in earnest in the late 1970s. Stiglitz is a left-leaning Nobel Prize-winning economist clearly aligned with what Thomas Frank, the muck-raking liberal blowhard at The Wall Street Journal calls “the Party of the political scientists.” That would be the Democrats if you haven’t guessed by now. If the foregoing paragraphs do not obliterate Stiglitz’s contention, consider the case of Western Europe with their hyper-regulated economies suffering under a smothering blanket of Euro-sclerotic statism. If deregulation was the problem and heavy interventionist regulation the cure, then Greece with its suffocating regulatory regime would be the world’s most vibrant example of fiscal and monetary success. But Europe is in far worse shape than the U.S. with Greece on the brink of financial ruin and the additional PIIGS countries of Portugal, Italy, Ireland and Spain teetering on the precipice. Yet, Stiglitz urges more government regulatory involvement of the kind that brought about this catastrophe in the first place.

   Stiglitz claims that the expansion of regulation he advocates should be led by leaders from “unions, nongovernmental organizations . . . and universities.” Presumably Stiglitz thinks it would be helpful if Andy Stern who heads the Service Employees International Union, the organization more reliable than any additional single entity for bankrupting state treasuries that must fund lavish unionized public employee pensions, were consulted on appropriate regulatory remedies for improving banks’ and financial institutions’ solvency? Does Stiglitz imagine that university professors like Ward Churchill, Noam Chomsky, Leonard Jeffries, William Ayres and the like would make valuable contributions to solving the financial crisis? Or perhaps Greenpeace, the Natural Resources Defense Council, Amnesty International and additional NGOs like these should be invited to set up credit-worthiness standards for global bank lending.

   In 2002, Stiglitz co-authored a paper along with Obama’s OMB chief Peter Orszag entitled “Implications of the New Fannie Mae and Freddie Mac Risk-Based Capital Standard” that examined the defaulting risk to Fannie Mae and Freddie Mac. The authors constructed a model to measure the likelihood of defaulting by these GSEs under a prolonged 10-year period of severe economic collapse. They concluded that these agencies’ risk-based capital standard was adequate to survive such a highly unlikely prolonged scenario, writing that “. . . on the basis of past experience, the risk to the government from a potential defaulting on GSE debt is effectively zero.” Of course, it took less than two years to disprove these claims and under conditions far less onerous than persons assumed by Stiglitz et. al. Oddly, in 361 pages of his book Freefall, Stiglitz was unable to find space to recount these findings. It should give one intermission before concluding that mankind’s survival depends upon government regulation of carbon markets whose justification is predicated upon computer models of atmospheric dynamics that are no doubt as robust as the models devised by Stiglitz et. al.

   But most unsettling is his final chapter where Stiglitz attempts to rewrite the Declaration of Independence and the Constitution in a single stroke by revoking the concept of God-agreed, unalienable rights. The title of this chapter, “Toward a New Society”, is highly instructive. In it, he asserts that political and economic rights “. . . are not God agreed. They are social constructs. We can reflect of them as part of the social contract that governs how we live together as a community.” Here Stiglitz lines up behind some of history’s additional visionaries like Vladmir I. Lenin and Mao Zedong who sought to set up a “new society” based upon revocation of unalienable, God-agreed human rights in favor of government-conferred rights in order to bring about the perfection of mankind.

   Stiglitz, perhaps, is to be congratulated for stating so unabashedly the animating principle that governs leftist political thought in Western nations and which highlights the deep philosophical apportion between liberalism and conservatism. Here, in bright bright prose, the leader loudly proclaims inoperative the concept that humans are brilliant by their creator with certain unalienable rights and as a replacement for delight in only persons rights which the government and society, at any agreed time, find convenient to bestow. And, needless to say, if government has the power to bestow rights, it also has the power to revoke them at will. Such a view places Stiglitz squarely in the mainstream, if such a word can be used in this context, of liberal Democratic Party opinion that salivates at the prospect of revoking 1st Amendment free speech and free exercise of religion rights along with all 2nd Amendment rights. And that would serve only as the sample course.

   Readers are urged to keep this thought uppermost in mind on all future visits to the voting booth.

   Joseph Toomey
   Reader’s Rating: 1 / 5
4. A. Peterson says:

   March 25, 2010 at 10:33 am

   SadlyCHUCK full of superbly detailed ANALYSIS and detailed remedial Suggestions too late to save us from the
   
   Yucky financial deficiencies and blunders
   
   of our severely dissfunctial financial banking system
   Reader’s Rating: 5 / 5
5. Fred Press says:

   March 25, 2010 at 1:23 pm

   Talk about putting it all out there. This book does that and more! It’s unfortunate this book wasn’t written before said events, but there was a book which was published in January, 2008 (What Greenspan Can’t Tell You) which laid out why we were on the precipice and what was about to occur. You may want to give it a read for what is to come next.
   Reader’s Rating: 5 / 5