Freefall: America, Free Markets, and the Sinking of the World Economy
by Joseph E. Stiglitz
Norton, 361 pp., $27.95
The Sellout: How Three Decades of Wall Street Greed and Government Mismanagement Destroyed the Global Financial System
by Charles Gasparino
Harper Business, 553 pp., $27.99
Taking Stock: What Has the Troubled Asset Relief Program Achieved?
by the Congressional Oversight Panel
181 pp. (December 9, 2009)
A year and a half after the bankruptcy of Lehman Brothers and the near collapse of the global financial system that followed, the US Congress still has adopted no new rules to reregulate financial institutions. Well over three years have passed since the housing market began to unravel after an unprecedented boom fed by Wall Street speculation. Some financial firms borrowed more than forty times their capital at the height of speculation in 2006 and 2007 to invest in mortgage and other securities. Yet today, there are still no significantly higher capital requirements for them. There are no restraints on multimillion-dollar banker compensation, except on the executives of companies that took and have not yet paid back bailout funds from the Bush administration’s $700 billion Troubled Asset Relief Program (TARP). Most of the major firms, including Goldman Sachs and even struggling Citigroup, already have.
There are no adequate new restrictions on the private credit-rating agencies such as Moody’s, which doled out AAA ratings in increasing numbers even as mortgage securities became far more risky in 2006 and mortgage defaults started to rise. There are no new requirements to trade derivatives openly and transparently, and they are still being traded in obscurity. The value of these highly leveraged and typically volatile instruments was based on other more stable securities, such as treasury bonds, which enabled investment firms to take on more risky investments while avoiding regulatory restrictions. And there are no new regulations to protect consumers from credit card or mortgage fraud, despite rampant deception and abuse of homeowners.
Meantime, financial institutions are thriving again. After many posted large losses in 2008, the banking firms earned record profits in 2009, and are set to pay as much as $145 billion in bonuses to their employees. The rest of the American economy is largely suffering. A congressional oversight panel headed by Harvard Law School professor Elizabeth Warren reported in December that lending to businesses and consumers by major banks was down from the previous year, especially by the twenty banks that received the biggest bailouts. The unemployment rate hovers around 10 percent. When those who have given up looking for jobs or are taking temporary jobs are included, about one in six Americans who want to work full-time cannot do so. Household incomes are suffering in general and because of high levels of debt, few experts see a strong economic recovery in the making. Three years after housing prices fell by an average of one third, they are still not rising. As a result of the recession the federal deficit keeps increasing as tax receipts flounder, preventing the federal government from introducing programs to rebuild infrastructure, improve education, and provide health care for all Americans.
Joseph Stiglitz, the Nobel Prize– winning economist who also served in the Clinton administration, cannot suppress his dismay in …