A Failure of Capitalism: The Crisis of '08 and the Descent into Depression Hardcover – May 1 2009
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Lively, readable, and plainspoken...Posner has an extraordinarily sharp mind.
--Robert M. Solow (New York Review of Books 2009-05-14)
Posner has managed to write a compelling book on the crash...The book has numerous worthwhile insights, including a surprisingly Keynesian analysis of the dynamics of depressions.
--Robert Kuttner (American Prospect 2009-05-01)
A surprising volume that explains what happened to the banking system and economy in terms the lay reader can easily understand...[Posner's] critique is bracing, all the more so because it comes from a right-leaning thinker normally hostile to the ministrations of government bureaucrats.
--Paul M. Barrett (Washington Post Book World 2009-05-03)
Before seeking political asylum in free-market Hong Kong, consider reading a new book that critiques what went wrong with capitalism, written in order to save it. Judge Richard Posner's A Failure of Capitalism: The Crisis of '08 and the Descent into Depression is noteworthy. As a longtime University of Chicago professor and father of the free-market-based law-and-economics movement, Judge Posner makes an unlikely critic of capitalism. But as author of some 40 books and as the most frequently cited federal appeals court jurist, he is also one of our most original and clearheaded thinkers.
--L. Gordon Crovitz (Wall Street Journal 2009-05-05)
It comes as something of a surprise that Posner, a doyen of the market-oriented law-and-economics movement, should deliver a roundhouse punch to the proposition that markets are self-correcting. It might also seem odd that a federal appellate judge (and University of Chicago law lecturer) would be among the first out of the gate with a comprehensive book on the financial crisis--if, that is, the judge were any other judge. But Posner is the late Daniel Patrick Moynihan's successor as the country's most omnivorous and independent-minded public intellectual. By now, his dozens of books just about fill their own wing in the Library of Congress...Compact and bracingly lucid...By the last page, not a single lazy generalization has survived Posner's merciless scrutiny, not one populist cliché remains standing. A Failure of Capitalism clears away whole forests of cant but leaves readers at a loss as to where to go from here. In other words, it is only a starting point--but an indispensable one.
--Jonathan Rauch (New York Times Book Review 2009-05-17)
[Posner] has the rare kind of mind that is a pure pleasure to watch in action, regardless of the subject and the argument being made.
--John Lanchester (New Yorker 2009-06-01)
Richard Posner is one of America's most prominent and prolific public intellectuals...With his concise, jargon-free analysis of the current economic crisis, Posner has cast his lot with those who believe that the "depression" (given the steep reduction in consumption, credit and production, the term, he insists, is appropriate) was the result "not of intrusive, heavy-handed regulation of housing and finance, but of deregulation, hostility to taxation and to government in general."
--Glenn C. Altschuler (Jerusalem Post 2009-06-19)
Richard Posner is a phenomenon...He provides a very competent account of the events which led to the current crisis, with an emphasis on the political and ideological context.
--John Kay (Financial Times 2009-07-31)
[Posner] is the quintessential U.S. economic-conservative intellectual...So an excoriating attack by Posner on modern financial market practices is news. A Failure of Capitalism is precisely that. There are still U.S. conservatives who think the crisis was overdone, that the policy response has been too great, that this was merely a crisis of confidence and liquidity, and that the banking system was not insolvent, merely illiquid. That is not Posner's view. His judgment is that the banking system is insolvent and the crisis that took place in 2008 transformed a recession in the US into a depression...In his preface, Posner emphasizes that he has written the book in medias res, a lawyer's way of saying "in the thick of it," with the implication that he has yet fully to make up his mind. He has, however, offered a thought-provoking interim analysis of what went wrong.
--Warwick Lightfoot (Financial World 2009-07-01)
The best book describing this malaise is Richard Posner's A Failure of Capitalism. The distinctiveness of his case is that he is a prominent conservative thinker with the intellectual acuity to argue that the crisis is not to do with the traditional enemy of conservatism, big government, but is a consequence of decisions taken by private firms. The ill-effects of those decisions were worsened by deregulation of banking.
--Oliver Kamm (The Times 2009-12-05)
[A] compelling read...Notable for [its] high seriousness and sophistication.
--Robert Teitelman (Huffington Post 2010-12-23)
[Posner's] bracing and intellectually admirable A Failure of Capitalism demands attention.
--Jonathan Kirshner (Boston Review 2011-01-01)
About the Author
Richard A. Posner is Circuit Judge, the United States Court of Appeals for the Seventh Circuit, and a senior lecturer at the University of Chicago Law School.
Top Customer Reviews
Here is a unique account of the recent global meltdown and recession that hasn't been written by a so-called financial expert or insider. Posner, a prominent American jurist and university lecturer, brings to the discussion on this epic series of events a detached and cerebral viewpoint that looks at a number of key considerations in an honest attempt to understand its causes and consequences. What I found incredibly interesting about this analytical but easy-to-read study is that Posner's legal mind collects all the relevant findings on why and how the economy went in the tank in 2008 before making a judgment as to its chances of making a recovery. There is lots of blame to pass around for why it happened in the first place. History shows, according to Posner's reckoning, that this edition of the financial collapse was bound to happen, given the build-up in irresponsible social and economic behaviour from a wide array of players. Some of the underlying conditions in this debacle are: a lack of regulations in place to keep in check reckless trading behaviour; a failure to recognize the signs that banks were becoming insolvent and not just illiquid; incompetent leadership at the top including the Federal Reserve; the White House and Congress; low interest rates and a collapsed housing market; the absence of effective economic models that could correctly identify what an economic depression looks like; and the lack of a comprehensive strategy for jump-starting the economy again. Summed up, 2008 and beyond is a time in America and the world at large where capitalism, as a financial system, has virtually dropped the ball in its failure to keep the economy functioning at an acceptable level.Read more ›
Most Helpful Customer Reviews on Amazon.com (beta)
Until now, that is. "A Failure of Capitalism" departs consciously from the prevailing libertarian take on the current recession (or, as Judge Posner argues it should be called, "depression"). In short, he believes that the depression was not mainly caused by government meddling. Rather, it is a "market failure" -- i.e., a crisis that market forces alone could not have prevented. And, given the size of this market failure, government should instead have used regulations to prevent it.
Before I got the book, I had read some indications that Judge Posner was taking this line. But in the book itself, he is crystal clear about his view that deregulation in the financial industry was a major culprit, and his recognition that he is going against the conventional wisdom of both libertarians and conservatives.
The book is well argued and much more thorough than I can convey here. One of the great things about Judge Posner's style is that he anticipates all of the reader's objections and tries to address them in good faith. Whether you agree or disagree, he is always worth reading.
The book also includes a narrative of how the depression developed, descriptions of the systemic problems in the financial industry that made the depression possible, and recommendations for government action.
Although the material may be a little difficult for those with no knowledge of finance, it has been intentionally written with non-specialists in mind. As always, Judge Posner repays the attentive reader.
At the same time, home buyers and their willing enabler mortgage brokers knew they were getting in over their heads. Wall Street, seeing a great opportunity, then leveraged these new mortgages to extreme levels. Thus, both mortgage-takers and Wall Street were in over their heads. (Posner believes home-buyers' failure to save was part of the problem - reality, however, is that they thought they were saving big time through home appreciation.)
Posner's Prescription: More EFFECTIVE government regulation, not just expanding the hodge-podge of overlapping partial management spread over myriad state and federal agencies. This should include limits on leverage, changing how credit-rating agencies operate and are compensated, requiring CDS be fully collateralized, limiting payday loans, etc. Posner also worries about the impact of enormous bailout monies on the value of our currency.
Why the title "A Failure of Capitalism?" Posner recognizes that competition carries the seeds of capitalism's destruction - bankers, etc. realize that if they don't participate in whatever current fad is popular, they risk becoming unemployed and their firm bought out by others who ride the fad to higher P/E multiples. That's why government regulation is essential.
Posner also believes that the free market is incapable of appropriately setting executive salaries and mutual (and hedge) fund fees due to the inherent biases and conflicts of interest involved. Finally, Posner also points out that current conservative thinking on this subject is vacuous.
More importantly, Posner has aimed this book at the layperson...and missed. Even though he has tried "assiduously to suppress the extraneous," he presumes a post-grad readership with a large and specialized vocabulary. One wonders, with amusement, when Posner last spoke to a "layperson" (and whether that person was a circuit-level judicial clerk).
He does a very good job of explaining the economic mechanisms involved in recent events, and if you're looking for that you'll do no better than this book. But, in my view, the Posner "brand" stands for fearless, airtight polemics - the kind of thing that makes you think "that can't possibly be right" and then spend the next 6 months thinking about it. When he lobs a couple of grenades at his own team (e.g. attributing the crisis to market failure, criticizing executive compensation) there is a glimmer of the classic Dick. But for the most part this is a dry, neutral primer on the economics of depression.
Which is not to say it's bad. It's excellent, in the way that some of the spicier textbooks are excellent. It's reliable and has little of the rushed-to-market sloppiness that characterizes contemporary law-and-econ (Cass Sunstein). As a Fed-junkie, I was bored by it, but I'm giving it to my friends and family members.
"A Failure of Capitalism" won quite a bit of attention (including a review in the NYRB), mostly focusing on his criticism of Capitalism - apparently astonishing critics who know Posner merely as a conservative. But Posner has never been an ideologue; anyone who actually knows Posner's works must realize that he's thoughtful and non-Partisan - as he puts it, he is a classic Liberal in the John Stuart Mill sense (see Overcoming Law). That he would be willing to support government regulation of the economy is hardly surprising.
Posner's book is a good introduction to the economic crisis, and it reminds me of Paul Krugman's The Return of Depression Economics, indeed, it pretty much does to the current depression what Krugman's book did to the economic woes of the 1990s. Posner writes elegantly and clearly, making "Failure of Capitalism" the best written, friendliest exposition of the Depression I've read anywhere. However, I think it is aimed slightly too high. Posner assumes too much knowledge of his readers, and proceeds a little too quickly. A few times, I had to re-read a sentence before understanding it completely (this never happened with Krugman's book - and Krugman actually explained business concepts such as "Hedge Fund" and "short selling").
The most exciting and troubling aspect of Posner's book - and hence the title - is the contention that the crisis is a failure of the Capitalist system. Conservatives argue that the underlying cause of the Depression was government actions - mainly the government subsidizing of mortgages via Fannie Mae and Freddie Mac and tax incentives, under the policy by both the Clinton and the Bush administration of advancing an "ownership society", and the Fed's nurturing the bubble via its low interest rates.
But Posner argues, convincingly in my view, that they are wrong. The root of the crisis is that rational human beings, acting in their interests, can cause disastrous consequences. The main reason is asymmetry in their results. CEOs who took gambles could make huge amounts of money in bonuses if the gambles succeeded, but at worst would be out of job if they failed, and often would enjoy large severance pay ("golden parachutes"). This is also true, albeit to a lesser extent of the owners, because they havelimited liability.
A critic of Capitalism may reasonably argue that this puts to question the basic assumptions of the Capitalistic order. The underlying assumption in Capitalism is that the pursuit of self interest furthers the ends of society as a whole. In Adam Smith's words (In The Wealth of Nations (Bantam Classics)):
"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."
The current crisis suggests that this is not always the rule. Sometimes, when people pursue their own self interest, even within a framework of laws, havoc ensues. The critics may feel the urge to say "I told you so".
But maybe they should resist it. The failure of foreseeing the crisis was widespread, especially among economics and politicians, both Left and Right. Scores of highly influential people underestimated the problem - and the government's actions actually made the crisis worse. The government's failure topped the market's failure.
Posner focuses more on describing the crisis, and the responses to it, than on offering policy prescriptions. Even his discussion of the solutions offered by the Bush and Obama administrations is lacking in that respect: Posner argues against the right that fiscal stimulus should be in the form of public spending rather than cutting taxes because tax cuts would lead to more saving, which the economy does not currently need. Right wing critics like Greg Mankiw argue that tax cuts have a larger multiplier effect, and Posner doesn't answer them. Nor does he answer the Left wing critics who call for the nationalizing of Banks, which they claim worked in the Norwegian Banking Crisis of the late 1980s.
Most conspicuously absent from Posner's account is the Global perspective. Although Posner acknowledges that this is a Global Depression, he hardly discusses the experience of countries other than the US. Even American readers who are naturally more interested in the US, may be interested in a comparison to other countries, if only to find out who is doing what, and how it is working. Beyond brief references to the Japanese "Lost Decade" of the 1990s, Posner's view is strangely and atypically parochial.
"A Failure of Capitalism" is also very much a typical Posner book, complete with Such Posnerian tropes as appeals to Bayesian reasoning and bitter critiques of academic theorists and excessive praise to active men - In this case, Academic economists are lampooned, but "financial managers[`] IQ exceeds my own" (writes the man whom Justice Alito called "the smartest man in the world" on p. 77), In other cases, it's academic moralists and "Moral Entrepreneurs" (The Problematics of Moral and Legal Theory) Law Professors and Judges (How Judges Think) or Academic versus non Academic Intellectuals (Public Intellectuals: A Study of Decline, With a New Preface and Epilogue).
For all its faults (which probably have more to do with Posner's rushing it to publication than anything else), "A Failure of Capitalism" is an insightful, clear and concise account of the economic crisis. After you finish reading it, you'll know more about the Depression - although not necessarily what to do about it.
I am not an economist by training. Yet, believe it or not, Posner writes engagingly for the informed reader who wants to know more about the probable causes and impacts of the Financial Crisis beyond the piecemeal reports of the press, which are increasingly resembling fragments picked up after a major explosion.
Anyhow, I find the chief merit of this book to be Posner's capacity in writing in a comprehensive, yet systematic fashion on all fronts. He updates the reader on what is most recent (one constantly gets the idea that the book was sent to press in a great rush, as if Posner was waiting till the last minute to do so--the binding glue of my book is still not quite dry); he also speculates with great reasonableness on what is likely to transpire. Importantly, Posner also weighs in the political implications of this Crisis without trying to be too political at the same time--he reserves his criticism for the Monetarist as well as the Keynesian at the helm.
In another word, Posner renders a non-technical and a detailedly fair depiction of the Financial Crisis that is also one of the most non-partisan and up-to-date version one can find in the world today. I have only two complaints.
The first is agreeing with Solow--many parts of the book are extremely repetitive--perhaps Posner is trying to help the lay reader along by making the same point on Economics 101 again and again, a possible conjecture that must have escaped Dr. Solow. That said, I did share with Solow the same sentiments that the book seemed to have been dictated as if in a great rush. I also happened to chance on a few editing mistakes--such as more than a handful of improbably long and chained sentences--that ought not to occur in a supposedly better edited publication (as this!).
The second complaint, which may be a regional one depending on how you see it, is Posner's most interesting but misleading title. This book is titled, "A Failure of Capitalism...", not "A Failure of Capitalism in the American Economy...". Yet Posner's entire book seems to have been written only for the American economy as if the implications of his 'Depression' conjecture are merely insulated within the folds of the American economy, rather than one evidently laced with major impacts on the global economy today. On this complaint, I see an even greater global reception, not to mention usefulness, if Posner had at least provided a short chapter to ponder on the implications of his thesis in the global context. He did mention his practice of keeping a blog as a supplementary tool to this book. Perhaps he has reserved his more global musings on the blog; of this I do not know.
Perhaps the greatest contentions on Posner's book is his polarizing bid on 'Depression', than 'Severe Recession' or 'Protracted Recession'. Posner admits that there is no clear cut, word-in-the stone tablet defining line between Depression or 'protracted recession'. Only time will tell if this is a marketing bid or an acute prophecy. Yet like all 'sound-bites' that end up on the tables of decision-makers (or at least their aides), they do enter into the consciousness of decision-making and thus affect real, practical actions. And so even when Posner rejects the commonplace idea with certain folks that 'all the talk of depression has made this into a real depression', more books written on, as policy actions enacted to treat this as a depression can indeed lead to one.
All said, I have not enjoyed reading a non-fiction piece such as this for a long time. On one hand Posner discusses a most pressing event with great sure-footedness. Obviously he did his homework and clearly he has filled in the gaps with his extraordinary judgment and insights. On the other hand Posner also tries to make this seemingly intractable issue simple for the informed reader without making it trite. This is not a simple feat. And if we further infer that he must have conceived and written this book in the short span of 5-6 months inclusive of time to press, I have only great admiration for his energy, intellectual acumen and social responsibility. These qualities, I presume, are those traditionally associated with great public intellectuals--personalities and characters that are most enviable and needed in a time like this.
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