Capitalist democracy crisis

It is three years since the failure of two Bear Stearns hedge funds signaled the start of the biggest financial crisis since the Great Depression, and the air is thick with the sound of stable doors being shut long after the horses bolted. At some point this year a vast new picket fence will be built around the entire ranch, in the form of a new financial regulation act.

Both these [proposed legislation] measures recall the old British sitcom “Yes Minister,” in which all crises elicited the following response from the clueless politician Jim Hacker: “Something must be done. This is something. Therefore we must do it.” As Richard A. Posner argues in “The Crisis of Capitalist Democracy,” Congress is rushing to devise remedies for a crisis we have not yet properly understood. Indeed, the House bill explicitly commissions studies of the causes of the crisis while at the same time legislating to prevent its recurrence.

The Crisis of capitalist democracy
By Richard A. Posner
402 pp. Harvard University Press. $25.95

Posner is a man for all crises. Although he made his reputation as a specialist in antitrust law (he is a judge in the Court of Appeals for the Seventh Circuit and a senior lecturer at the University of Chicago Law School), he wrote extensively on the subject of terrorism and other cata strophic threats in the wake of the 9/11 attacks. His indefatigable intellect has been equally engaged by this new crisis. He has written one book, “A Failure of Capitalism,” at least 10 articles and umpteen blog posts on the subject. This latest volume is a plea for us to understand first and pass legislation later.

In Posner’s eyes, we are living through a second depression. The root causes were a failure of monetary policy (the Fed kept its short-term interest rate too low between 2001 and 2004), a failure of regulatory oversight (the Federal Reserve and the S.E.C. were “asleep at the switch”) and a failure of intellectual rigor (economists claimed that the enlightened self-interest of bankers and shareholders would suffice to prevent such a crisis).

Greenspan is at the top of the list of the responsible parties, surely. And it is a long list.

After the crisis began, matters were made much worse by the “colossal blunder” of allowing Lehman Brothers to fail. Happily, successive administrations responded by running huge fiscal deficits, a Keynesian remedy of which Posner wholeheartedly approves. Unhappily, the public became distracted by “demagoguery about executive salaries and perks,” which were not themselves a cause of the crisis. Worse, Congress began prematurely legislating to increase financial regulation, forgetting that “anything that limits the rights of creditors causes them to raise interest rates, thereby reducing economic activity.”

Excoriating fat cat bankers and Wall Street satisfies the blood lust of the populace, but diverts attention to what really matters: understanding what happened, then fixing the system. But demagoguery will not allow for time to be taken, for elections loom and the advantage must be taken now.

By directing their fire at bankers, Posner suggests, legislators want us to forget that among “the major culprits in our present economic distress” have been “government officials.” Moreover, the new regulations being discussed in Congress are tending to increase uncertainty in financial markets, another drag on recovery. More and more, the question is whether or not the United States is actually “governable” — hence “the crisis of capitalist democracy.”

Among, yes, among many.

A born-again Keynesian who remains an ardent opponent of big government, Posner may remind some readers of the two-headed pushmi-pullyu in the Doctor Dolittle books.

Seems a contradiction to oppose big government and favor deficit spending.
For Posner, the American system of government is “cumbersome, clotted, competence- challenged, even rather shady.” He confesses himself “perplexed by how government . . . has managed to escape most of the blame for our current economic state.” Well, maybe because his fellow Keynesians have relentlessly lauded government as the solution.

What nonsense, to blame government and Keynesians.


Otherwise, we should apply lessons that have already been learned in the realm of counterterrorism. We need more rotation of senior personnel among government financial agencies; better funding of those agencies; more pooling of intelligence between those agencies.

Real reform is opposed by Wall Street money, and it will be given to those who defend its interests.

Posner makes it clear that he understands the risks the United States now faces as the crisis of private finance continues its metamorphosis into a crisis of public finance: an exploding debt relative to gross domestic product; larger risk premiums as investors prepare for higher inflation or a weaker dollar; rising interest rates; a greater share of tax revenues going for interest payments; a diminishing share of resources available for national security as opposed to Social Security. “As an economic power,” Posner concludes, “we may go the way of the British Empire.” Indeed. It seems not to have struck the judge that British decline and the rise of Keynesianism went hand in hand.

Oy.