More praise for FREEFALL “Stiglitz is the world’s leading scholarly expert on market failure, and this crisis vindicates his life’s work. There have been other broad-spectrum books on the genesis and dynamics of the collapse, but Freefall is the most comprehensive to date, grounded in both theory and factual detail…. The tone of this book is good- humored and public-minded.” —Robert Kuttner, The American Prospect “Bankers are born no greedier than the rest of us. That assertion alone makes Joseph Stiglitz’s comprehensive postmortem stand out from the reams of books published so far about the financial crisis.” —Barbara Kiviat, Time “Asks some basic and provocative questions…. Freefall is a must-read for anyone seeking to understand the roots of the financial crisis. Stiglitz brilliantly analyzes the economic reasons behind the banking collapse, but he goes much further, digging down to the wrongheaded national faith in the power of free markets to regulate themselves and provide wealth for all.” —Chuck Leddy, Boston Globe “As a Nobel Prize winner, member of the cabinet under former President Bill Clinton and chairman of his Council of Economic Advisers, Joseph E. Stiglitz has some practical ideas on how to ease the pain of the Great Recession and maybe help prevent the next one.” —Carl Hartman, Associated Press “An excellent overview from a Nobel Prize–winning economist of what caused the crisis and what reforms should be enacted…. I can only hope Obama makes room for it on his nightstand.” —James Pressley, BusinessWeek “Mr. Stiglitz uses his experience teaching to give the lay reader a lucid account of how overleveraged banks, a shoddy mortgage industry, predatory lending and unregulated trading contributed to the meltdown, and how, in his opinion, ill- unregulated trading contributed to the meltdown, and how, in his opinion, ill- conceived rescue efforts may have halted the freefall but have failed to grapple with more fundamental problems…. His prescience lends credibility to his trenchant analysis of the causes of the fiscal meltdown.” —Michiko Kakutani, New York Times “Freefall is a spirited attack on Wall Street, the free market and the Washington consensus.” —David Smith, The Times “Stiglitz’s polemic commands special attention.” —The New Yorker “This is a useful and timely book. Joseph E. Stiglitz is one of the two or three score pundits, economists and historians who more or less predicted the disasters that have overtaken the American economy…. A powerful indictment of Wall Street.” —Kevin Phillips, New York Times Book Review “[Stiglitz] has managed to clarify deftly and intelligently almost all the relevant and perplexing issues that have arisen from the crisis.” —Jeff Madrick, New York Review of Books “This is the best book so far on the financial crisis. Joseph Stiglitz, the Nobel Prize–winning economist, is knowledgeable about the historical background, immersed in the policy debate and a pioneer of the economic theories needed to understand the origins of the problems.” —John Kay, Financial Times “Joseph Stiglitz has written an indispensable history of the emergence of market fundamentalism (or ‘economism’) in the United States and its pernicious social consequences.” —John Palattella, The Nation “If anyone is going to produce a bold new economic theory and vision to guide the centre left beyond the financial crisis, it’s going to be Joe…. It is to Stiglitz’s lasting credit that, while other economists have already moved back into the realm of algebra and Greek letters, he has remained in the trenches of policy.” —Paul Mason, New Statesman “It requires bravery to take on the vested interests—along with good ideas and a “It requires bravery to take on the vested interests—along with good ideas and a strong sense of the right trajectory. At present we have too little of any of them. Stiglitz’s book successfully redresses the balance. It is very welcome—and important.” —Will Hutton, The Observer “This inquest into the recession of 2007–09 lashes many designated villains, banks above all. Writing in a spirit Andrew Jackson would have loved, Stiglitz assails financial institutions’ size, their executive compensation, the complexity of their financial instruments, and the taxpayer money that has been poured into them…. Zinging the Federal Reserve for good measure, Stiglitz insistently and intelligently presses positions that challenge those of rightward-leaning economists upholding the virtues of markets. Amid animated contemporary economic debate, Stiglitz’s book will attract popular and professional attention.” —Gilbert Taylor, Booklist “[W]hat brings this book to life is [Stiglitz’s] formidable grasp of economic policy and strong sense of conviction about the blunders that have been made, especially with respect to the bank bailouts.” —Jim Zarroli, NPR ALSO BY JOSEPH E. STIGLITZ The Three Trillion Dollar War: The True Cost of the Iraq Conflict (with Linda Bilmes) Making Globalization Work The Roaring Nineties Globalization and Its Discontents FREEFALL America, Free Markets, and the Sinking of the World Economy JOSEPH E. STIGLITZ W. W. NORTON & COMPANY NEW YORK LONDON Copyright © 2010 by Joseph E. Stiglitz All rights reserved First published as a Norton 2010 For information about permission to reproduce selections from this book, write to Permissions, W. W. Norton & Company, Inc., 500 Fifth Avenue, New York, NY 10110 Library of Congress Cataloging-in-Publication Data Stiglitz, Joseph E. Freefall : America, free markets, and the sinking of the world economy / Joseph E. Stiglitz. p. cm. Includes bibliographical references. ISBN: 978-0-39307707-0 1. Financial crises—United States. 2. Finance—Government policy–United States. 3. Global Financial Crisis, 2008–2009. 4. United States—Economic policy—1981–2001. 5. United States—Economic policy—2001–2009. I. Title. HB3722.S842 2010 330.973—dc22 2009051285 W. W. Norton & Company, Inc. 500 Fifth Avenue, New York, N.Y. 10110 www.wwnorton.com W. W. Norton & Company Ltd. Castle House, 75/76 Wells Street, London W1T 3QT TO MY STUDENTS, FROM WHOM I HAVE LEARNED SO MUCH, IN THE HOPE THAT THEY WILL LEARN FROM OUR MISTAKES. CONTENTS PREFACE ACKNOWLEDGMENTS Chapter 1 THE MAKING OF A CRISIS Chapter 2 FREEFALL AND ITS AFTERMATH Chapter 3 A FLAWED RESPONSE Chapter 4 THE MORTGAGE SCAM Chapter 5 THE GREAT AMERICAN ROBBERY Chapter 6 AVARICE TRIUMPHS OVER PRUDENCE Chapter 7 A NEW CAPITALIST ORDER Chapter 8 FROM GLOBAL RECOVERY TO GLOBAL PROSPERITY Chapter 9 REFORMING ECONOMICS Chapter 10 TOWARD A NEW SOCIETY AFTERWORD NOTES