Book Review: The Price of Inequality

I began with so much sympathy for the ideas in The Price of Inequality, by Nobel-Prize winning economist Joseph Stiglitz, so why did I grudge-read the book the whole way through?

I concur about the causes and problems of persistent and rising inequality in the United States, and I suspect Stiglitz and I would vote for similar political candidates.  But my goodness, this is a painful book to read.[1]

First, Stiglitz writes lazily about banking, making errors and relying on simplistic generalizations to match his political points.  As an ex-banker, I’ve got a little problem with Nobel-Prize winning economists getting basic facts wrong about banks in this country.

Second, Stiglitz never surprised me – not with his descriptions, his anecdotes, nor the economic studies he cited. Instead, any consistent reader of the New York Times and Wall Street Journal will know, in advance, the arguments and examples he cites.[2]

Finally and worst of all, Stiglitz is a hammerer, not a sifter, of ideas.  He pounds away at the inequality problem, always from the same left-of-center perspective, until all current events have been beaten into the same shape.

A bit more sifting, or a weighing of alternative perspectives would have won me over to his side.

No, that’s not exactly right.  I started out on his side.  A bit more sifting of competing thoughts would have prevented me from wanting to jump to the opposite side and point out all the ways he simplifies and distorts the left-of-center perspective.  I read a hammer book like The Price of Inequality and I just want to throw the hammer away.

If the last book I reviewed Unintended Consequences has one set of opening assumptions – that growth is the most important goal of economic policy and that financial incentives are a key to growth – then The Price of Inequality takes the opposite view of economic policy based on a very different set of starting assumptions.

While Unintended Consequences built a measure of good will with me, as a reader with banking experience, The Price of Inequality quickly gets my hackles up with a series of incorrect statements about banks.

MF Global did not, as Stiglitz incorrectly states on page 36, falter primarily as a result of derivatives trades – but rather it declared bankruptcy after a series of overly aggressive bets taken by its head Jon Corzine.  Corzine thought European bonds were cheap, so he loaded up his firm’s balance sheet with them, in the hopes that European bond prices would recover.  He was wrong, and the firm went under.  Derivatives were irrelevant.

There are not, as Stiglitz incorrectly states on p. 46, “hundreds of banks,” in the United States.  In fact there are over 7,000 banks in the country.

More troubling than these factual mistakes, however, is Stiglitz’ oversimplification in describing bank misdeeds.  For example, banks did not, as stated on page 47, systematically rig LIBOR ‘enabling them to make still more profits.’  The LIBOR rigging, perpetrated by a small number of cheating traders, had an unknown effect on profitability of the banks overall, and a reasonable argument could be made that systematically lowering LIBOR actually hurt banks’ overall profitability, as their lending portfolios would suffer from the lower interest rates sought by the riggers.  The rigging was wrong, and the cheaters will be and are being punished, but Stiglitz’ simplification doesn’t help his credibility.

Most egregiously, Stiglitz perpetuates the view, mistaken in my opinion, that predatory mortgage lending constituted a predominant bank strategy in the years leading up to the Credit Crunch.  Stiglitz describes the ‘rent seeking’ behavior of mortgage banks exploiting the poor through predatory lending, which he claims brought the banks extraordinary profits.

Ah, where to begin on that one?  Perhaps with those “extraordinary profits?”  Did anyone else notice the extraordinary losses banks took due to lending to poor people?  The write-downs and bailouts of 2008 and 2009 were a direct result of losing money, not making money, on the sub-prime debacle.

And then, if predatory lending was such a winning strategy, why aren’t banks falling all over themselves now to lend to the poor?  There are certainly more poor, and more unemployed now than there were during the boom years.  It should be a real boom time to pile up all those banking profits lending to the poor – right now, no?

What, you say, banks aren’t lending to poor people now?  Why do you think that is Mr. Stiglitz?

The real answer, the logical answer, is that lending to the poor is generally a terrible banking idea, and that banks don’t do it in the ordinary course of business.  The lending that led to the Credit Crunch was a short-lived, devastating experiment.  A near-death-experience-type experiment for banks.[3]

Look, lending to poor people is a damned-if-you-do, damned-if-you-don’t situation for bankers.  For the past thousand years, traditional banks did not do it because it’s not profitable.  To make up for that lack of profitability, federal government policies[4] demand some measure of lending to disadvantaged neighborhoods, while Fannie Mae, Freddie Mac, FHA/VA and USDA (among others) each in their own way incentivize mortgage lending to poor households.

For a brief decade – 1998 to 2007 – banks responded to a combination of government and market incentives, and the sub-prime market boomed. They did it from 1998 to 2007 based on a misunderstanding of market incentives, primarily rising real estate values and history-naïve modeling.

Sub-prime mortgages – before they became a bad word – were praised as an ingenious way of expanding home-ownership, of inviting more Americans into the American Dream.  Stiglitz’ narrative of the banker as profit-making predator and the poor homeowner as naïve victim – while common – is a distorted myth that ignores history and reality.[5]

Why do I get so agitated over Stiglitz’ simplification?  Just this:  If we completely mischaracterize the financial debacle of 2008, we’re likely to learn all the wrong lessons from the Crisis.  I realize its politically appealing to blame the greedy bankers and absolve the plucky poor people exploited by the greedy bankers.  I’m a creature of the same culture as Stiglitz and I love to criticize bankers too.  But please can we agree not to lie to ourselves so much about the mortgage debacle?

Ok, now back to the other problems with Stiglitz’ book.

If I assume I’m a pretty good representative of the intended audience for The Price of Inequality – Non-academic, informed on current events, politically opinionated, concerned with inequality – then why is this book such a chore to read?  I think it has something to do with the fact that Stiglitz’ examples all come from the same headlines and articles I’ve already read in recent years.[6]  I kept waiting for the original idea or surprising, counter-intuitive insight, but I waited in vain.

He offers statistics on the terrible state of wealth disparity in the United States, but in the driest way possible.

In the final analysis, I expected a more thoughtful weighing of evidence and ideas.  Stiglitz’ book wades into an important ‘Battle of Big Ideas,’ but he has no taste for engaging the opposition on its own terms.  He’s a warrior for his own side who does not speak the language of his enemy and cannot conceive of their humanity.

When someone wins the Nobel Prize in Economics, does that confer a monopoly on all the good ideas about a complicated topic like socio-economic inequality?  Are there, possibly, unintended consequences[7] to his policy prescriptions?  Does the opposition deserve a careful and open hearing?

Stiglitz really knows how to put the dismal back into the dismal science.  For a more intuitive, specific, sometimes funny, and interesting read on inequality and its societal costs, can I interest you in an excellent book here?


Please see related post: All Bankers Anonymous Book Reviews in one place.


[1] This is the opposite of my reaction to Ed Conard’s Unintended Consequences, which I reviewed earlier in the month, and which forms a neat book-end as the opposite worldview to Stiglitz’ The Price of Inequality.  Even though I disagree with many of Conard’s proposals, I enjoyed reading the book and would recommend it.  I guess I’m a contrarian that way.

[2] The New York Times’ Thomas Friedman is guiltier of this than anyone.  Never read his books.  I picked up The World is Flat only to discover that he’d retreaded his and his colleague’s columns and observations from the previous 5 years.  If you read newspapers regularly, you don’t need one of his books.  Did you know that hedge funds are allocating capital quickly around the world?  Did you know globalization is having far-reaching effects, visible even in small villages in foreign countries?  Wow.  Give that guy another $45,000 speaking fee.

[4] Primarily via the Community Reinvestment Act, known as the CRA.

[5] An interesting time-capsule on sub-prime lending comes from The Federal Reserve Bank of St. Louis in January 2006, characterizing the risks and rewards of the booming sub-prime mortgage market.  The research article has the advantage of not being tainted by the moral outrage that followed every subsequent discussion of sub-prime lending after 2008.  Accurately enough, the article states “subprime lending is simultaneously viewed as having great promise and great peril.”

[6] One example of rehashing known headlines and anecdotes:  He cites on p. 163 the infamous (and possibly apocryphal) Tea Partier whose protest sign read “Govt hands off my Medicare.”  Nevermind the silliness of citing one foolish protester to make a point, the recycling of Jon Stewart zingers does not win him any originality points.

[7] See what I did there?

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