Lost faith in the free market

Republican Richard Posner reserves his ire for the ideological rigidity of the Bush administration.

posner book 248 (photo credit: Courtesy)
posner book 248
(photo credit: Courtesy)
A Failure of Capitalism: The Crisis of '08 and the Descent into Depression By Richard A. Posner Harvard University Press 346 pp., $23.95 A Failure of Capitalism is important less for what it says than for who is saying it. A judge of the United States Court of Appeals for the Seventh Circuit and a senior lecturer at the University of Chicago Law School, Richard Posner is one of America's most prominent and prolific public intellectuals. A Republican, a philosophical pragmatist and one of the most influential antitrust scholars of the last half century, Posner often confounds conventional left-right political categories. 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." His views seem to reflect a growing consensus - among America's "chattering classes" if not among its braying asses - that "we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails." Posner agrees that responsibility for the economic crisis rests with the private sector, especially with the decisions of financial institutions to increase exponentially their risks in lending. He claims, however, that the orgy of moral recrimination directed against Wall Street is unwarranted. Competition forces corporations to be profit maximizers: It is, after all, "what drives economic progress." It makes no more sense, he writes, more than a bit hyperbolically, for a finance capitalist to worry about the small probability that his decisions will trigger a depression than for a lion to spare a zebra out of a concern for the future of the species. Since the "rational behavior" of individuals can precipitate collective irrationality and economic disaster, Posner rejects libertarian laissez-faire ideology. Government, he believes, has a duty, "in regulating financial behavior, to do more than prevent fraud, theft and other infringements of property and contract rights." Despite warning signs of a fragile credit system and a housing bubble, Posner points out, the federal government failed to act. The "seeds of failure" were sown with the deregulation of banking in the 1970s and '80s. They germinated in the Clinton administration with the repeal of laws separating commercial and investment banking - and an unwillingness to regulate new financial instruments, including credit-default swaps. The "way was open" for a doctrinaire pro-business, free-market free-for-all in the 21st century. Nonetheless, Posner argues, effective action by the Bush administration might still have averted a depression. While the stock market imploded and housing prices plunged, the president, in essence, was missing-in-action, preferring "reminiscence, retirement planning, legacy-polishing and foreign travel." He abdicated responsibility to Ben Bernanke, chairman of the Federal Reserve, and secretary of the treasury Henry Paulson, who were heavily invested in the proposition that "competitive markets are self-correcting." Meriting "strong criticism," according to Posner, was their passivity following the collapse of Bear Stearns in March 2008, their refusal to intervene in September to prevent the collapse of Lehman Brothers and their failure to recognize that American banks were not so much illiquid as insolvent or on the verge of insolvency. Posner supports Barack Obama's initiatives to speed the recovery, including the stimulus package opposed by virtually every Republican in the House of Representatives and Senate. Although conservatives prefer to cut taxes, Posner asserts that Americans are more likely to save than spend the windfall they receive. By contrast, public-works spending, such as road construction and measures to reduce carbon emissions, and unemployment benefits, food stamps and health care subsidies, will boost consumption and, then, production. Sounding like a New Deal Democrat, Posner adds that the case for the stimulus package is "compelling" because, even if it turns out to be wasteful, it will boost public confidence. In A Failure of Capitalism, Posner hopes against hope for a politics "of rational preconceptions, based on theory and experience" - and an end to "dogmatic libertarianism and egalitarianism." Democratic failures, he suggests, include an unrealistic view of human nature, an endorsement of "adversarial unionism," underestimating the costs of social engineering, and the benefits of punishment, personal responsibility and military force. But he reserves his ire - and his fire - for Republicans. The ideological rigidity and the managerial incompetence of the Bush administration, he maintains, weakened the Grand Old Party's claims to be "dependable trustees of the economy, of the national security and of the moral life of the nation." And the Republican Party of Rush Limbaugh, Sarah Palin and Joe the Plumber has pursued the self-defeating strategy of flaunting the anti-intellectualism of its supporters and deriding as elitists educated people who speak in complete sentences. Republicans, he warns, should realize - and soon - that the nation's economic crisis "cannot be solved in the gut." Acknowledging, of course, that the jury is still out, Posner concludes that in an "atmosphere electric with proposals," the Obama administration has enlarged the space for pragmatic solutions. Is he implying, as Sen. Arlen Specter of Pennsylvania recently did, that the Republican Party's over? The writer is the Thomas and Dorothy Litwin Professor of American Studies at Cornell University.