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The chuckling economist


'The market crash', by Chris JohnstonOn the night of 6 October 2008 the Nobel Laureate economist stood before a crowded lecture theatre in Geneva and grinned like a five-year-old at his own birthday party.

Two extra theatres, complete with big screens, were opened to accommodate the punters. Students, academics, UN workers, private bankers, and the odd housewife, such as myself, crowded around like it was a football game.

That day the markets had bled over the world and the University flooded with people waiting to hear his diagnosis, but Joseph Stiglitz couldn't stop chuckling. Perhaps it was because he stood minutes from the UN, where he used to be Chief Economist of the World Bank, and where he ended his term in fisty cuffs with the IMF and the US treasury over their financial bullying of developing nations.

When he stood at the podium, Joseph Stiglitz had schadenfreude written all over his face.

As bankers pressed their suits against my back and French translations echoed over the crowd, Stiglitz commenced by quoting Keynes and 'the importance of the influence of ideas' on the markets. He called for the revitalisation of history and traditional economic laws, and for the financial markets to be populated by people with a solid generalist education rather than narrow 'financial' specialists who don't know the first thing about human behaviour.

To make his point he quoted George Bush's summation of the financial crisis, 'We built too many houses'.

Stiglitz giggled with the audience, who laughed like the wonderful Europeans they are, but as a sobering follow-on, he stated that three million Americans have lost their homes and in the coming months another two million people will have their houses foreclosed.

He added, with raised eyebrows, that many of these houses are being bulldozed because they are vacant, then shook his head and mentioned waste. I wondered about increased homeless rates, increased unemployment and where all those families of those vacant houses were now.

Stiglitz argued that the markets had failed in their three main tasks: to mobilise savings, manage risk and allocate capital. The US has no savings to write home about, their debt runs indefinitely into the future, risk hasn't been managed — Look above! The sky's falling in — and capital, well all those vacant houses speak volumes.

Stiglitz calculated that the current American bailout package is equivalent to the amount that developed nations give in foreign aid to developing nations over a decade, and asked us to remember that the dodgy loans that caused this crisis were given to low income families who couldn't afford them. This collapse of the markets wasn't just about big men falling from power.

The audience shook its head, groaned as one, and he went on to say that the current US debt hasn't yet accounted for future medical needs of returning veterans from the Iraq war, estimated at half a trillion dollars. It will only get worse.

As I sat in that theatre, on a cold Monday evening surrounded by well-dressed Swiss, I could almost hear old wise voices rise through the carpet. Old-fashioned warnings like greed, pride, hubris and lack of trust riddled Stiglitz's speech. These basic vices, that centuries of education have warned us against, rose through his analysis of the financial markets like warm swords.

What shocked my non-economic brain was the explanation of how these sub-prime mortgages were made pretty and sold onto unsuspecting customers in America and abroad. Stiglitz explained how, up in the air, up in the unregulated ether, someone desperate to save their own overstretched skin, took these mortgages and 'spliced and diced' them into fancy financial products and then had the gall to sell them on.

I had images of a celestial butcher, blood over his apron as he hacked at the rotten mortgage carcass, 'splicing and dicing' and pulling out entrails, which he mixed with sawdust and animal fat, then wrapped in shiny plastic to be sold as meat. Stiglitz said these 'cut up' financial products were 'not fit for human consumption', and needed warnings attached to them before they could be sold with a clear conscience. I imagined the elderly, the pension funds and local councillors, taking a bite from the putrid 'meat' and falling dead to the floor.

I used to think that financial products were generally benign, if not boring, because only those with spare cash could afford them, but I forgot the age-old spiritual cliché and current reality of the globalised world: we are all connected. This enormous and desperate overreaching of empire, boiled in the cauldron of the illusive financial markets and manifested in these financial products, is bound to hurt the little guy. History proves that one.

Many times during the lecture Stiglitz lamented the lack of regulation. Greenspan was meant to take the punchbowl away when the party got too rowdy but he didn't. Instead he refilled the punchbowl over and over until everyone was so drunk they didn't know their own name and tripped over each over in a consumption stupor.

Stiglitz is no socialist. How far have we come as a species if those in the centre cry out for regulation, for accountability, for an understanding of history and a deeper respect for an obvious aspect of human life? If people panic, lose trust, then the human collective is at risk of some sort of Armageddon.

We need trust; we need to remember what has gone before us. We need to remember the lessons of the Great Depression; we need to hear the voices of philosophers and the saints warning us of pride and greed.

And now we need to remember that when something presents itself as an untouchable specialisation and uses incomprehensible gobbledegook to sell a product, we need wise eyes to check it before we swallow its promises.

I understood, as I sat amongst the powerful and the interested, that, at its most rudimentary level, economics is about how human beings organise themselves materially and what a mess, monetarily and environmentally, we have made of that in the last few years.

Stiglitz argued that deregulation is the problem, proposing increased nationalising of the banks akin to the Swedish model, and I had a strong sense of a tide turning. Perhaps the end of the American empire, but also a return to fiscal regulation and increased socialised public assets, something I thought my children might see, but never expected in my lifetime. There is nothing like a dead duck president to speed things up.

The financial markets have been in the ether above our heads for a long time. Most of us pay scant regard to them, only watching the home-loan rates and hoping we can make it through the next month while, rightly, shaking our heads at executive pay packets.

Listening to Stiglitz, I was relieved that someone was coming down from the economic high plains and explaining what these cowboys had done. It wasn't pretty. The markets are falling from the sky, from places where they have remained unchecked by any democratic, or proper regulatory system. I realised that, all over this small world of ours, they will continue to fall unless something serious changes in how things are done.

Stiglitz said it may not be too late, but between you and me, he didn't look too convinced.

Stiglitz was still smiling at the end of his talk. Perhaps it is some sort of personal soap opera for him: finally vindicated after years of fighting with the US treasury and the IMF. I walked back into the cold Geneva night and had a beer, but I couldn't shake the thought of that butcher in the sky, slicing and dicing up a financial product, someone's home, until it was sexy, but rancid.

I raised my glass with my friend and we bitterly toasted the end of empire. What next? An awful reversal of the trickle-down effect? How hard will the fall be? It was cold, rainy and downright sad. We toasted Stiglitz as well. We may not have understood or agreed with everything we heard but finally his voice calling for someone, somewhere, to get some decent digs on the Emperor — and fast — has been heard.

We are all connected and none of us want to be in the way when a fat, drunk, naked Emperor falls from the sky.

Bronwyn LayBronwyn Lay lives with her family in rural France, over the border from Geneva. She is currently enrolled in a Masters of English Literature at the University of Geneva and is working on her first novel. Previously she worked as a legal aid lawyer in Australia with post-graduate qualifications in political theory.

Topic tags: bronwyn lay, nobel laureate, joseph stiglitz, geneva, world bank, imf, market crash, global economy



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An incisive article that reminded me of the speech Prime Minister John Curtin gave to the Australian Parliament on the perilous stste of the Australian economy at the beginning of the great economic depression from 1929.

Frank Hornby | 13 October 2008  

Stiglitz always has something worthwhile to say, and this article is really well written by Ms Lay. A really enjoyable read.

Brucifer | 13 October 2008  

For the World markets to work efficiently, we need the following:

1. Build a Superstructure to oversee all Central Banks … IMF may or may not be mandated to play that role, but the recent events prove the need for one, an effective one that is,

2. Implement a uniform Banking regulation around the world and impose a set of well-defined supervisory practices by the Central Banks in each country, with random and unannounced audits by the “Regulators”,

3. Break the size of the Banks down to an appropriate mass and limit their area of activity to make sure none of them will cause systemic risks upon failure,

4. Impose strict standards for asset backed lending (Banks MUST NOT be allowed to take Market Risk under any circumstances) and impose stricter rules for securitisation,

5. Regulate the Credit Rating Agencies,

6. Create firewalls between those holding companies that have Banking, Insurance and Trading activities and make sure that all three business units are run as stand alone profit centers, well capitalized separately and there is no cross collaterisation….

7. Force the Banks to mark to market their assets NOW, and be ready to inject public/private cash to maintain their vital ratios and liquidity… I am convinced that there is enough private capital to recapitalize the Banks, but no one trusts their Balance Sheets,

8. Tighten inter-banking lending regulations and police them around the clock. There should be a mechanism that will force everyone to come on side by midnight Saturday each weekend, before the Asian Markets Open next day,

9. Regulate the Derivatives Markets, Hedge Funds or any player that sits outside the current regulated framework and tighten up the regulations on the stock exchanges with universal/global standards and practices,

10. The governments MUST act decisively to clean up this mess at once as the piecemeal approach has proven to be fatal.

At the end of the day, to create a functional and stable global financial system, we need absolute transparency absolutely, uniform standards for best banking practices (fairness), strict supervisory/enforcement regimes across all their activities; and uniform definition, interpretation, treatment and pricing for each category of risk in order to regain the trust and the confidence of the investors, depositors, lenders, borrowers and all other market participants.

Lewis Louthean | 13 October 2008  

Browyn, As an Australian of Scots-Irish descent I always retain the image, as brought to my mind in the writings of the time, of the Scots Banker who promoted the Darien Scheme of the early 18th century. It collapsed, so he went to France and sold an idea to recoup money lost on the many French wars of the time. Problem was , it collapsed. I think his name was Laws. His was pilloried by the essayists of the time in Scotland.
Modern times, "Dad, What is an economist? A loyal band of mathematical genii. Skilled at management of controlling resources and their use! When the economy goes down the gurgle they resolutely band together to disagree as to what the solution should be!"
I apologies to The National Times of years ago, and to its distinguished editor for borrowing the punch line of a cartoon published therein. I still retain a copy in my archives. But then I am an Australian who grew up in the 1930's

John W McQualter | 13 October 2008  

A terrific essay, which reminded me of my Presbyterian grandfather, a Minister, who explained to me that gambling was sinful because it fed and exploited greed, and cited as an example the manipulation of the stock market rather than the country pleasures of attending and participating in the local races. Economics is, or used to be, the art (not just a science) of predicting human behaviour. The marketplace needs agreed norms of conduct and accepted human values. Not much place in the old one for acting justly, valuing compassion, and walking humbly with our God. Thank you to Bronwyn, from another lawyer with a call.

Moira Rayner | 13 October 2008  

Thank you.

clinton | 14 October 2008  

Thanks for that, Bronwyn. Was it Stiglitz’s valuation of the full cost of the Iraq war to the US economy that won the Economics Nobel?
I used to describe the US invasion of Iraq as “Halliburton’s taxpayer-funded annexation of certain Mesopotamian petroleum assets”; perhaps it should have been better described as “Halliburton’s debt-funded annexation of certain Mesopotamian petroleum assets”. Should Halliburton be nationalised? By Iraq?
I’m encouraged by Lewis Louthean’s proposed solutions. To his list of 10 points, I’d add ...
11. No employee, contractor or director of any financial institution shall receive, in any given year, renumeration in excess of twice the median income of workers in that nation.
That’d get the wide boys and chancers out of the banking profession, and back down to the greyhound track.

David Arthur | 14 October 2008  

Toast the end of empire, indeed; but you will pardon those of us inside the United States, worried about our children and neighbors and lives, who will not be so quick to join you for a beer to celebrate disaster.

brian doyle | 14 October 2008  

As you say Bronwyn we are all connected. Finding scapegoats will not get us very far in the present climate. There is more to it than finding a few culprits and then getting on with it. No matter what we say this downturn (recession/depression) is similar to all other economic downturns. Frenzied economic booms are systematically followed by economic collapses and market correction. We have rewarded the greedy and now complain because they are too greedy. We are also far too indulgent towards economists who consistently fail to make any sense of market downturns.

Anne Schmid | 15 October 2008  

Dear Brian Doyle,

Please understand that there was no sense of joy or celebration when we toasted the end of empire. In fact it was 'downright sad' and that sadness came from imagining the effect this 'global economic crisis' will have within the USA as well as across the world.

Yours Bronwyn Lay

bronwyn lay | 16 October 2008  

It makes me mad, all this talk about shares plummeting and banks in trouble. I don't wait with bated breath to hear the latest interest rate cut. I have no shares, no mortgage, and no money in the bank. I'm a sole parent. I work. I thought that meant I counted as one of Kevin Rudd's working families. It took me a while to realise that his idea of a working family is two people working. Feature Letter, read more

Single Mum | 16 October 2008  

Thanks for that, Bronwyn, and for a somewhat different take on the continuing disintegration of the global financial system. Peter Maurin's "Easy Essays" could be worth revisiting.

Denis O'Leary | 17 October 2008  

Thank you, Ms Lay. Clyde Cameron would not be surprised. I only wonder if Labor has the courage to revisit history.

I wonder too, if the Americans could grasp the simple concept espoused by their own Henry George.

Raymond Franzini | 17 October 2008  

Hm. Good article. However, "Perhaps it was because he stood minutes from the UN, where he used to be Chief Economist of the World Bank, and where he ended his term in fisty cuffs with the IMF and the US treasury over their financial bullying of developing nations" is completely baffling. The UN is in New York. The World Bank (unrelated) is in Washington DC, as is the IMF. Also, the word is fisticuffs, not fisty cuffs. What did you mean to say with this paragraph?

Lynn | 24 October 2008  

Actually, Lyn, I like 'fisty cuffs' - I took it as a bit of fun word play, which is in keeping with the tone of the article. Great stuff Bronwyn, I hope we see more from you in Eureka Street!

Charles Boy | 24 October 2008  

Thank you 'Fairness in Lending Act'. How is being forced to lend to the 'sub-prime' considered greed? Giving away money that you historically and statistically know that you will never see again because the government has a gun to your head sounds more like a heist.

Stiglitz is a poor excuse for an economist. Oh, and he is definitely a socialist.

Free Market Economist | 08 August 2009  

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