Easy Credit and the Depression - Judge Posner @WSJ.com - The Diigo Meta page

• 06 May 09
  

  Lewis Miller

  Who's to blame and who's responsible for the recession? Judge Posner, who calls it a depression, distinguishes between the roles played by government and the private sector. "Although financiers bear the primary responsibility for the depression," he writes, "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." A pragmatic explanation for behavior that looks irrational in retrospect shows that it was logical, based on incentives at the time. Blame lies elsewhere: "The responsibility for building the fences that prevent an economic collapse as a result of risky lending devolves on the government."

  • Who's to blame and who's responsible for the recession? Judge Posner, who calls it a depression, distinguishes between the roles played by government and the private sector. "Although financiers bear the primary responsibility for the depression," he writes, "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." A pragmatic explanation for behavior that looks irrational in retrospect shows that it was logical, based on incentives at the time. Blame lies elsewhere: "The responsibility for building the fences that prevent an economic collapse as a result of risky lending devolves on the government."
  • As Judge Posner told me in an interview, "The role of bankers is to operate banks, which is inherently a risky business. It's not to save the economy." But he disagrees that government is chiefly responsible. Banks are responsible in the sense that as each financial firm made rational choices for itself, such as embracing new credit instruments, these choices in aggregate created huge risk to the system.
  • 3 more annotations...
  • • The conventional wisdom is that very smart bankers misunderstood their own interests. In a capitalist system, if you can't trust self-interest, what can you trust? Judge Posner instead reminds us that shareholders would have punished individual banks that failed to take advantage of low interest rates and seemingly safe, mortgage-backed securities. Likewise, consumers acted rationally over the years to accept offers of mortgages they couldn't afford, given the low risk of a burst bubble.
    • "At no stage need irrationality be posited to explain what happened," Judge Posner writes. Instead, this was a case of "intelligent businessmen rationally responding to their environment yet by doing so creating the preconditions for a terrible crash." He chiefly blames the Federal Reserve, for "cheap credit."
    • If we can agree that the private sector is responsible but the government gets the blame, we can move on to prevention. A streamlined set of regulators with access to public and private information should be charged with tracking systemic risk. We also need clear, predictable rules for how the Federal Reserve and other regulators would respond to various risk situations, which would give financial markets clearer rules of the road. Under this view, Washington's on-the-fly approaches to banks, autos and other industries risks further undermining confidence.
• 04 May 09
  

  David Palme

  finance depression recession

• 

  Gary Edwards

  What caused this recession? We still don't have a simple explanation. Such is the uncertainty sapping the country's confidence that in a recent Rasmussen Reports poll only 53% of Americans said they prefer capitalism to socialism; 27% were unsure and 20% preferred socialism.
  
  Before seeking political asylum in free-market Hong Kong, consider reading a new book that critiques what went wrong with capitalism, written in order to save it. Judge Richard Posner's "A Failure of Capitalism: The Crisis of '08 and the Descent into Depression" is noteworthy. As a longtime University of Chicago professor and father of the free-market-based law-and-economics movement, Judge Posner makes an unlikely critic of capitalism. But as author of some 40 books and as the most frequently cited federal appeals court jurist, he is also one of our most original and clearheaded thinkers.
  
  Who's to blame and who's responsible for the recession? Judge Posner, who calls it a depression, distinguishes between the roles played by government and the private sector. "Although financiers bear the primary responsibility for the depression," he writes, "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." A pragmatic explanation for behavior that looks irrational in retrospect shows that it was logical, based on incentives at the time. Blame lies elsewhere: "The responsibility for building the fences that prevent an economic collapse as a result of risky lending devolves on the government."

  financial-crisis obama-socialism

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