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It's Not Your Fault. It's Theirs.

Review by Paul M. Barrett
Sunday, May 3, 2009

A FAILURE OF CAPITALISM

The Crisis of '08 and the Descent into Depression

By Richard A. Posner

Harvard Univ. 346 pp. $23.95

In a recent column assessing the growing literature on the causes of the financial crisis, David Brooks noted that two broad schools of thought have formed: One sees the fiasco as a product of greed; the other, stupidity. Brooks overlooked the school of thought named Richard A. Posner.

Posner, the idiosyncratic and prolific federal jurist, has just published his book for this month: a surprising volume that explains what happened to the banking system and economy in terms the lay reader can easily understand.

Posner gained broad public notice in the 1980s as the leader of a scholarly movement that analyzed legal questions through the prism of free-market economics. He ordinarily gets categorized as a conservative, which is fair enough if you like one-word labels. He doesn't wring his hands over widows and orphans and sees the mission of judges as promoting unsentimental economic efficiency.

But Posner, a Reagan appointee to the federal appeals court in Chicago, is no party man. The main villains in our current financial saga, he argues, are Wall Street idol Alan Greenspan and the hapless George W. Bush. As chairman of the Federal Reserve, Greenspan propped up stock prices by keeping interest rates low. That policy fueled the borrowing boom that brought us toxic subprime mortgages, reckless securitization and the credit default swaps notoriously hawked by American International Group.

Bush, in Posner's telling, accelerated a decades-old deregulatory surge that allowed everyone from Bear Stearns to Bernard Madoff to run wild. Then, when the whole crazy casino showed signs of crumbling in 2008, Bush went AWOL, Posner writes: "The lame-duck President seemed uninterested in and uninformed about economic matters and was unable to project an image of leadership and instead spent his final months in office in frequent trips abroad and in legacy-polishing while the domestic economy melted away."

Posner knocks down greed or stupidity as a central reason for the crash. In his quirky way, he can't really understand the concept of avarice. He puts the word "greed" in quotes and follows it with the aside "whatever that means." Posner argues that one man's money lust is another's rational profit maximization. If you allow aggressive traders and investment bankers to do whatever they want, of course they're going to get into trouble!

He dismisses stupidity as an explanation, too, because, he contends, everyone knew exactly what they were doing. The home buyers knew they were borrowing too much. The lenders knew they were getting people in over their heads, and the Wall Street financiers knew that bonds confected from dubious mortgages weren't really safe. Everyone hoped that housing prices would keep rising so they could come out on top, no matter how unrealistic the whole hybrid pyramid-Ponzi scheme seems when you stop and think about it.

All economic bubbles eventually burst, and that's what happened to real estate. Rather than castigate greed or stupidity, Posner prefers to emphasize that smart regulators could have contained the damage. Greenspan could have put a floor under interest rates and taken the inevitable political heat. Other fans of the free market could have anticipated that deregulating trucking, airlines, telecommunications and energy -- a policy that Posner generally applauds -- didn't dictate also unleashing bankers. When trucking companies or airlines fail, they hurt themselves and their employees; when big banks fail, they send a chill through the entire economy that freezes credit and brings business to its knees.

Posner doesn't offer an agenda for reining in Wall Street. Perhaps he had moved on to the next three books he's writing -- or his blogs. But even without constructive proposals for reform, his critique is bracing, all the more so because it comes from a right-leaning thinker normally hostile to the ministrations of government bureaucrats.

My only complaint is that his title is confusing. Rather than a failure of capitalism, Posner warns of the dangers of an absence of rational oversight. And his preference for calling our troubles a depression, instead of a recession, seems excessively bleak, at least for the moment. Let's enact some thoughtful regulation and hope for the best.

Paul M. Barrett is an assistant managing editor of BusinessWeek.

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