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A Failure of Capitalism: The Crisis of '08 and the Descent into Depression
The financial and economic crisis that began in 2008 is the most alarming of our lifetime because of the warp-speed at which it is occurring. How could it have happened, especially after all that we’ve learned from the Great Depression? Why wasn’t it anticipated so that remedial steps could be taken to avoid or mitigate it? What can be done to reverse a slide into a full-blown depression? Why have the responses to date of the government and the economics profession been so lackluster? Richard Posner presents a concise and non-technical examination of this mother of all financial disasters and of the, as yet, stumbling efforts to cope with it. No previous acquaintance on the part of the reader with macroeconomics or the theory of finance is presupposed. This is a book for intelligent generalists that will interest specialists as well. Among the facts and causes Posner identifies are: excess savings flowing in from Asia and the reckless lowering of interest rates by the Federal Reserve Board; the relation between executive compensation, short-term profit goals, and risky lending; the housing bubble fuelled by low interest rates, aggressive mortgage marketing, and loose regulations; the low savings rate of American people; and the highly leveraged balance sheets of large financial institutions. Posner analyzes the two basic remedial approaches to the crisis, which correspond to the two theories of the cause of the Great Depression: the monetarist—that the Federal Reserve Board allowed the money supply to shrink, thus failing to prevent a disastrous deflation—and the Keynesian—that the depression was the product of a credit binge in the 1920’s, a stock-market crash, and the ensuing downward spiral in economic activity. Posner concludes that the pendulum swung too far and that our financial markets need to be more heavily regulated. Read Richard Posner's blog, and his latest article in The Atlantic.
368 pages, Hardcover
First published May 1, 2009
27 people are currently reading
914 people want to read
About the author
Richard A. Posner
130 books181 followersRichard Posner is Senior Lecturer in Law at the University of Chicago Law School.
Following his graduation from Harvard Law School, Judge Posner clerked for Justice William J. Brennan Jr. From 1963 to 1965, he was assistant to Commissioner Philip Elman of the Federal Trade Commission. For the next two years he was assistant to the solicitor general of the United States. Prior to going to Stanford Law School in 1968 as Associate Professor, Judge Posner served as general counsel of the President's Task Force on Communications Policy. He first came to the Law School in 1969, and was Lee and Brena Freeman Professor of Law prior to his appointment in 1981 as a judge of the U.S. Court of Appeals for the Seventh Circuit, where he presided until his retirement on September 2, 2017. He was the chief judge of the court from 1993 to 2000.
Judge Posner has written a number of books, including Economic Analysis of Law (7th ed., 2007), The Economics of Justice (1981), Law and Literature (3rd ed. 2009), The Problems of Jurisprudence (1990), Cardozo: A Study in Reputation (1990), The Essential Holmes (1992), Sex and Reason (1992), Overcoming Law (1995), The Federal Courts: Challenge and Reform (1996), Law and Legal Theory in England and America (1996), The Problematics of Moral and Legal Theory (1999), Antitrust Law (2d ed. 2001), Law, Pragmatism, and Democracy (2003), Catastrophe: Risk and Response (2004), Preventing Surprise Attacks: Intelligence Reform in the Wake of 9/11 (2005), How Judges Think (2008), and A Failure of Capitalism: The Crisis of '08 and the Descent into Depression (2009), as well as books on the Clinton impeachment and Bush v. Gore, and many articles in legal and economic journals and book reviews in the popular press. He has taught administrative law, antitrust, economic analysis of law, history of legal thought, conflict of laws, regulated industries, law and literature, the legislative process, family law, primitive law, torts, civil procedure, evidence, health law and economics, law and science, and jurisprudence. He was the founding editor of the Journal of Legal Studies and (with Orley Ashenfelter) the American Law and Economics Review. He is an Honorary Bencher of the Inner Temple and a corresponding fellow of the British Academy, and he was the President of the American Law and Economics Association from 1995 to 1996 and the honorary President of the Bentham Club of University College, London, for 1998. He has received a number of awards, including the Thomas Jefferson Memorial Foundation Award in Law from the University of Virginia in 1994, the Marshall-Wythe Medallion from the College of William and Mary in 1998, the 2003 Research Award from the Fellows of the American Bar Foundation, also in 2003 the John Sherman Award from the U.S. Department of Justice, the Learned Hand Medal for Exellence in Federal Jurisprudence from the Federal bar Council in 2005, and, also in 2005, the Thomas C. Schelling Award from the John F. Kennedy School of Government at Harvard University.
Following his graduation from Harvard Law School, Judge Posner clerked for Justice William J. Brennan Jr. From 1963 to 1965, he was assistant to Commissioner Philip Elman of the Federal Trade Commission. For the next two years he was assistant to the solicitor general of the United States. Prior to going to Stanford Law School in 1968 as Associate Professor, Judge Posner served as general counsel of the President's Task Force on Communications Policy. He first came to the Law School in 1969, and was Lee and Brena Freeman Professor of Law prior to his appointment in 1981 as a judge of the U.S. Court of Appeals for the Seventh Circuit, where he presided until his retirement on September 2, 2017. He was the chief judge of the court from 1993 to 2000.
Judge Posner has written a number of books, including Economic Analysis of Law (7th ed., 2007), The Economics of Justice (1981), Law and Literature (3rd ed. 2009), The Problems of Jurisprudence (1990), Cardozo: A Study in Reputation (1990), The Essential Holmes (1992), Sex and Reason (1992), Overcoming Law (1995), The Federal Courts: Challenge and Reform (1996), Law and Legal Theory in England and America (1996), The Problematics of Moral and Legal Theory (1999), Antitrust Law (2d ed. 2001), Law, Pragmatism, and Democracy (2003), Catastrophe: Risk and Response (2004), Preventing Surprise Attacks: Intelligence Reform in the Wake of 9/11 (2005), How Judges Think (2008), and A Failure of Capitalism: The Crisis of '08 and the Descent into Depression (2009), as well as books on the Clinton impeachment and Bush v. Gore, and many articles in legal and economic journals and book reviews in the popular press. He has taught administrative law, antitrust, economic analysis of law, history of legal thought, conflict of laws, regulated industries, law and literature, the legislative process, family law, primitive law, torts, civil procedure, evidence, health law and economics, law and science, and jurisprudence. He was the founding editor of the Journal of Legal Studies and (with Orley Ashenfelter) the American Law and Economics Review. He is an Honorary Bencher of the Inner Temple and a corresponding fellow of the British Academy, and he was the President of the American Law and Economics Association from 1995 to 1996 and the honorary President of the Bentham Club of University College, London, for 1998. He has received a number of awards, including the Thomas Jefferson Memorial Foundation Award in Law from the University of Virginia in 1994, the Marshall-Wythe Medallion from the College of William and Mary in 1998, the 2003 Research Award from the Fellows of the American Bar Foundation, also in 2003 the John Sherman Award from the U.S. Department of Justice, the Learned Hand Medal for Exellence in Federal Jurisprudence from the Federal bar Council in 2005, and, also in 2005, the Thomas C. Schelling Award from the John F. Kennedy School of Government at Harvard University.
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Displaying 1 - 30 of 42 reviews
April 22, 2013
To get a general impression about this book, consider this; even though this book is a very slight 300 pages long, 75-125 pages are an explanation of how regulatory agencies work within the United States. Why, if you're an author supposedly setting out to describe the failure of capitalism, do you have to spend 30% of your book describing actions taken by the government and their subsequent effects on the market?
More correctly, this book should be titled "A Failure of a Mixed-Economy;" because what we have here, today, is not capitalism. I have to admit, I cringed a little inside whenever Posner would refer to our economy as a "laissez-faire" market; it's on par with calling Guantanamo Bay prison a "coastal retreat."
More correctly, this book should be titled "A Failure of a Mixed-Economy;" because what we have here, today, is not capitalism. I have to admit, I cringed a little inside whenever Posner would refer to our economy as a "laissez-faire" market; it's on par with calling Guantanamo Bay prison a "coastal retreat."
January 18, 2011
This is a pretty good book, if for nothing else than the author's ability to plainly discuss and talk about the economic meltdown that occurred in 2008, as well the activities that lead up to it. I have to agree with others, though. The book was quickly written and it shows; however, it is not at all hard to follow, which is surprising when you realize Posner, as a judge, was able to break away from the legalese/court-style of writing.
What really impressed me, though, is Posner's ability to take on a potentially controversial subject and discuss it without politicizing it. Do not be put off by the title. Posner is a conservative judge (which sometimes comes though, but not in an offending way for this self-proclaimed liberal), and when he speaks of a "failure of capitalism," he is really referring to the failure of the monetarist principles. Posner starts out early by saying that both individuals and businesses acted well within expectations of natural behavior up to and during the early months of the recession (though he continuously refers to it as a depression). What failed specifically was, in Posner's opinion, the government's (in)ability to react and regulate business so as to avoid the meltdown. He goes on to talk about possible silver linings in the "depression" and solutions to addressing the economy. On some occasions, he even applies his judicial experience to how the courts might interpret Federal actions towards regulating the economy.
It gives interesting insight to the layperson interested in reading about theories regarding the economic collapse and what we can do to avoid it in the future. Though, honestly, given the numerous comparisons/similarities he provides between the 2008 and 1929 meltdowns leaves you with a feeling that the Federal Reserve and legislative and executive branches of government might very well always remain reactive, not proactive, to economic woes coming up on the horizon.
What really impressed me, though, is Posner's ability to take on a potentially controversial subject and discuss it without politicizing it. Do not be put off by the title. Posner is a conservative judge (which sometimes comes though, but not in an offending way for this self-proclaimed liberal), and when he speaks of a "failure of capitalism," he is really referring to the failure of the monetarist principles. Posner starts out early by saying that both individuals and businesses acted well within expectations of natural behavior up to and during the early months of the recession (though he continuously refers to it as a depression). What failed specifically was, in Posner's opinion, the government's (in)ability to react and regulate business so as to avoid the meltdown. He goes on to talk about possible silver linings in the "depression" and solutions to addressing the economy. On some occasions, he even applies his judicial experience to how the courts might interpret Federal actions towards regulating the economy.
It gives interesting insight to the layperson interested in reading about theories regarding the economic collapse and what we can do to avoid it in the future. Though, honestly, given the numerous comparisons/similarities he provides between the 2008 and 1929 meltdowns leaves you with a feeling that the Federal Reserve and legislative and executive branches of government might very well always remain reactive, not proactive, to economic woes coming up on the horizon.
November 22, 2020
I held high hopes before I read the book. After finishing, I have to say I'm disappointed. The analysis on the economy is very good (although repetitive sometimes), and the author seemed to try pretty hard to sound not to be orthodoxy, but overall his preconceptions are pretty strong.
Oh my, months after I read this book, I found out that the author himself is one of the culprits. No wonder.
What can I say? Disingenuous at least!
Oh my, months after I read this book, I found out that the author himself is one of the culprits. No wonder.
What can I say? Disingenuous at least!
August 22, 2020
Richard Posner, once the biggest name in Reagan’s era legal & economical conservativism, candidly using his pragmatism, culpriting laissez-faire & deregulation itself, he’s not shy at all to stridently blame both sides of the political spectrum. Everyone might benefit from this book before the new era of finger-pointing strikes in the dawning of the Great Lockdown Recession
February 17, 2015
Conservative judge excoriates the financial system, unions, and bipartisanship; fails to address falling down of laissez-faire capitalism and 'real' human costs of economic malfeasance.
September 10, 2022
Richard Posner is said to be the most cited legal scholar of the twentieth century. A Failure of Capitalism, a book published toward the end of his distinguished career, is not among the most cited of his scholarly works – not even close – but probably the most read, judged by the number of ratings on Goodreads. “The failure” of capitalism concerned herein is the financial crisis of 2008, which triggered the Great Recession, the worst recession the world had ever seen since the legendary depression of 1929. The book attempts to explain the causes of that crisis, who should bear the blames and what lessons we may collectively draw from the event.
Posner believes the main cause of Great Recession is the confluence of lower interest rates in 2000s and the over-deregulation of financial industry that began much earlier. On the one hand, cheap credit encouraged the expansion of homeownership, which pushed up home price because the supply in real estate market is usually slow to catch up with demand. Rising price convinced people that houses are good investment, thereby inducing more to dive in with money borrowed beyond their means to pay back unless home price continued to rise. On the other hand, deregulation made it harder for traditional commercial banks to raise equity capital from demand deposit accounts, owing to the competition from investment banks and hedge funds alike. To stay in the game, therefore, banks had to rely more on borrowed short-term credit, increase their leverage (the ratio of debt to equity) and make longer term (hence riskier) loans. With the huge demand for credit fueled by the low interests of 2000s, this business model was pushed to the limit, exposing the entire industry to the risk of default in the housing market should the price begin to fall. To mitigate these risks, banks invented complex debt securitization devices, including the infamous credit-default swaps. In hindsight, however, these tools were not so much about reducing the risks as hiding them, unconsciously or otherwise.
Given this analysis, it is hardly surprising Posner argues the leaders at Federal Reserve and other economic agencies – Alan Greenspan and, to lesser extent, Ben Bernanke, among others – are culpable for a misconceived monetary policy and the lack of foresight for the impending crisis. He also points fingers at the US government for its deregulation of the financial industry – driven largely by market fundamentalism – and the failure to prepare a contingence plan that would have avoided the “bumbling improvisations” in the initial response. Posner is also dismayed at the “failure of the economics profession to have grasped the dangers”. Many, including Robert Lucas – the most distinguished macroeconomist at the time – seemed to have been completely blindsided by the disaster. Lucas had gone so far as to downplay the imminence of a recession as late as September 19, 2008, four days after the collapse of Lehman Brothers. However, Posner argues his fellow academics deserve lenience for missing the warning signs that they were supposedly best poised to spot. For one thing, they were not well equipped to “empirically test rival theories of depression” and were increasingly isolated in their own silos by ever-greater specialization. More importantly, doomsaying is a tricky and unpopular craft. As Posner points out, “Cassandras rarely receive a fair hearing”, because “it is very difficult to receive praise, and indeed to avoid criticism, for preventing a bad thing from happening unless the probability of its happening is known”.
Posner pushes back forcefully against the claim that the crisis had much to do with the stupidity or greed of bank executives and hedge fund managers. Nor does he believe they should be held responsible for not heeding the warning signs of a gigantic bubble while taking seemingly undue risks to “ride it”. “Riding a bubble can be rational”, Posner explains, especially when money is cheap. More importantly, nobody really knows when a bubble, unattainably large as it might seem, will burst, and until it does one could still be making much money riding it than climbing off. Indeed, being rational could be a losing proposition when the majority is irrational, as summarized in Keynes’ famous aphorism,
“the market can stay irrational longer than you can stay solvent”.
Posner believes the duty of mitigating systematic risks resides elsewhere (i.e., government), because
“it would make no more sense for an individual businessman to worry that because of the instability of the banking industry his decisions and those of his competitors might trigger a depression than for a lion to spare a zebra out of concern that lions are eating zebras faster than the zebras can reproduce.”
Posner writes beautifully, with a combination of clarity, precision, and elegance that few authors could match. If one wants to learn how to explain complex concepts to a layman in an accessible but still sophisticated manner, the book will make a great tutorial. I don’t know enough about macroeconomics or finance to comment on many an opinion expressed in the book. Truth told, the book taught me a lot about those subjects – the difference between equity and security being a memorable example. However, I do question the wisdom of writing a book about an event that had not even run its course at the writing (early 2009). If Posner had waited a few more years, perhaps he would not insist to label the crisis as a “depression”. He might also reconsider his derision of Feds’ low-interest policy because that policy, in a much more aggressive form, had not only survived Great Recession, but also thrived for more than a decade since.
Posner believes the main cause of Great Recession is the confluence of lower interest rates in 2000s and the over-deregulation of financial industry that began much earlier. On the one hand, cheap credit encouraged the expansion of homeownership, which pushed up home price because the supply in real estate market is usually slow to catch up with demand. Rising price convinced people that houses are good investment, thereby inducing more to dive in with money borrowed beyond their means to pay back unless home price continued to rise. On the other hand, deregulation made it harder for traditional commercial banks to raise equity capital from demand deposit accounts, owing to the competition from investment banks and hedge funds alike. To stay in the game, therefore, banks had to rely more on borrowed short-term credit, increase their leverage (the ratio of debt to equity) and make longer term (hence riskier) loans. With the huge demand for credit fueled by the low interests of 2000s, this business model was pushed to the limit, exposing the entire industry to the risk of default in the housing market should the price begin to fall. To mitigate these risks, banks invented complex debt securitization devices, including the infamous credit-default swaps. In hindsight, however, these tools were not so much about reducing the risks as hiding them, unconsciously or otherwise.
Given this analysis, it is hardly surprising Posner argues the leaders at Federal Reserve and other economic agencies – Alan Greenspan and, to lesser extent, Ben Bernanke, among others – are culpable for a misconceived monetary policy and the lack of foresight for the impending crisis. He also points fingers at the US government for its deregulation of the financial industry – driven largely by market fundamentalism – and the failure to prepare a contingence plan that would have avoided the “bumbling improvisations” in the initial response. Posner is also dismayed at the “failure of the economics profession to have grasped the dangers”. Many, including Robert Lucas – the most distinguished macroeconomist at the time – seemed to have been completely blindsided by the disaster. Lucas had gone so far as to downplay the imminence of a recession as late as September 19, 2008, four days after the collapse of Lehman Brothers. However, Posner argues his fellow academics deserve lenience for missing the warning signs that they were supposedly best poised to spot. For one thing, they were not well equipped to “empirically test rival theories of depression” and were increasingly isolated in their own silos by ever-greater specialization. More importantly, doomsaying is a tricky and unpopular craft. As Posner points out, “Cassandras rarely receive a fair hearing”, because “it is very difficult to receive praise, and indeed to avoid criticism, for preventing a bad thing from happening unless the probability of its happening is known”.
Posner pushes back forcefully against the claim that the crisis had much to do with the stupidity or greed of bank executives and hedge fund managers. Nor does he believe they should be held responsible for not heeding the warning signs of a gigantic bubble while taking seemingly undue risks to “ride it”. “Riding a bubble can be rational”, Posner explains, especially when money is cheap. More importantly, nobody really knows when a bubble, unattainably large as it might seem, will burst, and until it does one could still be making much money riding it than climbing off. Indeed, being rational could be a losing proposition when the majority is irrational, as summarized in Keynes’ famous aphorism,
“the market can stay irrational longer than you can stay solvent”.
Posner believes the duty of mitigating systematic risks resides elsewhere (i.e., government), because
“it would make no more sense for an individual businessman to worry that because of the instability of the banking industry his decisions and those of his competitors might trigger a depression than for a lion to spare a zebra out of concern that lions are eating zebras faster than the zebras can reproduce.”
Posner writes beautifully, with a combination of clarity, precision, and elegance that few authors could match. If one wants to learn how to explain complex concepts to a layman in an accessible but still sophisticated manner, the book will make a great tutorial. I don’t know enough about macroeconomics or finance to comment on many an opinion expressed in the book. Truth told, the book taught me a lot about those subjects – the difference between equity and security being a memorable example. However, I do question the wisdom of writing a book about an event that had not even run its course at the writing (early 2009). If Posner had waited a few more years, perhaps he would not insist to label the crisis as a “depression”. He might also reconsider his derision of Feds’ low-interest policy because that policy, in a much more aggressive form, had not only survived Great Recession, but also thrived for more than a decade since.
August 3, 2018
Imagine a history of the Titanic hurriedly written while the ship was actually sinking. That's this book. It's interesting to get a real-time perspective on how people understood the economic collapse at the time it was happening, but it may not be strictly accurate or informative.
May 9, 2017
This is corporatist bullshit. simple as that.
May 13, 2009
At nearly 350 pages long, Posner's new book is definitely not a short book. Notably, the chapter on 'The Government Responds' is nearly book-length long. For a more professional review of this book, do look up Dr. Solow's review on the NYRoB. Here's my more pedestrian take.
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.
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.
September 19, 2009
Excellent book on the recent recession/depression.
According to Posner (and I agree), the recent recession was produced by rational actors both on the banking side and the homeowner side (see at least pgs. 100-101). I thought he could have spent more time on how how the downside risk of a borrower is limited in that in most states you can walk away from a house whose value is less than the outstanding loan amount with little more than a damaged credit rating. Posner points to the government and economists as the culprits in the housing crisis (pg. 111) and calls for more government regulation.
What I learned:
* Prior to the Great Depression, one could purchase stocks with only 10% down (pg. 11). I think this is the most important parallel between the currently deflating housing bubble and the stock market bubble that preceded the Great Depression. The Federal Reserve Board currently requires a 50% equity position to purchase stocks (rather than the 10% equity position requirement prior to the great depression). If it weren't for the 0% equity position required to purchase a house, the housing bubble would not have been as bad as it was.
* The federal government increases the money supply by selling government securities and decreases the money supply by purchasing government securities (pg. 208).
* Our current federal income tax is actually comparatively low today ("Federal tax rates are lower today than they were in the 1940s, 1950s, and 1960s—periods of healthy economic growth. The top marginal income tax rate reached 94 percent in 1945 and did not decline to 70 percent until 1965 (it is 35 percent today." Pg. 226).
* Fannie Mae, Freddie Mac, and the Community Reinvestment Act had very little to do with the housing bubble (pgs. 240-242).
* The banking crisis was one of insolvency rather than illiquidity (pg. 257).
Best paragraph of the book:
"Some readers may think that I am being too critical of the Federal Reserve and the economics profession and have let the financiers off too lightly—which may seem inconsistent with my claim that this depression is a failure of capitalism. But although the financiers bear the primary /responsibility/ for the depression, I do not think they can be /blamed/ for it—implying moral censure—any more than one can blame a lion for eating a zebra. Capitalism is Darwinian. Businessman take risks (mostly within the law) that promote their financial interest; it would make no more sense for an individual businessman to worry that because of the instability of the banking industry his decisions and those of his competitors might trigger a depression than for a lion to spare a zebra out of concern that lions are eating zebras faster than the zebras can reproduce. To tell banks not to make risky loans—to upbraid them for "an unquenchable thirst for easy profits" or for taking "unjustifiable risks for their own gain, and in so doing jeopardiz[ing:] the future of the nation's credit system and now the economy itself" (in the overheated words of the economic journalist Jeff Madrick)—or to upbraid a homebuyer for taking out a mortgage loan that he may be unable to repay, is like telling lions and zebras to build a fence between them." (Pgs. 284-5).
March 25, 2010
Two takeaways:
1. Posner makes a convincing argument that the actions of the various players in the financial crisis were not inept or irresponsible but rather quite rational. In his view, any one player (individuals or firms) could fully appreciate the fact that their actions were risky and their leveraging could even lead to bankruptcy. However, any one failure/bankruptcy might not be catastrophic, at least not for an individual person or firm. It's only the regulators, who should be expected to be focused on systemic risk, ie, the risk that one or several failures could lead to a catastrophic implosion. Consequently, he lays much of the blame for the crisis on ineffectual regulation.
From this line of reasoning comes the most profound of Posner's conclusions: the modern financial system, due to its complexity and interconnectedness requires a robust regulatory regime. This from an author famous for his free-market ideals.
2. Posner also addresses the issue of why it's difficult to prevent catastrophes -- things that seem obvious in hindsight rarely are and when a crisis is averted, there's a good chance it's not appreciated or even noticed. In addition to the recent crisis, Posner offers the Perl Harbor attacks as another example.
Overall, 'A Failure of Capitalism' is insightful for these conclusions but otherwise only a fair book. Posner should get credit for diligently presenting a host of aspects relating to the crisis, but this rehash is mostly for those not already familiar w/ the modern US financial system. Further, Posner wrote the book while the crisis was still unfolding. As a result, the book was written in a hurry, and it shows. The style is often rambling and not as organized as it might otherwise have been.
1. Posner makes a convincing argument that the actions of the various players in the financial crisis were not inept or irresponsible but rather quite rational. In his view, any one player (individuals or firms) could fully appreciate the fact that their actions were risky and their leveraging could even lead to bankruptcy. However, any one failure/bankruptcy might not be catastrophic, at least not for an individual person or firm. It's only the regulators, who should be expected to be focused on systemic risk, ie, the risk that one or several failures could lead to a catastrophic implosion. Consequently, he lays much of the blame for the crisis on ineffectual regulation.
From this line of reasoning comes the most profound of Posner's conclusions: the modern financial system, due to its complexity and interconnectedness requires a robust regulatory regime. This from an author famous for his free-market ideals.
2. Posner also addresses the issue of why it's difficult to prevent catastrophes -- things that seem obvious in hindsight rarely are and when a crisis is averted, there's a good chance it's not appreciated or even noticed. In addition to the recent crisis, Posner offers the Perl Harbor attacks as another example.
Overall, 'A Failure of Capitalism' is insightful for these conclusions but otherwise only a fair book. Posner should get credit for diligently presenting a host of aspects relating to the crisis, but this rehash is mostly for those not already familiar w/ the modern US financial system. Further, Posner wrote the book while the crisis was still unfolding. As a result, the book was written in a hurry, and it shows. The style is often rambling and not as organized as it might otherwise have been.
August 28, 2012
For several months, I have had a personal side project of attempting to understand the financial crisis. That challenge has culminated with this book. Posner does an incredibly thorough job of explaining the various factors that contributed to the financial crisis, including the economic system that allowed it. I am firmly of the belief that one cannot understand the financial crisis simply by pointing fingers at financial intermediaries or regulators, because neither explanation is complete. Posner gives the full picture. He analyzes the policies and de-regulation that laid the framework for the financial crisis, the financial actions that ultimately compromised the economy, and, what is most understated in other accounts, the very fact that in our system, such actions were completely consistent with competition and rational self-interest. As such, Posner reminds us that this is no easy surface problem and no quick fix, but it certainly helps to have an explanation that is thorough and comprehensive, not for blame, but for intelligent response.
February 23, 2010
It's not a terrible book, but not quite what I was hoping for. The title says it all, 'a failure of capitalism', not 'the failure', this just explains in detail the causes of the 'great recession' of 2008-present. There isn't much in the way of suggestions for change, condemnation of the current system, or even a critique of capitalism itself. It's more of a historical account. There are hints that the Honourable Judge sees things going very poorly for the USA in the near future, but it is barely explicated and the consequences and his ideas for solutions are barely touched upon. In all, a good explanation and summary, in plain and (relatively) easy to understand prose, but rather forgettable.
August 19, 2010
Posner wrote this book on the fly and it shows. At times sloppy, the book still gets as close as anything I've read to the origins of the financial crisis. He explains why there is no simple solution, but he also points out why little government action to begin with helped create the conditions where this kind of crisis could take place. As a leader in the law and economics movement and as a revered figure among the neocons, Posner has some credibility when he says we need to put more trust in Keynesian economics.
I would have liked the book more had Posner offered more reflections on the transformation of his own views about the relevance of the Chicago school. Unfortunately, the book seems somewhat disembedded from his past work.
I would have liked the book more had Posner offered more reflections on the transformation of his own views about the relevance of the Chicago school. Unfortunately, the book seems somewhat disembedded from his past work.
May 12, 2012
This book was written immediately after the credit crisis, and it won't stand the test of time or be thought of as a 'classic' document of the financial crisis. It's too political, and the attempts at prophecy and prediction have been revealed weak by the passing of time. There is great potential in the subject matter; Posner's essential thesis is that capitalism requires government intervention or it faces inevitable catastrophic market failure. He begins to write about a troubling possibility - that our government is structurally inadequate to provide adequate intervention - but he derails himself by ranting too much about Republicans and pointing fingers at specific people. Perhaps with a few years perspective he could write a much better book on the same subject.
November 18, 2009
Judge Posner offers some of the greatest insight into the financial crisis that I have seen. Because the author comes from a background outside of the financial world, the book is geared for people outside of the macroeconomic or financial communities.
The book was released in the first half of 2009, so the author was not able to address the headline grabbing events that have unfolded with General Motors and Chrysler. However, I would recommend the Becker-Posner Blog if readers are interested in further insights from one of the greatest minds our country currently has to offer.
The book was released in the first half of 2009, so the author was not able to address the headline grabbing events that have unfolded with General Motors and Chrysler. However, I would recommend the Becker-Posner Blog if readers are interested in further insights from one of the greatest minds our country currently has to offer.
August 27, 2009
A failure of interpretation.
Posner basically argues that government prepared the tinder for the financial meltdown and started the fire, but concludes capitalism failed? He also doesn't seem to understand or note the role that rating agencies played in the meltdown and how the SEC impacted them.
Many of the dots are there, but I don't believe he connects them, though many of his arguments are very good and he is a clear and lucid writer for the layman.
However, Thomas E Woods book "Meltdown" is a much better book for understanding the financial crisis and its remedy.
Posner basically argues that government prepared the tinder for the financial meltdown and started the fire, but concludes capitalism failed? He also doesn't seem to understand or note the role that rating agencies played in the meltdown and how the SEC impacted them.
Many of the dots are there, but I don't believe he connects them, though many of his arguments are very good and he is a clear and lucid writer for the layman.
However, Thomas E Woods book "Meltdown" is a much better book for understanding the financial crisis and its remedy.
September 1, 2010
Although this is a concise and well-written summary of the causes of the current economic crisis, Posner's policy prescriptions are much too modest. He makes much of the fact that he has decided to assign more blame to the banks than the government, but this is noteworthy only if you've read his earlier work. Like his other recent book Not A Suicide Pact, A Failure of Capitalism leaves you feeling that the author has an understanding of the problems he has chosen to address but is either unable or unwilling to present cogent, sophisticated answers to them.
November 29, 2011
Posner's conclusions about the financial crises starting in 2008 stake out an independent position that will please neither liberals nor conservatives: financial businesses, facing game theoretic pressures, are rationally forced by the market to take riskier positions in low interest rate and low regulatory conditions, and therefore only stronger regulatory conditions can prevent asset bubbles. Agree or not, it is a closely reasoned position arguing persuasively for more stringent financial regulation in the future.
Read
July 26, 2011An interesting book about the housing bubble and economic collapse. Posner is a libertarian but the lessons he takes from the recession are not those free marketeers would like. It is amazing that such a big collapse has been studied so little. And it surprises me that people responded to the crisis by reading Ayn Rand rather than figuring out how the capitalist system failed on this one. Hint: the answer is not less regulation of banks.
April 19, 2013
A very instructive book, even considering that the author repeats often the main arguments from different points of view just to make them hit home with the reader. In a way, it is very pedagogic, because it is written avoiding the economic terms that may obscure sense and understanding. The main conclusions are very clear, and repeated in the last chapter. It is important to learn from this traumatic experience, in order to avoid, as far as possible, new occurrences in the (near) future.
June 5, 2009
This was a concise, intelligent account of the financial crisis, followed by a lucid analysis of the crisis. The overall judgment, more or less, is that no one was really "at fault" for the crisis, but that the market failures that caused this crisis are inherent in markets and that perhaps better regulations are needed.
June 12, 2010
Reading this, almost 2 years following the crash that it dissects, I feel a bit behind the times, which contributed to my stalling out at several points throughout the read. Posner makes some good points regarding the shared responsibility of government and the free-market for the crisis. Overall, an interesting, if dry read. It is short.
July 30, 2011
A very clever guy who sees the present economic turn down as a depression, not recession. Some interesting things to say about the causes of the present mess. He throws brickbats at both conservatives and liberals. Too long but if you interested in an analysis different then you get from the media it is worth the read (assuming you know which parts to speed read) !!!
Read
February 26, 2012Very well written towards the layman's understanding. Pretty much explains what went on and who and what was to blame for the mess. Shows what led up to the conditions that allowed this to occur and it is refreshing to hear someone actually describe what we are in for what it really is, a depression. Well worth a read, even if it is dated.
January 20, 2016
This gets repetitious as Posner continues to unwind what is essentially the same argument in response to each aspect of the current economic crisis, but it is an unusually coherent, articulate argument that should be read: we are in a depression; it was caused by rational capitalist behavior; and the only way to avoid these problems is governmental regulation.
Want to read
May 29, 2009To read as a companion to Krugman's
The Return of Depression Economics and the Crisis of 2008
.
August 10, 2011
Decently balanced approach in its analysis of the current economic crisis we are in, mixed with historical perspective. Also places blame on both political ideologies in their short-sightedness in regards to human nature and economic markets.
didn-t-finish
July 31, 2013This isn't so much of a DNF as it is a not right now. I just do not have enough brain power to spare for Failure right now. It's an exhaustive study written by a federal judge. Intense and dry, but probably worth it. When I am in a place where I can read smart again I'll pick it back up:)
Want to read
October 17, 2015(Excellent review in the New York Times.)
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