Yesterday I received my copy of Richard Posner's new book, A Failure of Capitalism: The Crisis of '08 and the Descent into Depression. My plan is to blog the book here as I read it.
Last night I just had time to read the preface (completed in Feb. '09) and the first half of Chapter 1. Judge Posner begins by arguing that we are in a depression, not just a recession. It's not a "Great" depression like that of the 1930s -- the current indicators are nowhere near what was seen then -- but this is more than a recession, "especially if, as may well happen in the present instance, a 'successful' effort to avoid a repetition of the Great Depression will impose enormous long-term costs on the economy."
He then states his thesis, which was unexpected from someone with Judge Posner's reputation as a libertarian:
Some conservatives believe that the depression is the result of unwise government policies. I believe it is a market failure. The government's myopia, passivity, and blunders played a critical role in allowing the recession to balloon into a depression, and so have several fortuitous factors. But without any government regulation of the financial industry, the economy would still, in all likelihood, be in a depression. We are learning from it that we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails. The movement to deregulate the financial industry went too far by exaggerating the resilience -- the self-healing powers -- of laissez-faire capitalism.
This is strong stuff, almost shocking, in view of who's written it. Many libertarians believe that there is, or very nearly is, no such thing as market failure. In other words, they believe that market forces, if left to themselves, will (almost) always bring about the optimal situation.
Even those who agree that market failures can sometimes occur nonetheless deny that regulation, especially federal regulation, is needed for the financial industry. Judge Posner clearly has rejected that view (if he ever held it). "Our model of a capitalist economy" needs regulation.
Judge Posner also explains that this book is divided into two main parts: the first five chapters deal with how the depression came about and what the government is doing to try to remedy it, and the remaining six chapters deal with the lessons we can learn.
He acknowledges that it may seem "premature" to write about this depression, since it may not even have bottomed out. (I think it has.) He thinks his effort is useful now because "hindsight will rewrite history" once the depression ends. In addition, he promises to launch a blog one week after the book's publication to provide weekly updates to the book. I have not yet checked to see whether this blog -- to be called "The Posner Economic Crisis Blog" -- is up.