Causes of the global financial crisis unveiled

July 20, 2010

Joseph Stiglitz speaking at Murdoch UniversityProfessor Joseph Stiglitz, renowned economist and winner of the 2001 Nobel Prize in Economics, spoke to a capacity crowd in the Kim E Beazley Lecture Theatre on the first date of an Australian tour.

Professor Stiglitz outlined the events that led to the global financial crisis, as discussed in his new book, Freefall: Free markets and the sinking of the global economy.

He said that prior to the crisis, the US was living in an unsustainable “bubble”.

He said: “Somewhere between two-thirds and three quarters of our growth was related to real estate. House prices were soaring while the income of most Americans was going down. Almost all the growth was going to very few people at the top. We were consuming beyond our means.”

Professor Stiglitz said the situation was made worse by a mistaken belief that markets were self-correcting.

“What happened was that government kept saving the market and because it did such a good job the market began to think it was saving itself,” he said.

“The banks that were being bailed out by government had failed in their basic job of assessing creditworthiness. They loaned to people who couldn’t pay. Government bailed them out and that led them to engage in more and more of these bad lending practices.”

Professor Stiglitz said the stimulus packages introduced by governments around the world after the crash did work – particularly the Australian one, which he considered the most effective.

But he said the American one was not well-designed and was too small.

He added: “There was a big economic and political mistake in leaving those who made the mess in charge.

“Some of the people in charge in the Obama administration were the very ones who pushed extreme deregulation,” he said.

“They wanted to believe that the economy was only going through a temporary bump. The result was a package that was not strong enough and that means that two or three years after the bubble has broken the economy remains weak.”

Professor Stiglitz described the crisis as a “slow train wreck”.

He said: “We had this bubble, and the consequences of that bubble breaking were predictable and predicted. Every bubble breaks and has severe economic consequences. In this case it was an economic and financial meltdown.”

He said there was now a need for an alternative approach that would restore the appropriate balance between markets and government, which had been lost in the run-up to the crisis.

Professor Stiglitz’s visit to Murdoch was secured by Dean of Murdoch Business School Professor Malcolm Tull, who is also WA Branch President of the Economics Society of Australia.

He said: “Professor Stiglitz has an outstanding international reputation for his contribution to economic theory and policy. We were extremely fortunate to have such a distinguished scholar giving a lecture at Murdoch.”

A podcast of Professor Stiglitz's presentation is available on Lectopia.

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Media contact: Jo Manning
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Comments (2 responses)

Stock Investment Research February 25, 2011

The Government has implemented a series of measures to deal with the financial crisis for the last 2 years, all with the primary aim, not of protecting taxpayers- its claims to this cannot be taken seriously; and not even to bail out its banker and developer friends – yes it wants to do this partly to save its own grimy secrets but the crisis is so sensitive this is no longer primary.

paul May 11, 2012

To what extent could it be argued that the global economic crisis reflects the failure of capitalism?

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