Auto Bailouts and Bankruptcies

Today's post (really, late last night's post) on Judge Posner's Failure of Capitalism blog discusses the auto bailouts, the second stimulus package (which was passed after he finished the book), and bank stress tests.

In the book, Judge Posner argued that the auto bailouts were necessary simply to keep the major auto companies from collapsing when uncertainty about the course of the depression was highest. Their utility lay in delaying bankruptcy, not in making the companies viable again.

Today, some five months later, Judge Posner observes that the bailouts "worked." They kept the companies from failing at the height of public fear, when there was the greatest risk of a deflationary spiral. But by the end of March, the generalized, public fear had largely subsided. Thus, the bankruptcy of Chrysler and likely bankruptcy of GM do not raise the same concerns they did in December.

Although Judge Posner does not say this, it would therefore appear that there is now no emergency that could justify the administration's efforts to strong-arm Chrylser's bondholders.

Hat tips to Volokh Conspirator David Bernstein and to Instapundit.

Blasts from the Bully Pulpit

In an short, amusing post, law professor David Bernstein dramatically compares the cynical rhetoric of Presidents Obama and George W. Bush.

Update to Judge Posner's Failure Blog

The second post on Richard Posner's new blog about A Failure of Capitalism is now up. It is the first of three promised posts on the federal government's responses to the current depression. Today's post looks at the Fed's "easy money" response, Treasury's effort to partner with private investors to buy mortgage-related assets from banks, and planned legal changes to give relief to underwater mortgagors.

Of particular interest to me is the paragraph explaining why nationalization of "bad banks" would be a wrong step. Nationalization would be much more complicated, time-consuming, and unpredictable than it at first sounds: Because the bad banks are not worthless, their current owners would need to be compensated in any takeover. And then the government would face the question of what to do with the banks it would now own.

Richard Posner's New Blog Is Up & Running

As promised in his latest book, A Failure of Capitalism, Judge Posner has launched a new blog in which he will expand upon the book's argument as events unfold. The first post appeared today.

He observes that events since February, when he finished the book, have not "alter[ed] the basic analysis and conclusions in my book." He cites data showing that the economy is continuing to decline, "but there is evidence that the rate of the decline has slowed" (his emphasis).

He refuses to speculate on whether we have hit bottom. My own (very impressionistic) sense is that we have, and that we're seeing more and more signs of impending recovery. I hope I'm right about that.

The Wall Street Journal on A Failure of Capitalism

The WSJ today has a positive opinion piece on Richard Posner's Failure of Capitalism (may be gated). The author appears to agree with the book's argument and concludes:

Even capitalism's staunchest supporters recognize that it cannot function unless government plays its proper part. If all the players, including regulators and bankers, can accept their rightful share of blame and responsibility, we can begin to prevent future failures.

New regulations will inevitably come out of the current economic crisis. And they will inevitably be bad regulations if "capitalism's staunchest supporters," especially those with finance-industry know-how, do not participate in the process with a good attitude.

Posner's A Failure of Capitalism -- XIII

This post concludes my ongoing review Failure, which I finished reading last night. The last chapter of the book, "The Future of Conservatism," is followed by a "Conclusion" that is (by design) nothing more than a summary of the entire argument.

Judge Posner's hope is that both conservative and liberal preconceptions can be sufficiently loosened that "pragmatic, apolitical, nonideological solutions to economic crises" can be considered. The Republican "coalition" of economic, security, and social conservatives has been shaken by recent events, each component pulling away from the others. The Democratic Party, meanwhile, came out on the winning side of the "competence gap" during the presidential campaign. But both conservatism and liberalism have "substantial" histories of failures.

Judge Posner realizes that politics cannot be banished from economic policymaking. ("There are conflicts within society that can be resolved only by political competition.") The current crisis, however, has given rise to a spirit of pragmatism among economists that with luck will result in better policy-making once the current crisis has passed.

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.)