Accurate but common analysis; fails in larger goals

books:

	• A Failure of Capitalism: The Crisis of '08 and the Descent into Depression The Honorable Richard A. Posner Harvard University Press, 2009 - 368 pages average customer review:based on 29 reviews view larger image
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Accurate but common analysis; fails in larger goals

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.

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Why We Have a Depression

This is a very readable book targeting a general readership.

The author's approach is psychological to some extent.
He examines why consumers spend less and how economic forecasts or uncertainty play into the decision to spend or save.

Among his many observations the most poignant was how the financial crisis surprised the government, and most economic professionals even though it had been building for years. He lists some of the economists (exceptions)who did warn of the crisis before it happened.

He makes the argument that the crisis is a failure of capitalism more than anything else. And regulation isn't a bad idea.

On page 243 he makes the point - " A profound failure of the market was abetted by government inaction".

He also points out that a free market does not correct itself despite the ideology that it does.

A FAILURE OF CAPITALISM is not a partisan book, and it is unbiased in covering the many angles of the crisis from start to the future effects that are part of it.
Mr. Posner conveys his points clearly and in simple terms.
Excellent book on the subject!

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Important, Vital, and also Flawed

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.

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Fantastic!

Fantastic and a classic book.
And the store send it very fast, considering the shipment to Brazil.

reviews: page 1, 2, 3, 4, 5, 6

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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