A Failure of Capitalism: The Crisis of '08 and the Descent into Depression |  | Author: The Honorable Richard A. Posner
Publisher: Harvard University Press
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Rating:  27 reviews
Sales Rank: 14446
Media: Hardcover
Edition: 1
Pages: 368
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Dimensions (in): 7.1 x 4.6 x 1.4
ISBN: 0674035143
Dewey Decimal Number: 330.973
EAN: 9780674035140
ASIN: 0674035143
Publication Date: May 1, 2009
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Product Description
The financial and economic crisis that began in 2008 is the most alarming of our lifetime because of the warp-speed at which it is occurring. How could it have happened, especially after all that we’ve learned from the Great Depression? Why wasn’t it anticipated so that remedial steps could be taken to avoid or mitigate it? What can be done to reverse a slide into a full-blown depression? Why have the responses to date of the government and the economics profession been so lackluster? Richard Posner presents a concise and non-technical examination of this mother of all financial disasters and of the, as yet, stumbling efforts to cope with it. No previous acquaintance on the part of the reader with macroeconomics or the theory of finance is presupposed. This is a book for intelligent generalists that will interest specialists as well. Among the facts and causes Posner identifies are: excess savings flowing in from Asia and the reckless lowering of interest rates by the Federal Reserve Board; the relation between executive compensation, short-term profit goals, and risky lending; the housing bubble fuelled by low interest rates, aggressive mortgage marketing, and loose regulations; the low savings rate of American people; and the highly leveraged balance sheets of large financial institutions. Posner analyzes the two basic remedial approaches to the crisis, which correspond to the two theories of the cause of the Great Depression: the monetarist—that the Federal Reserve Board allowed the money supply to shrink, thus failing to prevent a disastrous deflation—and the Keynesian—that the depression was the product of a credit binge in the 1920’s, a stock-market crash, and the ensuing downward spiral in economic activity. Posner concludes that the pendulum swung too far and that our financial markets need to be more heavily regulated. Read Richard Posner's blog, and his latest article in The Atlantic. (20090501)
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Showing reviews 1-5 of 27
 Fantastic! October 9, 2009
Luis R. C. Creuz
Fantastic and a classic book.
And the store send it very fast, considering the shipment to Brazil.
 Accurate but common analysis; fails in larger goals October 9, 2009
Richard Gibson (Woodland Hills, CA)
This is another book on the recent financial crisis. It presents an accurate, but not particularly original analysis of the crisis. It also tries to cover some larger issues, such as what this flamboyant failure of free market theory proves, what is wrong with the economics profession that they missed predicting this one and what this failure means for conservatism. At all of the larger goals, the book pretty much falls on its face; Judge Posner has, in my view, bitten off more than he can chew.
The basic analysis of the crisis is straightforward. The Fed under Greenspan kept interest rates down too long, in the early decade, which set off a real estate boom. The move toward deregulation of Wall Street removed all restraints on the financial sector. These two things together lead to a wild, absurd speculative boom in real estate, which inevitably blew up, taking the economy down with it. The Fed, and the federal government as a whole, then messed up their reaction to the crisis, because they saw it as a liquidity crisis, not as a solvency crisis. (In a liquidity crisis, solvent banks are unable to turn their assets into cash, short term, and thus face a short term crisis, which can be solved by flooding the system with credit. In a solvency crisis, the liabilities of the banks exceed the value of their assets, thus shutting down lending because the banks are broke. While this crisis looks like a liquidity crisis, and to some degree it is, the real problem is lack of solvency, caused by almost a decade of insane lending, insane leverage and generally lunatic risk taking by Wall Street.)
While this analysis is pretty common sense at this point, it is remarkable to see a major conservative taking this position. Posner says in this book that the free market is not stable, and created this problem. That is a major deviation from conservative orthodoxy. It invites the larger questions, OK, since deregulation of the financial sector did not work, what would work? How should economists understand these things? How should conservatives react to the collapse of their pet idea?
Judge Posner explores these larger questions. He is to be commended for raising the issues. His answers, however, are not very good. As for why economists messed up so badly, he has no clear answer. He basically says that, gosh, economics is not a very settled science; there are lots of theories out there, and no one of them is right. Sorry Judge, that is an evasion, not an answer. I suggest that the answer lies in taking the work of Hyman Minsky more seriously, and, more generally, in seeing that the business cycle is a natural feature of the free market system.
Posner is equally feeble on what this all means for conservatism. Conservatives, obviously, pushed deregulation, and that idea has now blown up in their face. The question is, was the conservative support for the free market basically wrong, or only wrong in points of detail? How much correction do we need to conservative ideas, after this fiasco? Posner's suggestion is that we be pragmatic and open to new approaches. Again, not an answer but an evasion. I would suggest that the answer lies in distinguishing between the real economy and the financial sector. Deregulation of the real economy is almost always a a good idea. Deregulation of the financial sector is an extremely bad idea. Conservatives need to distinguish between the two.
Important, Vital, and also Flawed September 7, 2009
Reckless Reader
This is an important book about the Panic of 2008 and the consequent Depression we are now in. It is perhaps most vital because it represents the thinking of a self-proclaimed conservative who recognizes that this economic crisis forces all of us, of whatever persuasion, to do some basic re-thinking of economic truths we thought we knew and understood. One can only admire someone like Posner, who is willing to let changed facts at least begin to change his thinking. His willingness to acknowledge that Keynesian economic thinking is useful in addressing out current crisis is a welcome relief from the long drought of practicality we have all endured while economists sat in Ivory Towers and spun beautiful mathematical theories of the market which bore too little relationship to day to day reality. His acknowledgement of the flaws of deregulating the financial industry is the beginning of a new attempt to overcome slavish worship of a totally free market and perfectly rational actors; his acceptance of the fact that the market is not a pure and self-regulating enterprise, but a place where mad chaos can prevail and irrationality can outlast anyone's staying power are useful starting points for coming up with a way out of this dilemma we all face. But this book is also flawed by its failure to delve deeply enough into the history of Depressions in America. Posner has failed to address the problem of under consumption and its basis, at least in part, on mal-distribution of our nation's tremendous income. There is no mention of the fact that most of the increase in wealth in the last 3 decades went to the wealthy, and therefore a failure to recognize that, at least in part, the reason people cannot pay their mortgages off, or their credit card debt off, or their massive consumer debts, is because they do not earn enough to pay for the American Dream --- a house of their own, a car, and food and fun for their families. He has analyzed with wonderful insights the failures of the wealthy and the inaction of the government to regulate the wealthy, and their banks, insurance companies, hedge funds, money market funds, etc., but he seems to have no appreciation for the other 4/5's of our society, the people who work hard but do not get enough of a share of the income from their work to keep up with the Dream --- real wages have not gone up appreciably for almost 4 decades, and now we are having a temporary "recovery" that has so far created almost no jobs. It is good to begin with Posner's book, but it is a look at only the sliver of our society at the top and how thoroughly they have mucked things up for now; what Posner still needs to address, in my opinion, is how to get enough income into the pockets of our daily working sector so that we need not rely on the Chinese to buy our Treasuries, for that is disappearing. I hope Posner will one day re-focus on the other 4/5's --- this book shows that he is a thinking conservative, not just a knee-jerk pontificator, and it is precisely this kind of mind that must confront JKGalbraith's ideas about what caused the last Great Depression, or we will know no escape --- because only when there is something more of a consensus will we begin to climb out of the ditch that we allowed people like Greenspan, Cox, and their ilk to dig for us.
Late to the Game September 4, 2009
Fred Press
This is a well-thought-out, nice piece of work. But if you are looking to find out what got us into this mess from someone who saw it coming and wrote all about it before it came, check out "What Greenspan Can't Tell You".
An accessible and even-handed exploration of the current depression August 16, 2009
David Ribar (Greensboro, NC United States)
2 out of 2 found this review helpful
In A Failure of Capitalism, Judge Richard Posner has written an accessible, clear-headed exploration of the current economic depression, including its causes and potential remedies. The book would be an excellent supplement to an undergraduate course on macroeconomics or money and banking. It is also an equally excellent introduction to these issues for non-economists.
Judge Posner points to several causes of the depression. First and foremost was the collapse of the housing bubble. The bubble was inflated by low interest rates and excessively risky lending and borrowing. The crisis was also abetted by an improvident lack of regulation that allowed financial institutions to become over-leveraged and subject to runs. Another contributing factor was the high level of private debt. When housing and later financial markets began to fall and when banks pulled back their lending, households were vulnerable because they could not draw on savings to smooth consumption. Yet another factor was a sharp energy price spike that led to a collapse in demand for large SUVs and trucks that had been the profit base for the American automotive industry.
Posner is at his best as an economic instructor when he describes how individually rational decisions by financial firms and households contributed to the inflation of the bubble and to its aftermath. These individual actions were the failure of capitalism.
Posner also makes an especially valuable contribution by making the case that the country has experienced a full-blown depression, which Posner defines as a sharp reduction in economic output that is severe enough to risk a deflation. In a deflation, the economic downturn becomes self-sustaining over a long period. Posner, a well-known conservative, could have tried to minimize the crisis; however, he addresses it head on.
Posner goes on to discuss the immediate policy tools that are available to fight the depression. These include bailing out financial institutions, flooding the markets with liquidity, using federal deficits to stimulate output, and regulating the financial industry. Each of these tools has drawbacks. For example, the precarious condition of financial institutions has put us in a "liquidity trap" that severely limits the standard monetarist tools of increasing the money supply and increasing liquidity. Massive deficit spending (the Keynesian approach) may increase output now but at the risk of inflation and lower growth later. Posner explains how each of these tools can help but also how they can hurt. There are no magic bullets, but given the depth of the crisis, Posner argues that none of them should be taken off the table.
The strengths of Posner's book are its "above the clouds" and even-handed treatment of the crisis. Posner seldom gets lost in the weeds, and he keeps blame-giving to a minimum. Readers will gain a greater understanding of how the country fell off an economic cliff and of the controversial options for clawing our way back up. The principal weaknesses are the exploratory and tentative nature of the analysis. In the end, Judge Posner's conservatism leads him to hedge by offering modest policy considerations instead of firm policy advocacy.
Showing reviews 1-5 of 27
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