On January 20, 2010, New America welcomed distinguished economist Joseph Stiglitz in presenting his new book, Freefall: America, Free Markets, and the Sinking of the World Economy. Dr. Stiglitz began his talk by stating that the economy prior to the collapse had been sick for quite some time; indeed, according to Dr. Stiglitz, the economic collapse had been highly predictable. The cause of the financial crisis had been the false assumption that markets are self-regulating. However, Dr. Stiglitz asserted that market capitalism is actually characterized by fluctuations and frequent financial crises. The major deregulation of the economy in the 1980s only augmented the instability inherent in a free market economy.

Dr. Stiglitz continued by isolating the more specific causes of the economic downfall. The financial sector, for example, had failed to allocate capital, manage risk, work the payment mechanism, and keep down transaction costs. Dr. Stiglitz explained that the incentives within the system had encouraged them to exhibit the short-term, high-risk behavior that led to the crisis. The economic stimulus had done little to fix the damage. It had been too small and had placed too great an emphasis on tax cuts. Consumers were already so greatly in debt, Dr. Stiglitz explained, that tax cuts did little to induce spending.

Dr. Stiglitz concluded by emphasizing the need for the country to have a new “vision” of where the economy ought to go. The second stimulus ought to be at state-level, he said. Small community banks supporting medium-sized businesses and entrepreneurs –major sources of job creation –ought to be supported over the large conglomerate banks. Looking to the future, Dr. Stiglitz dismissed the idea of returning to the economic state before 2007. While others have pronounced the financial crisis a “clog in the pipes,” Dr. Stiglitz argued that the entire piping system should be thrown out and redesigned.

---Kalie Pierce, Research Intern with the American Strategy Program