Friday, May 1, 2009

Posner's A Failure of Capitalism -- XII

Chapter twelve of Failure (entitled "The Way Forward") discusses measures that could be taken to help prevent future depressions. In keeping with his view that systemic reforms should not be attempted or even devised until after the depression has ended, Judge Posner here offers an open-ended array of changes to consider, not a fully worked out program. Among other things, we need to see first what "the new, bound-to-be activist regulatory regime . . . can do within the existing regulatory framework."

Almost nothing is off the table. Possible (but not necessarily recommended) changes include consolidating the various federal and state financial regulatory bodies; forming an "international regulatory authority"; capping credit-card and mortgage debt; further restricting the extent to which debt can be discharged in bankruptcy; changing compensation arrangements for credit-rating agencies, to reduce conflicts of interest; "forbidding proprietary trading by banks (that is, trading of their equity capital, which puts that capital at risk)"; changing bank reserve requirements; regulating hedge funds more like banks and credit-default swaps more like stocks; "and even resurrecting usury laws." Controlling executive compensation through income taxation, and increasing income taxes generally to finance the anti-depression programs, are other suggestions that will surprise readers accustomed to thinking of Judge Posner as a libertarian.

Judge Posner devotes several pages to the difficulties that will be faced in trying to regulate well. We could, he notes, return to the regulatory framework of the 1960s, but we don't know how much value on net is added by having a deregulated financial industry. Consequently, we're unable to compare the costs and benefits that would be associated with various forms of re-regulation. (Judge Posner's description of everything that will need to be taken into account for regulations to be of benefit left me wondering where we can find the Solons capable of meeting the challenge.)

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