A Failure of Capitalism: The Crisis of '08 and the Descent into Depression [Hardcover]

This is the fifth book by Richard Posner (law professor at the University of Chicago and a long-time judge on the 7th Circuit Court of Appeals) that I've read, in addition to many legal opinions. There is no question that he's brilliant and an excellent, clear, and precise writer. There is also no question about his credentials as a libertarian-leaning conservative.

Until now, that is. "A Failure of Capitalism" departs consciously from the prevailing libertarian take on the current recession (or, as Judge Posner argues it should be called, "depression"). In short, he believes that the depression was not mainly caused by government meddling. Rather, it is a "market failure" -- i.e., a crisis that market forces alone could not have prevented. And, given the size of this market failure, government should instead have used regulations to prevent it.

Before I got the book, I had read some indications that Judge Posner was taking this line. But in the book itself, he is crystal clear about his view that deregulation in the financial industry was a major culprit, and his recognition that he is going against the conventional wisdom of both libertarians and conservatives.

The book is well argued and much more thorough than I can convey here. One of the great things about Judge Posner's style is that he anticipates all of the reader's objections and tries to address them in good faith. Whether you agree or disagree, he is always worth reading.

The book also includes a narrative of how the depression developed, descriptions of the systemic problems in the financial industry that made the depression possible, and recommendations for government action.

Although the material may be a little difficult for those with no knowledge of finance, it has been intentionally written with non-specialists in mind. As always, Judge Posner repays the attentive reader.

Judge Posner was appointed to a Federal Appeals Court position by President Reagan, and has sometimes also been mentioned as a Supreme Court candidate. During his legal career he has pioneered the inclusion of economic perspectives in interpreting law and now regularly writes a blog on economics. In "A Failure of Capitalism" he focuses his combined talents on our current economic downturn, and reaches a surprising (for a conservative, "Chicago-school" proponent) verdict. Those most guilty of contributing to the downturn are Alan Greenspan and George W. Bush - Greenspan for keeping interest rates low, fueling the surge in home prices, and Bush for accelerating deregulation of financial markets and then doing little while the economy began crumbling. (Posner also includes the monies China invested in T-bills as a factor holding American interest rates low.)

At the same time, home buyers and their willing enabler mortgage brokers knew they were getting in over their heads. Wall Street, seeing a great opportunity, then leveraged these new mortgages to extreme levels. Thus, both mortgage-takers and Wall Street were in over their heads. (Posner believes home-buyers' failure to save was part of the problem - reality, however, is that they thought they were saving big time through home appreciation.)

Posner's Prescription: More EFFECTIVE government regulation, not just expanding the hodge-podge of overlapping partial management spread over myriad state and federal agencies. This should include limits on leverage, changing how credit-rating agencies operate and are compensated, requiring CDS be fully collateralized, limiting payday loans, etc. Posner also worries about the impact of enormous bailout monies on the value of our currency.

Why the title "A Failure of Capitalism?" Posner recognizes that competition carries the seeds of capitalism's destruction - bankers, etc. realize that if they don't participate in whatever current fad is popular, they risk becoming unemployed and their firm bought out by others who ride the fad to higher P/E multiples. That's why government regulation is essential.

Posner also believes that the free market is incapable of appropriately setting executive salaries and mutual (and hedge) fund fees due to the inherent biases and conflicts of interest involved. Finally, Posner also points out that current conservative thinking on this subject is vacuous.

I love reading Posner for the same reason I love reading Nietzsche - he's bold, witty, bitterly funny, and sincere - even when sincerity is a bit irresponsible. When Posner's in prime form, he's willing to think dangerous thoughts in his search for a working version of "the truth." But this book has little of his trademark edgeiness.

More importantly, Posner has aimed this book at the layperson...and missed. Even though he has tried "assiduously to suppress the extraneous," he presumes a post-grad readership with a large and specialized vocabulary. One wonders, with amusement, when Posner last spoke to a "layperson" (and whether that person was a circuit-level judicial clerk).

He does a very good job of explaining the economic mechanisms involved in recent events, and if you're looking for that you'll do no better than this book. But, in my view, the Posner "brand" stands for fearless, airtight polemics - the kind of thing that makes you think "that can't possibly be right" and then spend the next 6 months thinking about it. When he lobs a couple of grenades at his own team (e.g. attributing the crisis to market failure, criticizing executive compensation) there is a glimmer of the classic Dick. But for the most part this is a dry, neutral primer on the economics of depression.

Which is not to say it's bad. It's excellent, in the way that some of the spicier textbooks are excellent. It's reliable and has little of the rushed-to-market sloppiness that characterizes contemporary law-and-econ (Cass Sunstein). As a Fed-junkie, I was bored by it, but I'm giving it to my friends and family members.