By Richard A. Posner, Harvard University Press, Cambridge, Mass., 402 pages, $25.95
‘Hard times, come again no more,” implored Stephen Foster. The plea went unheeded. Relentlessly, the business cycle has continued to inflict its periodic cruelties on the deserving and the undeserving alike. In “The Crisis of Capitalist Democracy,” Judge Richard Posner of the U.S. Court of Appeals for the Seventh Circuit analyzes at length the hard times from which we hope we are now emerging. He treats the political as well as the economic aspects of his subject.
To begin, this is not an easy book. Readers seeking light summer reading must look elsewhere. The author deals with abstruse concepts that sometimes involve recondite terminology. He goes in for long, complex sentences, True, Posner once again shows his skill at writing for the uninitiated, but it takes concentration and patience to grasp his explanations and arguments.
By no means renouncing his conservative credentials, the author makes it plain from the start that he is no libertarian. In his introduction he argues, “a capitalist system cannot consist just of free markets.” Some degree of regulation is required. Thus, he maintains, “A combination of unsound monetary policy and regulatory inattention brought on the banking collapse of September 2008.”
The book explains in an early chapter how the collapse of Lehman Brothers in that month turned a year-old cyclical decline into a credit crisis that led in turn to what the author insists must be called a depression. What sort of policy, many have asked, could have caused the Treasury Department and the Federal Reserve to let Lehman perish (“a colossal blunder,” in Posner’s opinion), when just six months earlier they had rescued Bear Stearns? The author answers, “In fact, there was no policy, just a series of ad hoc responses by a government caught by surprise.”
In detail that some readers may find burdensome, the author takes it from there. He goes into everything that happened to the economy and everything that government agencies did to try to restore the country to economic health. He takes up the Troubled Assets Relief Program, the help given to General Motors and Chrysler, the $787 billion stimulus appropriation of February 2009, the “stress tests” that Treasury administered to certain banks in early 2009, the “cash for clunkers” program, the tax credit granted first-time home buyers and much more.
The author’s approach to these remedial efforts is generally critical, sometimes harshly so. (He calls the proposed Consumer Financial Protection Agency “a step in the wrong direction.”) Yet his criticism extends farther and deeper than the bare “no” that supporters of the Obama administration impute to its legislative opponents. He displays a broad and profound knowledge of economics, history and high finance. He relies on the teachings of John Maynard Keynes, “the greatest economist of the twentieth century,” and other respected authorities. He expresses approval of President Franklin D. Roosevelt’s handling of the 1933 banking crisis.
When it comes to the fixing of blame, the author concentrates on the public sector. As a principal culprit he names Alan Greenspan, chairman of the Federal Reserve Board from 1987 until Jan. 31, 2006. According to Posner, Greenspan first contributed to the housing bubble by keeping interest rates at a level that facilitated home buying and then both denied the existence of such a bubble and assured that if housing prices collapsed the Fed could by itself “mitigate the fallout when it occurs.” The author asserts that Greenspan’s successor, Ben Bernanke, has maintained the same attitude and the same policy.
The book takes a positive turn in a late chapter. Posner offers 11 suggestions of how to prevent future depressions. They include undoing the 1999 repeal of the Glass-Steagall Act, the New Deal measure that separated commercial from investment banking. He advances his ideas only tentatively, however, in the belief that the present downturn requires still further study.
No happy ending awaits the reader who makes his or her way through the 388 pages of Posner’s text. In his last chapter he cites “features of the American political scene that suggest that the country may be becoming in important respects ungovernable.”
Having time and again mentioned political barriers to economic reforms, he now goes into detail. Decrying the influence of special interests, especially labor unions, he calls our legislative system “one of quasi-bribery.” He deplores our “short electoral cycle (major federal elections every two years)” as discouraging politicians from thinking in long-range terms. Adding other counts to the indictment, he poses the disturbing question “whether the United States has an institutional structure and political culture equal to the economic challenges facing it.”
‘Many days have you lingered around my cabin door,” complained Foster to the hard times whose return he dreaded. We, too, have endured a prolonged stay by the same unwelcome visitor.
Whether or not Judge Posner has pointed the way to warding off future economic disasters, he has shown, in convincing terms, exactly what happened this time and, in his brilliantly informed opinion, why. He has earned thanks for a significant contribution to the alleviation of an affliction that has vexed the lives of so many for so long.
Walter Barthold has retired from the practice of law in New York City.