Tuesday, May 19, 2009

Posner on the Failure of Capitalism

Richard A. Posner, who lectures at the University of Chicago Law School, and has developed a reputation for systematically courting controversy, has a new book: A Failure of Capitalism: The Crisis of ‘08 and the Descent Into Depression, Harvard University Press, 346 pages, £17.95.

As befits a law professor, he seems constitutionally resistant to the notion of moral blame and resolutely finds some plausible explanation or justification for the actions of governments, financial institutions, and even the public.

Sometimes, he is simply wrong. For example, when he writes: “the critical role of government in the crisis was one of permission rather than of encouragement.” This is patently untrue. As I have documented elsewhere, governments (egged on by the elite and endorsed by the public, leaving people such as me in good company in the middle) initiated and promoted not merely the theory of self- correcting markets to create the spectre of deregulated and highly-leveraged finance, but also many of the specific mechanisms that increased leverage - e.g. securitisation of mortgages.

Posner considers Greenspan’s low interest rates a key part of the plot: “Especially when interest rates are low, riding a bubble can be rational even though you know it’s a bubble”. True, but low interest rates were contributory not central.

What was central? Apart from obeisance to self-correcting markets, it was the encouragement of unregistered leverage, combined with manipulation of currency values by governments as diverse as the USA and China.

Posner acknowledges that “each flood of money into the economy set the stage for the next bubble." Given the flood of money which has been pouring in ever greater volume since the start of this crisis, that should be frightening reading for everyone – even those who disagree with his other views.

As with Greenspan, Posner has apparently only now learned “that we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails.” That, I thought, was the lesson of the First Great Depression (I mean 1873, which did not get resolved till after the Second World War, though the 1930s were the lowest point).

We certainly have more active governments around the world, now. Whether they are more intelligent remains to be seen. On current performance (e.g. the so-called “stress tests”, which I call the "relaxation tests"), the score card is decidedly mixed. Sphere: Related Content

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