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by Joseph E. Stiglitz, AARP Bulletin, April 22, 2010
Several commentators have referred to the massive bailouts and government interventions in the economy as socialism with American characteristics, something akin to China’s march to what it calls “a market economy with Chinese characteristics.” But, as one Chinese friend pointed out, the description is inaccurate: socialism is supposed to care about people. Socialism American-style didn’t do that.
Had the money been spent on helping those who were losing their homes, it might have been a correct characterization. As it was, it was just an expanded version of Corporate Welfarism American-style.
The current crisis has seen the government assume a new role—the “bearer of risk of last resort.” When the private markets were at the point of meltdown, all risk was shifted to the government. The safety net should focus on protecting individuals; but the safety net was extended to corporations, in the belief that the consequences of not doing so would be too horrific. Once extended, it will be difficult to withdraw: firms will know that if they are sufficiently big and their failure represents a sufficient threat to the economy—or if they are sufficiently politically influential—the government will bear the risk of failure. That is why it will be critical to prevent banks from growing so big.
There is, still, a chance for the American political system to restore a modicum of confidence in itself. Yes, Wall Street has used its power and money to buy deregulation, followed swiftly by the most generous bailout in the history of mankind. Yes, the government has failed to restructure the financial system in ways which would reduce the likelihood of a similar crisis, and which strengthened those parts of the financial system that were actually doing what they were supposed to be doing—managing risk and allocating capital. But, still, there is the chance to re-regulate, to correct the mistakes of the past. It is imperative that that be done quickly: for while one side in the struggle, ordinary taxpayers who had to bear the brunt of the cost of the financial sector’s failure, might lose interest as the economy recovers, the other side, the banks, have every incentive to continue to fight to ensure that they have as much freedom to make profits as they can get. But because both the structure of the financial system has been made worse and the way the bailouts have been conducted has worsened the problem of moral hazard, the need for re-regulation is all the greater.
Reprinted from Freefall: America, Free Markets, and the Sinking of the World Economy by Joseph E. Stiglitz. Copyright © 2010 by Joseph E. Stiglitz. Used with permission of the publisher, W.W. Norton & Company Inc.
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