“A Failure of Capitalism: The Crisis of ’08 and the Descent Into Depression”

Posted by AzBlueMeanie:

Catchy title. The latest book by Paul Krugman? No. You may want to sit down first.

The title is to the latest book by one of the conservative movement's high priests, Judge Richard A. Posner, who until now has been a devotee of Ayn Rand and Milton Friedman. The Earth just trembled.

In a brief interview at US News and World Report, Posner chatted with U.S. News about the financial crisis, the government's role in fighting it, and the mistakes he and others like him made in espousing the deregulation of the banking industry. Excerpts:

What will surprise readers about your book?

That I'm writing about the banking industry; I haven't done that in the past. But also I do say that we went too far in deregulating the banking industry. I've always been a strong supporter of deregulation, and I should have said deregulation in everything but banking.

Why is banking regulation different?

All business and all consumers are involved to some degree in borrowing and lending. So if that process of borrowing and lending gets disrupted because the risks of banking materialize in a crash, then the whole economy can be very seriously damaged.

* * *

Who's to blame for the economic crisis?

Primarily the deregulation movement—people like me who didn't carve out banking from the other industries to be deregulated. But also the Federal Reserve under [Alan] Greenspan and [Ben] Bernanke for having pushed down interest rates so far that it caused a housing bubble. The problem is that houses are the principal assets that are bought with debt—with a mortgage. So the lower the interest rates are, the cheaper it is to buy a house. And a surge in demand leads to housing starts but not enough housing starts to satisfy the entire demand for houses. So house prices rise. You have asset price inflation. And when that bubble bursts, it not only brings down the housing industry but it brings down the banking industry because the banks are almost partners in real estate because so much of the purchase price of a house is in the form of a debt, a loan from a bank.

* * *

Where do the ideas you put forward in this book fall on the ideological spectrum?

I think they're actually quite centrist. On the extreme right are really people who don't want to do anything and let the depression unwind of its own force. And they're very fearful of inflation and of the government getting too deeply involved in the banking industry. I'm sympathetic to those concerns. I just think the situation is too serious to take a laissez-faire view. And on the left, there are the people who want to take over the banking industry. And I think that's a very serious mistake. And then you end up with the government saying who gets a loan.

NB: Richard Posner's loss of faith in free market religion follows on the heels of Ayn Rand and Milton Friedman acolyte Alan Greenspan's loss of faith in free market religion last October. Greenspan Concedes Error on Regulation “Do you feel that your ideology pushed you to make decisions that you wish you had not made?” Mr. Greenspan conceded: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”

0 responses to ““A Failure of Capitalism: The Crisis of ’08 and the Descent Into Depression”

  1. I wonder, Jeff, is there someone who has had a powerful government position anywhere that rates as a capitalist in your mind? If so, who?

  2. Typo: Greenspan joined the Fed 20 years ago, not 30.

  3. This post is wishful thinking. Greenspan is no capitalist and free markets did not cause the crisis.

    Alan Greenspan lost the right to call himself a free market advocate when he joined the Fed 30 years ago. Any self-respecting capitalist wants to *abolish* the Fed, not ride it into one over-expansion after another. I am an Objectivist so I know his history with free markets. Greenspan had left nothing to renounce.

    And how exactly does one pin this credit bubble on free markets, since banking is one of the most heavily-regulated industries in the U.S. (besides medicine/insurance, where free markets have also supposedly “failed”)? As always, the primary enabler is altruist public policy: in this case, the idea of putting people in homes who cannot actually afford them (a decidely non-capitalist idea). It was enabled by the Fed’s low rates, by Fannie Mae’s and Freddie Mac’s low-rate pressures, by the CRA, and by other regulatory pressures pushing this ill-considered idea. Truly free markets would have given risky borrowers the answer they should have gotten: application denied.

  4. Once again, Thane’s dream vacation:


  5. This is an interesting post about a generally interesting guy. It is worth noting that people who admire Ayn Rand do not always admire (in all ways) Milton Friedman and vice verse. Milton Friedman believed that government could dance the fine line between inflation and “good growth” and apparently Judge Posner (and advocate of centrism) thinks so too.

    http://mises.org/Community/blogs/brainpolice/archive/2008/06/04/the-danger-of-political-centrism.aspx

    It all comes down to what the definition of capitalism means. Some apparently think that capitalism includes government bailouts. I certainly think government subsidized capitalism is a failure.

    If you want to learn about capitalism (without government distortions and subsidies) then I recommend reading the book Capitalism by George Reisman (available without charge in PDF format).

    http://www.capitalism.net/

    Mr. Friedman has plenty of books, check out a copy at the library or buy a copy if you wish (or don’t).

    The society that rewards risk taking (without government bailouts) as a means to increase wealth, personal responsibility and individual freedom (as depicted in Ayn Rand’s novels) has been largely absent from America for many years. I hope it returns soon. It will not take its blueprint from Judge Posner’s book.

    http://atlasshrugged.com/