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THE CRISIS OF CAPITALIST DEMOCRACY [Kindle Edition]

Richard A. Posner
3.5 out of 5 stars  See all reviews (2 customer reviews)

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The prolific federal judge and University of Chicago economist argues that competitive forces inspire financiers to take irrational gambles--especially when they're betting other people's money. We cannot trust them to put the common good ahead of profits, says Posner. As a result, government must step in to limit the risks bankers take and, occasionally, repair the damage they inflict. Posner, who less than a year ago began his dissection of the crisis of 2008 with A Failure of Capitalism, has enormous credibility when he casts a skeptical eye on Wall Street. As an influential free-market thinker, he helped shape the antiregulatory ideology that inspired so much public policy since 1980...Posner offers solid suggestions for change. He echoes those, including former Fed Chairman Paul Volcker, who would reestablish the Glass-Steagall Act's separation of commercial banking from proprietary trading and other forms of high-risk finance. That would insulate the financing of small and midsized businesses from the gales of Wall Street. He also urges eliminating the semi-official status of the big three bond-rating agencies, paring back their conflicts of interest, and beefing up the beleaguered corps of civil servants who staff federal regulatory agencies. Good ideas, all. In his final pages, though, the author can't muster much confidence that America will overcome its splintered politics, the "quasi-bribery" of campaign money, or the bipartisan myth that we can thrive indefinitely on low taxes and profligate public spending. Posner may have shaken off old shibboleths--and hurray for that--but at present he sees no reason to expect that courage or fresh thinking will prevail. -- Paul Barrett BusinessWeek 20100315 Posner presents well-argued suggestions for change and offers fresh thinking about the business cycle, building on Keynes's theories. -- Don Tapscott Globe and Mail 20100423 My advice is: Read it. While his book is not exactly beach reading, Posner is a fine writer with a real talent for making complex economic and financial matters clear to the average reader. If you're a little vague on exactly what a credit-default swap is or why deflation can be a bigger problem than inflation, The Crisis of Capitalist Democracy is just the ticket...Altogether, The Crisis of Capitalist Democracy is the best thing I've read on the origins and development of the "Great Recession." -- John Steele Gordon National Review 20100621 This book is the most rigorous, detailed examination of the subject of origins we have so far. -- Robert Teitelman The Deal 20100910 The best volume I have read specifically about the financial crisis and its implications is Richard Posner's The Crisis of Capitalist Democracy...Posner's book contains a formidable-looking chart of supply and demand curves, but do not be misled: this is a clear and brilliant exposition of the greatest economic news story for generations. -- Azar Nafisi The Times 20101127 [A] compelling read...Notable for [its] high seriousness and sophistication...Posner unreels any number of sharp insights about shareholders, regulation and economists. --Robert Teitelman Huffington Post 20101223

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Judge Posner continues to react to the current economic crisis and reflect upon the impact on our views and reliance on capitalism. Posner helps non-technical readers understand business-cycle and financial economics, and financial and governmental institutions, practices, and transactions, while maintaining a neutrality impossible for persons professionally committed to one theory or another.

Product details

  • Format: Kindle Edition
  • File Size: 2633 KB
  • Print Length: 408 pages
  • Publisher: Harvard University Press (31 May 2010)
  • Sold by: Amazon Media EU S.à r.l.
  • Language: English
  • ASIN: B005IWT45W
  • Text-to-Speech: Enabled
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  • Word Wise: Enabled
  • Average Customer Review: 3.5 out of 5 stars  See all reviews (2 customer reviews)
  • Amazon Bestsellers Rank: #425,193 Paid in Kindle Store (See Top 100 Paid in Kindle Store)
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0 of 1 people found the following review helpful
4.0 out of 5 stars Excellent book about the recent financial crisis 2 Jan. 2011
By R. Wild
Format:Hardcover
I cant write much as unfortunately Im short on time.

This book was bought as a present for me this Christmas and I have to say it was an excellent read. I thoroughly enjoyed parts 1 and 2 "An Analytic Narrative of the Crisis" and "What Lessons Have We Learned from the Crisis". The final part which looks at "The Way Forward" is the shortest part in the book and this means Posner doesn't really offer a clear analysis of the reforms he suggests. Even Posner himself says "I am not entirely happy with the suggestions that I have made in this chapter..." (at the end of chapter 11, part 3) and I actually think this chapter might have been better shorter with a clearer cost-benefit of each of his suggestions.

However part 3 is a small part of the book and im possibly been a little fussy anyway as Posner has created a very enjoyable read.

The problem with this book is the title. The title just does not seem to fit with the themes in the book very well. The title itself suggests the book is about politics (to me at least) and I wouldnt have thought that I had received a book about the recent financial crises is i hadn't read the contents. I may be confused but I am sure the crises didnt just effect capitalist democracies and some of the lessons from the recent crisis can be lessons for many political systems.
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0 of 4 people found the following review helpful
3.0 out of 5 stars An Insight to Modern Finance 7 Nov. 2010
Format:Hardcover
To read about the extreme complexity in the operation of money-markets, it is not surprising that they become chaotic. The book demonstrates the need for investors to be aware of sharks.
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Amazon.com: 3.8 out of 5 stars  12 reviews
18 of 21 people found the following review helpful
4.0 out of 5 stars Insightful - 30 Mar. 2010
By Loyd E. Eskildson - Published on Amazon.com
Format:Hardcover
Judge Posner was appointed to a Federal Appeals Court position by President Reagan, and has sometimes also been mentioned as a Supreme Court candidate; reportedly he was not selected because of concern that his thinking would change over time, proven through this and his preceding book. During Posner's legal career he has pioneered the inclusion of economic perspectives in interpreting law and now regularly writes a blog on economics. In the preceding "A Failure of Capitalism" he focused his combined talents on our current economic downturn, and reached 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's earlier "A Failure of Capitalism" covered recent events up to February, 2009. His point was not that capitalism has failed and we need something different, but that we also need laws, regulations, and enforcement institutions because competition and financial markets do not permit business leaders to subordinate profit maximization to concern for the welfare of society. Since then (the subject of "The Crisis of Capitalist Democracy"), Posner has become a Keynesian, ready to incorporate psychology into economic reasoning, and agreeing that not all 'investing' or savings increases output - much is actually hoarding. Investment only increases output when it finances creation of productive capital, and this may also be impeded by banks' unwillingness to lend. Posner now also accepts the liberal position that government spending can be just as useful in priming a weak economy as private spending, and probably is necessary because of the prevalence of fear of the future and the overly leisurely pace of private investment vs. the economy's needs.

Thus, Posner is supportive of the stimulus program overall, yet worries about its future effect on inflation and believes some components were misguided - eg. the $8,000 tax-credit for first-time buyers allowed a lot of 'no-down' home purchases and resulted in an 11% default rate for 2009 purchases. On mortgage modifications, Posner explains bank reluctance to participate as due to their having to then recognize losses on both the involved mortgage and other similar ones. As for bank stress tests, Posner believes they only looked to the short-term - the longer-term (starting in 2010) future may bring a return of banking problems as large-scale refinancing becomes needed. On the job-subsidy plan - not very optimistic because it doesn't change product demand. The Fed - essential that it remain independent.

Long-term unemployment is a particular concern for Posner. More than 40% of those now unemployed have been out of work for at least six months, and the longer this continues the less likely they are to obtain a comparable-paying job because their skills atrophy, they age, and employers take this idle period as evidence that they are not that motivated. "Measures that might be effective, such as reforming immigration laws, . . . eliminating agricultural subsidies, fighting protectionism, limiting the power of unions, . . . are off the political radar screen."

President Truman complained that economists always couched their advice with reservations - "on the one hand . . .," and "on the other hand . . ." and wished for a "one-handed economist." Posner is more blunt - "Macroeconomics is a weak field. With but a few exceptions even the most illustrious did not anticipate the great recession. And the profession cannot agree on what to do about it." The reason is their inability to conduct useful experiments, their almost constant assumption of rational and informed decision-making, and their failure to include decision-making psychology. Posner further adds that too often economics has turned into a branch of applied mathematics, detached from real-world events.

Posner, however, has not been completely overcome with Keynesianism. When David Ricardo first proposed his theory that free trade would produce gains for all nations, he assumed that trading partners only had an advantage in some areas - not mostly all, as is now the case with Asia's China and India. Even Keynes began questioning the doctrine of free trade later in life. Posner, however, does not and worries that the Obama administration will limit free trade and immigration in the pursuit of wealth redistribution and creating an aura of prosperity on borrowed money.

Posner's Prescriptions: More effective government regulation, not just expanding the hodgepodge 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. (I'd also add enforcement of reasonable mortgage requirements.) At the same time, Posner realizes that those being regulated are always a step ahead of the regulators, and that regulators are frequently overly concerned about furthering their career within the industries they regulate.

Bottom-Line: Posner's "The Crisis of Capitalist Democracy" is guilty of sometimes covering the same ground as his "A Failure of Capitalism," and that detracts from the value of his second book. Posner's greatest contribution is recognizing 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 a dangerous fad to higher P/E multiples. That's why government regulation is essential, say Posner, and its a message that bears repeating from someone with such enormous conservative credibility. He's also concerned that the strength of our capitalists democracy has been brought into question by modern techniques of political manipulation overlaying an 18th-century constitution. That's an even bigger problem to overcome than the mostly vacuous thinking of conservative idealogue economists, and requires much more coverage than that provided in the final pages of Posner's book. Hopefully his next writing will elaborate.
3 of 4 people found the following review helpful
4.0 out of 5 stars economic pessimism 7 Dec. 2010
By Ronald - Published on Amazon.com
Format:Hardcover
Richard Posner

Posner's book can be very helpful to anyone who is seeking an understanding of the recent near-collapse of the capitalist system.

Posner correctly blames the government for failing to enforce existing regulations, and the various regulatory bodies for not anticipating the extent of the danger to the economy. But Posner is willing to exonerate the financial institutions on the grounds they were simply doing what businesses do, making money, maximizing their profits. and ignoring everything but the bottom line. Financial institutions were driven to take enormous risks because all their competitors were doing the same thing, and in order to stay in business and make ever larger profits, they had to behave just like everyone else. There is some truth in what Judge Posner says, but not everyone went crazy and followed the herd: witness JPMorgan.

Certainly the regulatory climate encouraged businesses to exploit loopholes in the laws and regulations, but the financial institutions lobbied to create that libertarian environment, and they raced ahead taking huge risks, certain the government would bail them out if things went bad. They used their huge profits to cripple regulation so they could make even bigger profits, so they could continue the whole circular process,

Posner fails to mention the huge disparity in wealth and income that helped to create the huge amount of personal debt. Over the last thirty to forty years middle and lower class income has grown very slowly, while the amount of upper class wealth has exploded. The result was the lower and middle classes went deeply into debt to buy the goods and services that were constantly being shoved in their faces by ever more aggressive forms of advertising. When the housing bubble started to inflate people jumped at the opportunity to improve their life styles by speculating on their home values. The middle class speculated on the growing value of their homes and lower income people took the opportunity to enjoy home ownership.

Posner also blames the Federal Reserve for keeping interest rates low in the early 2000's, because this provided easy credit that helped the growth of the housing bubble. The Fed seemed to feel that it was better to allow the bubble to follow it's natural course, and pick up the pieces after the bubble collapsed, Obviously the Fed failed to realize just how bad the collapse would be, once they started to increase interest rates.

Posner blames the Bush administration for passing two huge tax cuts that primarily benefited the rich, while fighting two wars, at least one of which was totally unjustified. When the Depression came the government was so deeply in debt it couldn't spend the money necessary to pull the economy out of collapse. What funds the government was able to spend were used to avert the collapse of the financial system, a collapse which the Bush administration had helped to bring on by gutting the regulatory system.

Obama, according to Posner, probably made things worse by pushing through an expensive medical care bill that will cost a trillion dollars over the next ten years. This left no extra funds in the budget. Obama faced an impossible task when he entered office. No one realized the extent of the Depression, and Obama was anxious to keep a campaign promise while the Democrats had the votes.

Posner is honest enough to admit that no one can be sure how to repair the economy. If we cut spending we risk doing the same thing we did in the 1930's; Putting on the brakes and keeping the economy at recession levels for years. If we go further in debt we risk even further dangers such as run-away inflation, and an enormous tax burden for future generations. Since there is no empirical evidence to give a definitive answer we rely on political ideology for answers, that can easily lead us into disaster.

What is truly daunting is Posner correctly maintains that government regulation is vital to protect the economy from itself.
But government lacks the resources to keep up with the creativity and wealth that businesses and financial institutions can command in their struggle to nullify regulations that limit profits. The wealthier Wall street and the Banks become the more impossible it becomes to cope with their political power. There seems to be no answer to the problem. Posner has some suggestions he hopes will keep the economy from sinking into deeper trouble, but he admits he is not sure what he recommends will work.

Twenty years ago the West and most of the rest of the world celebrated the collapse of communism in Russia and Eastern Europe. Today we appear to be witnessing, at the very least, the enormous contraction of the capitalist system. Posner is both economically and politically pessimistic. He has good reason.
3 of 4 people found the following review helpful
5.0 out of 5 stars a good start to understanding the recent financial crisis 11 Nov. 2010
By philip affuso - Published on Amazon.com
Format:Hardcover
The author,Richard Posner, is an exceptional intellectual who not only writes books, about forty at last count, but is also a professor at the University of Chicago Law School, and since 1981 has sat on the federal Seventh Circuit Court of Appeals. So what is a federal judge and a law professor doing by trying to explain the causes of the recent financial crisis? That's what makes Posner so exceptional, his knowledge of economics is incredible, but even more amazing is his ability to explain esoteric subjects like derivatives in simply language so that even those of us with little background in economics can understand what he's talking about. Now don't get me wrong this is not an easy read, and I'm sure many people are not interested in a comprehensive analysis of the subject matter. But it's certainly nice to know what a derivative is. As defined by Posner, "a security that is based upon another security." Another term which has been used a lot lately is "moral hazard", and again while you may have a vague idea of what it means, Posner illustrates it, "as the tendency to be less careful if one is well insured against the consequences of one's carelessness than if one is not."
In Posner's view the recent financial crisis wasn't a recession but a depression felt across the globe. Here in the U.S. we saw unemployment rise close to 10% and remain there with a present rate of 9.6%. Fannie and Freddie went into receivership. GM and Chrysler had to be saved by the federal government and today the feds own 60% of GM. Bear Stearns and Merrill Lynch are gone, as they were taken over by other firms, and Lehman Bros. was allowed to go bankrupt, something which he faults Bernanke for. The failure of Lehman was a major reason for the acceleration of the crisis with the threat that the whole financial system was on the brink of failure, as banks stopped lending to one another.
Economists are still debating the causes of the great depression in the 1930s, so I am sure the causes of this downturn will be debated for years to come, but according to Posner the crisis started with errors of monetary policy by the Federal Reserve, mainly Greenspan's low interest rates in the early 2000s. He soundly criticizes Bernanke for a number of things including lowering the federal funds rate as housing values plummeted; reacting too late to the crisis, and allowing Lehman to go broke. Inadequate banking regulation in the form of lax regulation, regulatory complacency, and regulatory ineptitude is the other major cause of the crisis as stated by Judge Posner. Low interest rates and lax banking regulations led to the housing bubble. And when housing failed securities which were based on housing mortgages, mortgage backed securities, also failed. Since these securities were packaged and repackaged and then sold and resold to multiple institutions, the failure was systemic and ultimately threatened not just our economy but the global economy as well.
The second part of the book is not as interesting as the first part as it deals with the lessons to be learned and his recommendations for reform. Also there is a chapter on John Maynard Keynes, who Posner reveres, and calls the foremost economist of the 20th century. Some of his recommendations for reform include re-institution of the separation of commercial banking from investment banking as prescribed by the Glass-Steagall Act, which was repealed in the 1990s, a commission to study the causes of the crisis,and reorganization of the regulatory structure.
The crisis of capitalist democracy as Posner sees it is that he questions if we have the political and intellectual fortitude to do the difficult things that have to be done, like raising taxes and cutting government spending including the hugh entitlement programs of social security and Medicare,in order to keep our capitalist system viable.
1 of 1 people found the following review helpful
4.0 out of 5 stars Excellent contribution 1 April 2010
By Citizen John - Published on Amazon.com
Format:Hardcover
We're a richer country when the brilliant and original Judge Richard Posner weighs in on the the way forward post-GFC (Global Financial Crisis). Judge Posner, considered by many an American Treasure, does not truly fit into the ideology of any political party. His parents were affiliated with the American Communist Party and he has had courage to write numerous opinions on hot button topics. These include abortion rights and animal rights. He has also expressed unique opinions on drugs, torture and privacy. There is no issue too sensitive for this graduate of both Yale and Harvard, where he was first in his class.

Posner's recommendations for the way forward all make good common sense to me. At some point, there has to be a non-politicized executive committee to study the crisis and identify necessary reforms. Citizens should demand this. Changing the bankruptcy code seems like an inevitablity as it always is in a democracy when so many go bankrupt. This will happen, I firmly believe. Staff at regulatory agencies should be rotated for control purposes. Even the military rotates drill sergeants on the assumption that power corrupts over time. A financial intelligence agency will certainly happen for national security reasons, perhaps within one of the agencies such as Homeland Security. The question will be it's mission, I think. Posner is out ahead with this idea. Surely the credit rating agencies have little credibility nowadays. I wonder if they can be reformed timely or if it's better to start from scratch. Posner's idea to tie capital requirements to the business cycle seems to be what Chinese authorities are trying to do in their own way. Bringing back Glass-Steagall is high on Volcker's agenda and is a solid plan.

One notable attribute of Posner is his honesty regarding his less than confident overall assessment that the right things will or can be done to achieve a good economy without crushing debt. He is nobody's shill. The debt problem, which has been kicked down the road for a long time and now at a much faster rate, seems intractable in our society. We will have a monstrously difficult time getting out of living on governmental debt as a country. Our country has never seen such debt, at least not as a trade deficit nation. And our debt is growing faster than ever with no end in sight. Posner did not offer a platitude to give us hope.
4.0 out of 5 stars The World Crisis 26 Aug. 2010
By Omer Belsky - Published on Amazon.com
Format:Hardcover|Verified Purchase
In 2009, Richard Posner made something of a splash with his speedy account of the 2008 Financial Crisis, A Failure of Capitalism: The Crisis of '08 and the Descent into Depression. The title, combined with Posner's reputation as a Chicago-influences right winger, led left wingers to accept him as a convert (or deride him as a late comer), and right wingers to disdain him as an apostate. This left Posner where he usually ends up - dead at the center, under attack not so much from extremists-of-all-sides, than simply from every imaginable angle.

Posner's newest book seemed to have slipped by unnoticed, which is a pity, since It's a better book than its predecessor. Unlike the earlier volume, this was written with a sense of perspective, and it allows Posner to cast his net a little wider - the descriptions of the various investment vehicles in the "virtual economy" are illuminating, the reflections on the applicability of John Maynard Keynes's economics to the current crisis astute, the international perspective a little broader (although still lacking), and the meditation on the incapacity of the American body politic to match the challenges of the complicated world economy troubling.

Yet in broad strokes, "the Crisis of Capitalistic Democracy" covers ground that would be familiar to readers of Posner's earlier book, and of his numerous writings in between: the world crisis (which Posner quixotically continues to call a Depression) is the ill begotten child of twin evils: low interest rate set by the Federal Reserve, and lack of efficient government regulation of excessively risk universe financial institutions.

So Bankers took excessive risks, yet government is to blame? Yes, says Posner, once we "recognize that competition will force banks to take risks (in order to increase return) that the economic and regulatory environment permits them to take, provided the risks are legal and profit-maximizing, whatever their consequences for the economy as a whole" (p. 264).

The greatest weakness of Posner's thesis is that he offers this assertion about the over-determination of market activity without proof, as if it is self-evident. In my view, it is nothing of sorts. No doubt market competition constricts the freedom of action of market players; But I don't think that it deprives them completely of free will; Posner treats the market as if it is a force of nature, beyond any control. But the market is an aggregation of human beings, who are not necessarily any more constrained than the government officials Posner continually targets. Posner's otherwise detailed book is almost completely free of any attempt to actually prove this point by any study of non-government market players.

Posner also continues his bizarre crusade against Academic economists. He is of course correct that the current crisis has revealed for all the primitive state of the dismal science. But calling Academic economists (along with government officials) "the major culprits in our present economic distress" is surely a gross exaggeration.

Having by now read several books directly or indirectly about the crisis (Posner's previous piece, Robert Shiller's The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It, Martin Wolf's Fixing Global Finance (Forum on Constructive Capitalism), DeLong and Cohen's The End of Influence: What Happens When Other Countries Have the Money), as well as countless articles and Blog posts, I doubt any single book, or indeed, any single individual, can fully explain what is coming to be known as "the Great Recession". Posner's book is, as usual, wide ranging, penetrating and insightful, not to mention well written.

After narrating the crisis and delineating what he considers its causes, Posner ventures to offer reforms. But he offers them with a great deal of uncertainty - the main argument of the book, one with which I concur, is that we need to understand the crisis better before trying to "reform" it. For this purpose, "The Crisis of Capitalist Democracy" is highly valuable.
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