If you’re masochistic – or have a lot of Adderall – economist John Maynard Keynes’ 75-year-old opus, The General Theory of Employment, Interest, and Money, is full of gems that shine light on the modern pickle over regulatory reform and ideological direction.
To wit: “The difficulty lies not in the new ideas, but in escaping from the old ones,” Keynes wrote. That is an apt summary of the message that Nobel-laureate and New Keynesian economist Joseph Stiglitz is preaching as he tours the country with his new book, Free Fall: America, Free Markets, and The Sinking of the World Economy (W. W. Norton, January).
The Obama stimulus bill, he argues, was neither big enough nor enacted fast enough.
On February 18, the day after the first anniversary of the stimulus bill, Stiglitz brought his book and ideology to enemy territory, the University of Chicago. The “Chicago School” is ruled by the deceased demigod Milton Friedman, who preached the monetarist and efficient market discourse at the university. His ideas stand in direct opposition to Stiglitz, who has emerged as one of the left’s most prominent champions of financial regulatory reform.
Free Fall was written during “the middle of the battle,” Stiglitz told In These Times. While the full consequences of the crisis are not yet known, he says, “Almost surely, the failures of the Obama and Bush administrations will rank among the most costly mistakes of any modern democratic government at any time.”
Stiglitz and his followers want, among other things, rigorous regulation, including the separation of investment banking, commercial banking, and hedge funds, and another round of ecoomic stimulus. To Stiglitz, size does matter, and it’s a problem: the market share of the five largest U.S. banks grew from 8 percent in 1995 to 30 percent today.
“The concern I have,” Stiglitz says, “is that even now, in Congress, the Republicans are saying that they don’t want to take actions to deal with systemic risk” – that is, the risk that the entire economic system will fail.
“I didn’t expect universal support for the perspective that I push for,” says Stiglitz, “but at least very strong support. I have been a little bit amazed at, for instance, within the economics profession, the number of economists that seem to still believe the efficient market hypothesis. There are even those who say, ‘What are people upset about with unemployment? That is just an opportunity to enjoy more leisure.’ “
Stiglitz attributes that quote to the Arizona State University economist Edward Prescott, winner of the Nobel Prize for economics in 2004. In his defense, Prescott says he was referring to economic definitions, not making light of the U.S. “depression.” (He also says: “Joe’s an asshole.”)
There was a moment at the height of the current financial crisis, Stiglitz says, when everyone was a Keynesian, but that’s no longer true.
“Let’s get this notion out of our heads that the government creates jobs,” Republican National Committee Chairman Michael Steele told CNN in February 2009. “Not in the history of mankind has the government ever created a job.”
In Europe, says Stiglitz, “the orthodoxy battle is still going on.” The policies that the European Union is demanding in Greece are massive fiscal contractions.This is similar, he says, to what happened during the Asian financial crisis of 1997, when the International Monetary Fund demanded that ailing countries like Thailand follow similar policies – policies that were doomed to fail, as Herbert Hoover’s policies did during the Great Depression and Bush and Obama’s policies are now.
Stiglitz laments these and other events in the news: the “inchoate anger” of Tea Partiers and the $3.7 billion in losses incurred by the Federal Reserve from the Bear Stearns bailout. “Of course, as a citizen I feel very upset about what is going on – the revelation, day by day, of the billions of dollars the taxpayers have lost in the bailout deals,” he says. And how that money won’t be repaid with interest.
He does, however, identify what he termed “very big steps in the right direction,” like the Volcker Rule that would restrict banks from making speculative investments that do not benefit their customers; the proposed tax on the too-big-to-fail banks that are highly leveraged; and the appointment in 2008 of Harvard law professor Elizabeth Warren as head of the Congressional Oversight Panel.
“But,” he says, those steps “are about one third of what needs to be done.”
The fight continues
More may be done soon. On March 15, Connecticut Democrat Christopher J. Dodd, chairman of the Senate’s banking committee, unveiled a regulatory overhaul proposal. He hopes to get it through his committee before the Easter recess beginning March 27.
The proposal abandons the stand-alone Consumer Financial Protection Agency initially proposed by House and Senate Democrats in February, as well as overhauls legislation passed by the House four months ago. But it would still enact the most rigorous overhaul of regulations since the Great Depression.
Dodd’s proposal aims to create a special council that would watch for systemic threats to the economy. It would have an independent chairman appointed by the president and its members would include the Treasury Secretary, the Chairman of the Federal Reserve and the heads of several regulatory agencies. The proposal would also create a consumer agency within the Federal Reserve that would have the power to write regulations governing a range of consumer financial transactions, from mortgages to payday loans to credit cards. Those rules could be vetoed by a two-thirds vote of the council. The consumer agency would not have enforcement powers.
And the proposal would give federal agencies greater control over the financial markets, including the power to dismantle ‘too big to fail’ institutions. The United States “is still vulnerable to another crisis,” Dodd said March 15. “It is certainly time to act.”
All 10 Republican senators on Dodd’s committee want him to slow down because of the “sheer magnitude and complexity” of the financial reform package he proposes and its inevitably substantial impact on the financial system and overall economy, they said to him in a letter. The banking industry is also avidly against new consumer regulators, arguing that they would inevitably interfere with existing regulators whose duty is to ensure the soundness of banks.
Apart from rigorous regulatory reform, Stiglitz supports “a fair tax system” and hopes for an economic dream team made up of the “users, not the producers.” In other words, people like Sheila C. Bair, Chairman of the Federal Deposit Insurance Corporation, who Stiglitz says has done a remarkable job defending the public interest by pushing forward regulation of incentive structures that prevent excessive risk by making deposit premiums higher.
Popular pressure points
Where should average citizens channel their anger?
For starters, Stiglitz says, people should demand that Congress limit the size of banks – in other words, break the big banks into smaller units.
“Because they are too-big-to-fail, they can borrow at a lower interest rate, he says. “And as they grow bigger they garner more of the market. We ought to tax them to level the playing field.”
He says we should be inspired by Theodore “Trust Buster” Roosevelt, who dissolved 44 trusts, including U.S. Steel and Standard Oil, during his two terms as president. “I think [Teddy Roosevelt] would be horrified at the current political influence of the big banks,” Stiglitz says. “He would have said, ‘This is a question not of market power but political power.’ The fact that I am having such difficulty dealing with this is proof of that point.”
A shorter version of this article appeared in In These Times’ April 2010 issue.