A Failure of Capitalism: The Crisis of '08 and the Descent into Depression

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A Failure of Capitalism: The Crisis of '08 and the Descent into Depression

by Richard A. Posner

3.44 · rating details · 77 ratings · 27 reviews

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-b

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Hardcover, 324 pages

Published May 15th 2009 by Harvard University Press (first published May 1st 2009)

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Oct 20, 2009

Bruce rated it

A conservative thinker himself, Posner is convinced that our present financial crisis is not a recession but rather a depression. And, unlike some conservatives who think that the dilemma is the result of government policies, Posner thinks that it is a failure of the market itself. Among many other interesting points, he notes that the motivations and rationale for individual financial decision making is counter to what is best for the overall economy, ie to save and reduce consumption in hard...moreA conservative thinker himself, Posner is convinced that our present financial crisis is not a recession but rather a depression. And, unlike some conservatives who think that the dilemma is the result of government policies, Posner thinks that it is a failure of the market itself. Among many other interesting points, he notes that the motivations and rationale for individual financial decision making is counter to what is best for the overall economy, ie to save and reduce consumption in hard times and spend when the economy is doing well, such individual behavior causing whatever the economy is doing to become more extreme and therefore dangerous. For such a reason, among many others, government involvement in the economy cannot be simply to prevent waste and fraud, since the very nature of a market economy involves such a conflict of individual vs collective economic interest; the arguments of libertarians are thus inherently flawed. Posner’s reasoning and arguments are challenging for me to follow and, even more, to remember, but he provides helpful analogies and examples to clarify the points he tried to make.

One important reason that Posner suggests as the cause of the current depression was not the willful and nefarious behavior of business and investors, all of whom were acting in predictable and rational ways, but rather the negligence of government in constructively regulating the economy and, in fact, by deregulating it, thus setting up the inevitable problems that have occurred. He is not shy about also blaming Republican free-market ideology from preventing political appointees from being able to see beyond their own preconceptions and from having the incentive and will to introduce proactive preventative measures that would have raised the ire of business and Congress; he has absolutely nothing good to say about the second President Bush and his Administration. He cites example after example of current government economists, those who are trying to salvage the situation, as being the very economists who misread the situation in advance and incorrectly reassured everyone that the depression simply could not happen. Not very reassuring, is it?

I find it interesting to compare Posner’s book to the recent book by Paul Krugman. The two authors come from seemingly opposite ends of the political spectrum, and Krugman devotes more discussion to how various government policies and interventions did or did not work in international financial crises over the past several decades, but both have been helpful for me in understanding not only the nature of the current problem but various views regarding both causes and suggested solutions. I am far from having a head for economic issues, and I must confess to little general interest in them; in fact, I pick up books like this either because I feel guilty for not being better informed or because someone has suggested that I might benefit from more information and contrasting views. As I read such works, I broaden my understanding, at least for a time, although I cannot say that at the end I could easily summarize what I’ve read, maybe an indication that I didn’t understand as well as I wished or thought.

Posner writes: “The depression is a failure of capitalism, or more precisely of a certain kind of capitalism (“laissez-faire” in a loose sense, “American” versus “European” in a popular sense), and of capitalism’s biggest boosters.”

The book was both informative and entertaining, and I do not hesitate in recommending it to others.
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May 13, 2009

Jeffrey rated it

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...moreAt 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. (less)

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Jun 07, 2009

R. Kevin rated it

There is a puzzling mismatch between the content and the purpose of this book. Posner insists that it is the market, not the government, that is essentially to blame. He then goes out of his way to show that low interest rates (set by the Fed, a part of the government) induced rational actors in the market to create the bubble. Though he mentions a variety of other factors, this seem to be the principal factor. So this is a very helpful book if you actually read it, because he seems to have anal...moreThere is a puzzling mismatch between the content and the purpose of this book. Posner insists that it is the market, not the government, that is essentially to blame. He then goes out of his way to show that low interest rates (set by the Fed, a part of the government) induced rational actors in the market to create the bubble. Though he mentions a variety of other factors, this seem to be the principal factor. So this is a very helpful book if you actually read it, because he seems to have analyzed the situation correctly. But this makes it all the more perplexing that he calls this a failure of capitalism. The only explanations for this oddity that I can think of is that he thinks of the Fed as a market participant, which of course it is in a sense, or that he calls "capitalism" the total system which includes all the markets and their participants and the government structures that sustain and regulate them. The problem with the former is obvious, since the Fed is more appropriately thought of as a market structurer, not participants; the problem with the latter is that the polemical tone of the title and matching passages within makes no sense if he means "what caused the system to collapse was... the system, collapsing." If one can read past this pervasive oddity (explained, ultimately, I think, by Posner's hostility to the current Republican Party and an unwillingness to be perceived as giving in at all to a demonizing the government line that might associate him with them) it is a useful book for non-specialists, simply because the party lines we are getting from both parties are so wide of the mark (the Democrats' time honored target is "greed" [Wall Street:] and the Republicans' time honored target is "compassion" [Fannie Mae and Freddie Mac:]). Until people begin to grasp that the great inflation fighter Alan Greenspan panicked in the face of the dot.com bust and decided to stimulate the economy with low interest rates, thus making mortgage borrowing overly attractive and creating the bubble, we will not begin to grasp what the Austrians have understood for decades: the unmanageability of fiat money.(less)

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Jan 18, 2011

Telly McGaha rated it

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 a...more

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Mar 24, 2010

Sean rated it

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 b...more

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Aug 19, 2010

Brayden rated it

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 K...more

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Aug 18, 2010

John rated it

Shelves: history-sociology-economics

A fine account of the financial crisis, though I could have done without Posner's irrelevant jibes about "adversarial unions." Also, while I tend to agree that the financial crisis was precipitated by easy credit and the decades-long trend toward deregulation, it seems a bit convenient to have a confident diagnosis for now but then to say that we shouldn't re-regulate until after the crisis is long-over because only with hindsight will we have a clear picture of the causes of the depre...more

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Feb 23, 2010

CutFromAbove rated it

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 barel...more

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Aug 27, 2009

Drex rated it

Shelves: partially-read

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, Tho...more

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Nov 29, 2011

John rated it

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 regu...more

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Sep 19, 2009

Jamie rated it

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 ...more
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).

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Jul 30, 2011

Peter rated it

Shelves: contemporary-non-fiction

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) !!!

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Jun 11, 2010

Scott rated it

Shelves: non-fiction

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.

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Jun 05, 2009

Max rated it

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.

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Jul 25, 2011

Kevin added it

An 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.

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Aug 10, 2011

Chandler added it

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.

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May 29, 2009

G. Branden marked it as to-read

To read as a companion to Krugman's The Return of Depression Economics and the Crisis of 2008.

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Mar 12, 2010

E.J. Matze marked it as to-read

Recommends it for: b-cyclists

Recommended to E.J. by: The New York Review of Books

Shelves: science, business

minationn of the current financial crisis for the non-specuialist who wants to... (The New York Review of Books Volume LVI, Number 8 May 14 - 27, 2009.)

The New York Review of Books

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Dec 22, 2011

Albert Derbes rated it

Shelves: economics

The basic premise, that the crisis is one of insolvency rather than liquidity, is correct. His treatment of the possible role for bankruptcy law in solving the Great Recession is in error.

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May 15, 2009

Richard marked it as to-read

Recommended to Richard by: NY Times Review

Shelves: economics, non-fiction

(Excellent review in the New York Times.)

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Nov 18, 2009

Dave rated it

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 in...more

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Sep 01, 2010

Oliver L. rated it

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 unabl...more

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Sep 21, 2009

Brook Miscoski rated it

This is a pretty panoramic explanation of the crisis, even if it has flaws.

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May 30, 2009

Chaucersbooks added it

Shelves: ed

Ed's pick of the month for May 2009.

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Sep 01, 2010

John rated it

This book is especially fascinating since it is written by a Reagan-appointed conservative (7th Cir) federal judge.

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Nov 28, 2010

Adil Ahmed rated it

blames the system, not specific investment decisions. i get it, but prescriptions are still not clear.

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Jul 16, 2010

Anthony rated it

I wrote a review for HLPR, available here:
http://hlpronline.com/2010/04/kammer_pos...

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Feb 08, 2012

Rodney Ulyate marked it as to-read

Jan 31, 2012

Angela marked it as to-read

Jan 31, 2012

Daniel marked it as to-buy

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About Richard A. Posner

Richard 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 ...moreRichard 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 currently presides. 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.(less)

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