A Failure of Capitalism
Encyclopedia
Richard Posner
Richard Allen Posner is an American jurist, legal theorist, and economist who is currently a judge on the United States Court of Appeals for the Seventh Circuit in Chicago and a Senior Lecturer at the University of Chicago Law School...
, the most-cited American
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
legal scholar in history, among the most respected judges in the United States (as of 1999), and a major proponent of the economic analysis of law. The book is significant in Posner's criticism of President George W. Bush
George W. Bush
George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....
and his administration's policies and the response to the fiscal crisis, as well as his movement away from his past well-known advocacy of free-market capitalism. The book has been primarily noted not for his criticism of progressive
Progressivism
Progressivism is an umbrella term for a political ideology advocating or favoring social, political, and economic reform or changes. Progressivism is often viewed by some conservatives, constitutionalists, and libertarians to be in opposition to conservative or reactionary ideologies.The...
government policies (which he attacks again for good measure), but rather his critique of laissez-faire
Laissez-faire
In economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies....
capitalism and its ideologues.
Posner's newest book has been received with generally good reviews from the press, including The New York Times
The New York Times
The New York Times is an American daily newspaper founded and continuously published in New York City since 1851. The New York Times has won 106 Pulitzer Prizes, the most of any news organization...
, but the reception has not been universally positive.
Synopsis
The primary argument of the book is that we have gone from a recessionRecession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
into a depression
Depression (economics)
In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle....
(the "D" word, as one author calls it) in 2009, and Posner suggests several possible short-term and long-term solutions to this fiscal crisis. His thesis is not that government, politicians, or even bankers primarily caused this depression, but rather that the capitalist system is to blame for its own faults.
The text is divided into a preface
Preface
A preface is an introduction to a book or other literary work written by the work's author. An introductory essay written by a different person is a foreword and precedes an author's preface...
, a conclusion, and 11 chapters:
- The Depression and its Proximate Causes
- The Crisis in Banking
- The Underlying Causes
- Why a Depression Was Not Anticipated
- The Government Responds
- A Silver Lining?
- What We Are Learning About Capitalism and Government
- The Economics Profession Asleep at the Switch
- Apportioning Blame
- The Way Forward
- The Future of Conservativism
Some of the causes of the depression that Posner cites are the lack of enforceable usury
Usury
Usury Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate . In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law...
laws, which would discourage risky loans, the Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(FDIC) and central banks taking risks, securitization of mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
s, illiquidity and insolvency of the banking system, the housing bubble, blindness to warning signs of a crisis, and the preconceptions of ideology.
Posner wraps up the book with a chapter containing several suggestions, including eventual re-regulation of the banking industry, but warns that "this is not the time" to do so — a long-term solution after the economy recovers — that can "wait calmer days." He also suggests putting off reorganization of the Treasury and the Federal Reserve until a later time. In the meanwhile, he writes, "piecemeal reforms may be feasible and helpful." These include a halt on government marketing of home ownership, requiring banks and financial institutions to "disclose the full compensation of all senior executives", backloading of compensation, increasing marginal income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
rates on the highest incomes, and usury
Usury
Usury Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate . In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law...
laws to discourage risky loans.
Criticism of George W. Bush
The book is significant in Posner's criticism of President George W. BushGeorge W. Bush
George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....
and his administration's policies and the response to the fiscal crisis. Part of the shock is due to Posner's longtime "conservative" views. Judge Posner was nominated to the Seventh Circuit by Ronald Reagan
Ronald Reagan
Ronald Wilson Reagan was the 40th President of the United States , the 33rd Governor of California and, prior to that, a radio, film and television actor....
, but is "no party man."
Posner starts his criticism of Bush with a broad attack on his behavior in his final months as President:
Posner blames Bush for pushing policies, such as the "ownership society", a $10 trillion national debt and "the huge budget deficits run by the Bush administration,", "prop[ping] up stock prices by keeping interest rates low," which were underlying causes of the crisis, as well as "Dithering" in late 2008. By the ownership society, Posner referred to the American Dream Down Payment Act of 2003
American Dream Down Payment Act of 2003
On December 16, 2003, President George W. Bush signed into law the American Dream Downpayment Initiative, which was aimed at helping approximately "40,000 families a year" with their down payment and closing costs, and further strengthen America’s housing market.This legislation complemented the...
and other laws that made ownership easier.
Posner points out that Bush's proposed privatization
Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...
of Social Security
Social Security (United States)
In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance program.The original Social Security Act and the current version of the Act, as amended encompass several social welfare and social insurance programs...
would have made the depression even more harmful. Posner states that one of the "lessons learned" is that the "blurred" line between "the government and the private sector ... in the Bush Administration" contributed to a lack of insight into the underlying problems. Even more so, "the emphatically pro-business philosophy of the Bush administration made the SEC too trusting of the securities industry." The bottom line is that "there might not have been a depression had it not been for the Bush administration's mismanagement of the economy."
Criticism of capitalism and mainstream economists
Posner, famous for his advocacy of free markets, turns on free-market capitalism in this book: "the financial crisis is indeed a crisis of capitalism rather than a failure of government." Posner explicitly states that he has changed his mind, that in the words of economist Robert LucasRobert Lucas
Robert Lucas may refer to:* Rob Lucas , Liberal member of the South Australian Legislative Council* Robert Lucas, 3rd Baron Lucas* Robert Lucas, Jr. , economist...
, "that macroeconomics in this original sense has succeeded." Posner states that:
Posner points out that one of the causes of the depression was "blindness to warning signs" of a crisis. A few people had warned of problems, including Nouriel Roubini
Nouriel Roubini
Nouriel Roubini is an American economist. He claims to have predicted both the collapse of the United States housing market and the worldwide recession which started in 2008. He teaches at New York University's Stern School of Business and is the chairman of Roubini Global Economics, an economic...
, and Brooksley Born
Brooksley Born
Brooksley E. Born is an American attorney and former public official who, from August 26, 1996, to June 1, 1999, was chairperson of the Commodity Futures Trading Commission , the federal agency which oversees the futures and commodity options markets...
,, but they were ignored. He asserts that the "depression is a failure of capitalism".
This is the second and most powerful shock. The New York Times points out that:
Spreading the blame: Critiques of Bill Clinton, Barack Obama, et al.
Posner also assigns part of the blame for the recession on the administration of Bill ClintonBill Clinton
William Jefferson "Bill" Clinton is an American politician who served as the 42nd President of the United States from 1993 to 2001. Inaugurated at age 46, he was the third-youngest president. He took office at the end of the Cold War, and was the first president of the baby boomer generation...
. He says they were to blame for pushing policies that created the housing bubble. The training and experience of several Clinton advisors, notably Robert Rubin
Robert Rubin
Robert Edward Rubin served as the 70th United States Secretary of the Treasury during both the first and second Clinton administrations. Before his government service, he spent 26 years at Goldman Sachs eventually serving as a member of the Board, and Co-Chairman from 1990-1992...
, were tilted towards Wall Street
Wall Street
Wall Street refers to the financial district of New York City, named after and centered on the eight-block-long street running from Broadway to South Street on the East River in Lower Manhattan. Over time, the term has become a metonym for the financial markets of the United States as a whole, or...
, which he found to be ultimately dangerous. Likewise, Alan Greenspan
Alan Greenspan
Alan Greenspan is an American economist who served as Chairman of the Federal Reserve of the United States from 1987 to 2006. He currently works as a private advisor and provides consulting for firms through his company, Greenspan Associates LLC...
, Clinton's appointee as chairman of the Federal Reserve, gets a special blame for pushing low interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
s, which increased stock prices and led, in turn, to the bubbles in banking, stocks, and housing.
Posner sweeps a wide swatch in assigning portions of blame for causing the underlying recession on a variety of factors and persons. He praises the use of specific deterrence in shaming debtors, which, in his mind, has not been used enough recently. He faults the concept of limited liability
Limited liability
Limited liability is a concept where by a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a company or partnership with limited liability. If a company with limited liability is sued, then the plaintiffs are suing the company, not its...
for increasing risk. He points out the harmful focus on short-term profits at the expenses of long-term stability. Bad credit was, in Posner's words, given a "so what?" attitude.
Clinton and the Democratic leadership in Congress encouraged home ownership by people who had bad credit and should have, in Posner's view, remained tenants. Competition in the banking industry led to deregulation in Clinton's administration, and enactment of the Gramm-Leach-Bliley Act
Gramm-Leach-Bliley Act
The Gramm–Leach–Bliley Act , also known as the Financial Services Modernization Act of 1999, is an act of the 106th United States Congress...
, which increased risk to the system. Posner is not alone in criticizing the Gramm-Leach-Bliley Act; some economists, including Nobel laureate Joseph Stiglitz also believe it helped create the 2007 financial crisis. Encouraging the practice of "sweeps" by large investor
Investor
An investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...
s (removing money from demand deposit
Demand deposit
Demand deposits, bank money or scriptural money are funds held in demand deposit accounts in commercial banks. These account balances are usually considered money and form the greater part of the money supply of a country.-History:...
s into money market funds overnight) exacerbated the problem.
Preconceptions and ideology
Ideology
An ideology is a set of ideas that constitutes one's goals, expectations, and actions. An ideology can be thought of as a comprehensive vision, as a way of looking at things , as in common sense and several philosophical tendencies , or a set of ideas proposed by the dominant class of a society to...
held by both sides of the spectrum, argues the book, prevented novel challenges to changing fiscal realities. Macroeconomics
Macroeconomics
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...
has not made use of chaos theory
Chaos theory
Chaos theory is a field of study in mathematics, with applications in several disciplines including physics, economics, biology, and philosophy. Chaos theory studies the behavior of dynamical systems that are highly sensitive to initial conditions, an effect which is popularly referred to as the...
, and thus says Posner, the signal-noise ratio prevented a clear analysis and even created "blindness" and "misinformation" for policy analysts.
Posner went on the record against how Barack Obama
Barack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...
's administration's Keynesian
Keynesian economics
Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...
stimulus in the ARRA
Arra
Arra is a census town in Puruliya district in the state of West Bengal, India.-Demographics: India census, Arra had a population of 19,911. Males constitute 52% of the population and females 48%. Arra has an average literacy rate of 66%, higher than the national average of 59.5%; with 59% of the...
"could have been better designed," and specifically demurs against some of Obama's statements:
Nonetheless, Posner points out that what is rational for an individual corporation may not be rational for the industry as a whole.
Reception
Reviewing for The New York TimesThe New York Times
The New York Times is an American daily newspaper founded and continuously published in New York City since 1851. The New York Times has won 106 Pulitzer Prizes, the most of any news organization...
, Jonathan Rauch
Jonathan Rauch
Jonathan Charles Rauch is an American author, journalist and activist. After graduating from Yale University, Rauch worked at the Winston-Salem Journal in North Carolina, for the National Journal magazine, and later for The Economist magazine and as a freelance writer.Currently a senior writer and...
wrote that:
The Huffington Post gave a long review, noting with a bit of schadenfreude
Schadenfreude
Schadenfreude is pleasure derived from the misfortunes of others. This German word is used as a loanword in English and some other languages, and has been calqued in Danish and Norwegian as skadefryd and Swedish as skadeglädje....
that Posner had changed his views. Michael Casey, in a review published in the Irish Times, writes "Blaming the system is a cop-out.... Posner’s approach is far too deterministic", and further calls the book "[a]n incomplete analysis of a floundering social system."
In the Washington Post, Paul M. Barrett, an assistant managing editor of Business Week, writes that Posner seems to spread the blame too much, denigrates mere stupidity and "greed" as causes, and lacks "constructive proposals for reform...." Barrett points out how notable this book is, which is that "his critique is bracing, all the more so because it comes from a right-leaning thinker normally hostile to the ministrations of government bureaucrats."
The New York Review of Books said that "it is at best a partial success; it gets some things right and some things wrong, and the items on both sides of the ledger are important." In the Review, Nobel-prize-winning economist Robert Solow
Robert Solow
Robert Merton Solow is an American economist particularly known for his work on the theory of economic growth that culminated in the exogenous growth model named after him...
praises the author quite faintly:
Solow's review itself was notable to some degree, according to Brad DeLong, who critiqued Posner's logic along the way:
In an interview with The Economist
The Economist
The Economist is an English-language weekly news and international affairs publication owned by The Economist Newspaper Ltd. and edited in offices in the City of Westminster, London, England. Continuous publication began under founder James Wilson in September 1843...
, Posner was forced to defend his use of the term "depression
Depression (economics)
In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle....
" and his move "to the centre..."
Forbes magazine printed the preface of the book as a measure of its importance.
In January 2010, The New Yorker
The New Yorker
The New Yorker is an American magazine of reportage, commentary, criticism, essays, fiction, satire, cartoons and poetry published by Condé Nast...
revisited A Failure of Capitalism, noting that by September 2009, Posner had become a confirmed Keynsian: "As acts of betrayal go, this was roughly akin to Johnny Damon
Johnny Damon
Johnny David Damon is an American professional baseball outfielder and designated hitter. From 2000–2008, he was third among active players in runs and seventh in hits and stolen bases . He is currently second among active leaders in triples , five behind Carl Crawford...
's shaving off his beard, forsaking the Red Sox Nation
Red Sox Nation
Red Sox Nation refers to the fans of the Boston Red Sox. The phrase "Red Sox Nation" was first coined by Boston Globe feature writer Nathan Cobb in an October 20, 1986, article about split allegiances among fans in Connecticut during the 1986 World Series between the Red Sox and the New York...
, and joining the Yankees
New York Yankees
The New York Yankees are a professional baseball team based in the The Bronx, New York. They compete in Major League Baseball in the American League's East Division...
."