Chapter seven addresses "What We Are Learning about Capitalism and Government" from the current depression. Here, Judge Posner revisits his claim that the depression was not caused by government action. Rather,
As far as one can judge on the basis of what is known today (obviously an important qualification), the depression is the result of normal business activity in a laissez-faire economic regime -- more precisely, it is an event consistent with the normal operation of economic markets.
He obliquely supports this claim by examining the government's conduct in the years leading up to the depression. The government's role in the rise of risky mortgage lending, he finds, "was one of permission rather than of encouragement." In other words, government allowed the rational self-interest of private actors to pursue, in the aggregate, a course that was harmful.
The government's permissivenes, or inaction, is exemplified in the SEC's failure to investigate the Madoff scheme, notwithstanding Harry Markopolos's repeated efforts over several years to alert the SEC to what was going on. Judge Posner rejects "conservatives'" interpretation of this episode as an example of government incompetence. Instead, he proposes, "the emphatically pro-business philosophy of the Bush Administration made the SEC too trusting of the securities industry."
He concludes that "there undoubtedly was a grave government failure as well as a market failure" in the run-up to the depression. He predicts that the government's response will be, as usual, "regulation and reorganization." Reorganization is the easier move and the less effective. Regulation or reregulation is more likely to do good, but it should not be attempted until the depression is at an end.