Book Review: Posner, A Failure of Capitalism
posted by Lawrence Cunningham
It took only two hours to read Richard Posner’s breezy, odd and disjointed new book, A Failure of Capitalism. This awkwardly compact volume (346 pages in a trim size of 5×7) reassembles meditations first surfaced on his blog. It describes well-known points about the global financial crisis and offers little new. It contains a few statements commentators see as startling rebukes to free market capitalism unlikely from this conservative pioneer of law and economics (see, e.g., Solow, NYT, WaPo). Underappreciated in the excitement capitalism’s critics see in a devotee’s rebuke are insights on pragmatism, greater hallmarks of Posner’s work.
Although the book is disjointed, repetitious and disorganized, one may discern two themes, one I share and one I don’t. The one I share is that pragmatism is the way to approach financial policy. The diagnostic take from the financial crisis is subordination of pragmatism to ideology. This is due to free-market ideologues who deregulated too much by over-confidence in market capacity for self-correction. But this is no endorsement of extensive government intervention into the economy that equally ideological opponents of free markets may equally culpably prescribe.
Second, primary responsibility for the global financial crisis is with markets and market participants. Although I share this viewpoint, I part company when Posner argues that they did not act irrationally. He says there is no place in critique for insights from behavioral economics concerning limited cognition or biases. Government is to blame only in failing to protect against dangers that arise from market failure and inept responses once crises manifested, Posner argues. He says the principal justification for government regulation of economic activity is to prevent disruptions like recessions from turning into crises like depressions.
In short, this is rightly not a call for ideologically-driven government intervention on one side or ideologically-based laissez faire non-intervention on the other. It is a clarion call to pragmatic balancing that allows markets vast space for self-operation with government oversight and a regulatory system available to avert excesses when necessary to prevent challenges from becoming crises. The following review gives chapter-by-chapter accounts of this little book’s contents, including notes on the book’s awkward style in content, writing, documentation and publishing.
My chapter-by-chapter summary renames chapters for clarity, as follows, giving page length in parentheses.
1. Proximate Causes (40). This Chapter reviews what is well-known, citing as proximate causes of the global financial crisis decline in personal savings and risky lending following from overzealous deregulation.
2. Banking Crisis (34). This Chapter also reviews what is well-known, zeroing in on banking aspects of the crisis. It indicts deregulation and reviews proliferation of securitization and credit default swaps. It explains how difficulty valuing these limited market capacity to self correct and government ability to diagnose and respond.
3. Underlying Causes (42). This Chapter likewise reviews what is well-known, although Posner argues that deeper causes are consistent with rational economic actors making rational decisions. He repeatedly emphasizes this leaves no room in diagnosis for contributions from behavioral economics concerning psychology, cognition, emotion or character flaws. The argument is strained and the repetition reinforces the sense of its weakness. Behavioral finance has an explanatory role in market operations.
4. Why Not Anticipated (31). This Chapter, consciously and admittedly repeating much of the previous three, also reviews what is well-known: warning signals existed and some people sounded alarm bells. It tries, unconvincingly, to explain why it is rational for people to overlook such warnings and Cassandras sounding them.
5. Government Response (72). This Chapter, the longest and most disorganized, is a rambling selective trot through aspects of government’s response to the crisis. It gives disproportionate attention to bailout of the automotive sector, providing limited review of bailouts of banking. It gives considerable attention to central bank policy, debates over monetary versus fiscal policy as responses to national economic adversity and meditates on competing implications of deficit spending and stimulus.
6. Silver Linings (14). This odd Chapter identifies silver linings Posner perceives amid economic adversity, the most important of which, to me, is appreciating need to balance faith in free markets and government intervention, although this insight is buried in the middle of an essay also listing: promoting efforts to moderate business cycles, renewing interest in efficiency, learning lessons (like being averse to privatizing social security), reallocating brain power from financial services to scientific research and a wake-up call to limitations on thought in the economics profession.
7. Lessons on Markets and Government (18). This Chapter, repeating much in earlier ones, emphasizes government does not bear primary responsibility for causing the crisis. Blame goes primarily to “normal business activity in a laissez-faire economic regime.” But, once capitalism failed, government failed to intervene correctly to reduce its severity and some responses increased risks. Pages are devoted to the fair indicting of the SEC’s performance under Chair Chris Cox. Posner prescribes better government regulation as cure. Anticipating points a later chapter makes, however, no major changes should be made until after the crisis has been resolved–a prudent caution consistent with that David Zaring and I make.
8. Economists Failed (17). This Chapter shames the economics profession for failure to predict or detect the crisis, blaming this on “overinvestment by economists, policymakers, and business leaders in a free-market ideology that opposes aggressive governmental intervention.” Critique consists of sweeping generalizations rather than nuanced evaluation.
9. Blame Apportionment (19). This Chapter, amplifying the theme giving markets primary blame for causing the crisis and government secondary blame for enabling or not curtailing it, concentrates on why government gets some blame. This is a stinging rebuke to the second Bush administration, calling the SEC’s Cox “symptomatic” of a disastrous “doctrinaire free-market, pro-business, anti-regulatory ideology.”
10. Next Steps (16). This Chapter notes the fragmented US regulatory structure and says rationalizing it may be appealing. It identifies a few specific possible reforms like leverage caps, credit rating fees, reserve requirements and hedge fund disclosure. But, above all it says “now is not the time” to reorganize or regulate. It is too complex to make large scale changes while crisis continues. Again, David Zaring and I elaborate the case for this perspective and provide a more complete account of this Chapter’s breezy one.
11. Pragmatism over Ideology (11). This is the book’s strongest Chapter, a clarion cry for pragmatism. It rebukes conservatives and liberals alike for inflexible, rigid commitment to cause and ideology. Conservatives are embarrassed by Bush’s failures, including “overestimation of the efficiency of unregulated markets.” But opponents show excessive belief in opposite stances that are equally naïve. Neither can be proven correct. The “space for pragmatic, apolitical, non-ideological solutions to economic crises can be enlarged,” Posner says, adding “We should embrace “the spirit of pragmatism rather than of ideology.” I concur.
On style, Posner calls this little book a “high-altitude survey.” An equally valid description might be stream of consciousness, a quality that pervades much of the book, manifested in weak organization, repetition, long sentences, few topic sentences, no chapter overviews by introductory paragraphs, and little evident editorial work from the publisher.
Posner says he’s avoiding jargon but doesn’t always (“Bayesian decision theory” p. 135) or does so unhelpfully (like substituting tiers for tranches in describing structured financial products, p. 50). He uses words, worse than jargon, few are likely to know (a “faitnéant SEC” p. 239 and the “amour propre” of a legislative body, p. 240).
Posner acknowledges he’s not using footnotes. But they would help. Numerous examples of needed references appear (e.g., p. 135 “I have elsewhere described President Clinton as the consolidator of the Reagan revolution” without citation; “An economic-legal team at Columbia University has proposed that . . . p. 215 without citation; and “Warren Buffett is reported to have said . . . ” p. 221 without citation–I confess, he could have cited my book for this).
As for the book’s publisher (Harvard), the book is awkwardly printed. It is in 5×7 trim, a small area, spanning 330 pages of text, each with about 26 lines averaging about 10 words per line. So it is more than an inch thick. These are uncomfortable proportions for a reader to handle the book. The index is weak.
The book was written and produced quickly, drawing on blog posts, and it shows. There are some good insights and phrases. But it is more of a draft than a book. Compared to Posner’s other books, this very likely is the weakest (it certainly is not remotely in the same league as the other Posner books I’ve read).
May 28, 2009 at 3:43 pm
Posted in: Book Reviews, Current Events
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Responses (2)
michael webster - May 28, 2009 at 6:23 pm
Posner fails to deal what William Black calls “control fraud”.
This is not surprising, since for most economists the notion that there could be systemic fraud at the highest corporate levels is unfathomable.
Black, because of his experience with corporate fraud in Savings and Loan debacle, has unique insights – marrying economic theory with criminal psychology.
No view of our current economic situation which leaves out this element of criminal fraud is a complete explanation.
Frank - May 28, 2009 at 7:13 pm
Just to elaborate on Michael’s point: here is an interview with William Black:
http://www.pbs.org/moyers/journal/04032009/profile.html
“Now an Associate Professor of Economics and Law at the University of Missouri, William K. Black tells Bill Moyers on the JOURNAL that the tool at the very center of mortgage collapse, creating triple-A rated bonds out of “liars’ loans” — loans issued without verifying income, assets or employment — was a fraud, and the banks knew it. And while there is no law against liars’ loans, Black points out that there are, “many laws against fraud, and liars’ loans are fraudulent. [...] They involve deceit, which is the essence of fraud.”
Here’s a concrete example of the thin line between fraud, stupidity, and recklessness:
“[In the package of loans,] Moody’s learned that [over 38 percent of the borrowers] did not provide written verification of their incomes. . . . On the plus side, Moody’s noted, 94 percent of those borrowers with adjustable-rate loans said their mortgages were for primary residences. “That was a comfort feeling,” [one analyst] said. Historically, people have been slow to abandon their primary homes. When you get into a crunch, she added, “You’ll give up your ski chalet first.”"
from:
http://www.concurringopinions.com/archives/2008/05/subprime_with_a.html
Finally, regarding the lack of footnotes in Posner’s book, that’s no surprise to me. I took him to task for failing to support his positions in this blog post:
http://www.concurringopinions.com/archives/2006/12/fisking_posner.html
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