There is a serious flaw in Stiglitz argument that market dynamics naturally fail. In fact this is a serious flaw in many who today categorise the credit and banking crisis as one that is a result of trust in natural market dynamics.
The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, “I have found a flaw.” Congressman Henry Waxman pushed him, responding, “In other words, you found that your view of the world, your ideology, was not right; it was not working.” “Absolutely, precisely,” Greenspan said. The embrace by America—and much of the rest of the world—of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.
Stiglitz own piece here in Vanity Fair precisely argues against his own conclusion. He lists these contributors:
- Romoval of Volker and institution of Greenspan by Reagan. The argument goes that Volker controlled money supply and inflation whereas Greenspan did not.
- Nov 1999 repeal of Glass-Steagall whereby investment banking and retail banking could interoperate, thus allowing term driven money to interact with investment cowboys.
- Bush tax cuts circa 2001
- Sarbanes Oxley circa 2002, with Worldcom., Enron and the corporate lies fixing financial statements.
- Oct 2008, and TARP – unheard of allotments of new prined money sent into the system.
He then leaps to the demise of market economics. I have deliberately summarised his five points in short form here to illustrate that no matter your political colour (Stighiltz’s is obvious) that the five points are precisely NOT market driven, but regulatory driven.
With that in mind, lets not throw out the baby out with the bathwater. Lets not pretend that we have been operating in a period of perfect market driven economics – we have been operating in a period of political driven economics.
Mr Stighiltz, I suggest we focus on the issues at hand and not the politics. These are serious times and the solution is neither Republican or Democrat. The reality is something that could be argued is created by regulation. Lets take time to sort out the facts, and solve the problem.
Bankwatch 
Colin,
I’d agree with you that “we have been operating in a period of political driven economics”. I’d actually go a step further: I’d say there’s simply no such thing as “perfect market driven economics”, and it will always be influenced by politics. Too far to the left and the market is held back; too far to the right and the market runs rampant. Or so the common wisdom goes, anyway.
When we talk of regulating the markets, we don’t (or, at least, we should not) mean regulating the markets themselves. We should be regulating the effect (or lack thereof) that politics have on the markets.