Thursday, April 30, 2009

Posner's A Failure of Capitalism -- XI

In chapter nine of Failure (entitled "Apportioning Blame"), Judge Posner explains that his thesis -- viewing the current depression as a market failure -- "doesn't let the government off the hook." This chapter thus overlaps to a considerable extent with chapter seven, "What We Are Learning about Capitalism and Government."

The argument here focuses on the government's failure to keep a recession from devolving into a depression. Recessions are frequent, and it's "unrealistic" to expect the government to prevent them. But the government should be able to prevent depressions, especially given our experience with the Great Depression "and the tools forged then and later to prevent a repetition."

The "seeds" were sown and nurtured in the gradual deregulation of banking and credit, which began in the 1970s. This process included repeal of the Glass-Steagall Act and the decision not to regulate credit-default swaps and other innovative financial products. The experts in charge in the '90s -- Greenspan, Rubin, and Summers -- "allowed the head of steam to build up."

But a depression might still have been avoided were it not for "the Bush Administration's mismanagement of the economy." Judge Posner notes that Paulson's predecessors as Secretary of the Treasury weren't "financial experts." President Bush also erred in "firing" Lawrence Lindsey as chair of the National Economic Council in December 2002. None of Lindsey's successors as chair (until President Obama's appointment of Larry Summers) was an economist.

Other mistakes under President Bush were the budget deficits and increase in the national debt, and a philosophy of lax enforcement of financial regulations. Judge Posner also spends several pages helpfully explaining why, in his view, the decision to let Lehman Brothers fail in September 2008 is "the single biggest blunder to date in the response to the gathering storm." Aside from the financial fallout, the episode and its aftermath shattered confidence by making it "increasingly obvious that the government had no game plan." This was exacerbated by President Bush's apparent lack of engagement with the crisis and abdication of leadership to Bernanke and Paulson, "neither of whom has the communication skills that the emergency required."

Congress is likewise to blame, for its "squabbling and grandstanding and demagoguery" in an effort to use the crisis to advance political agendas, such as its "eagerness to promote unionization in a depression."

Greenspan and, to a lesser extent, Bernanke are also culpable for their actions as chairmen of the Fed. Greenspan did not use the opportunity afforded by his "tremendous prestige" to arrest the housing bubble's growth. Bernanke shared Greenspan's misapprehension that any recession caused by the eventual bursting of the housing bubble could be "neutralized by lowering interest rates."

Finally, Judge Posner explains why he is not being harder on private actors: Although private actors are "responsible" for the depression in the sense that their rational market behavior primarily caused it, they (unlike the government) are not morally culpable "any more than one can blame a lion for eating a zebra." Judge Posner therefore criticizes journalists and politicians "and some who should know better, like . . . Paul Krugman," for directing their ire at Wall Street. "They have the wrong target."

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