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Posner’s book
The
Crisis of Capitalist Democracy
(Harvard University Press, 2010) aims to
explain to the average reader the collapse
in US and global economies in 2008, 2009.
A US Court of Appeals Judge, Chicago Law
School lecturer and thoughtful
progressive, Posner managed to get across
some key points. The 2008 2009
financial collapse was evidently
transformative in many ways. The
prior broadcast assumption that the market
was self regulating silently disappeared.
Large
scale government intervention was suddenly
OK. Posner adds insights to all this. But
his cool explanations raise questions
about an economy driven by private greed
which requires people to spend and consume
in the name of the common good. Is the
logic really OK when it allows for bank
CEOs to depart with handsome payoffs while
the unemployed workforce finds itself with
no pension? Posner
describes the important role banking and
forms of securities play in a modern
economy. From 2000, the inflationary
“bubble” in housing mortgages went largely
unnoticed. Raising interest rates normally
controls inflation, but too little too
gradually begun in 2004 had no effect on
the housing bubble. Regulating banks is
possible, but was not tried. When this
bubble burst it had an unforeseen major
impact on the banks because their capital
was heavily in housing mortgages. “We
needed sound monetary policy or effective
regulation of banking. We got neither”
(page39). The depression was the
consequence of a governmental failure to
regulate through bodies such as the US
Federal Reserve. The book
falls into sections. The first thoroughly
covers events in a series of time periods,
the first from December 2007 to September
2008, the last June 2009 to December 2009
and a final “Depression and Aftershock
2007 –.“
Posner introduces instruction on
some economic matter in the course of
several of these periods. The second
section considers lessons learned.
Basically, finance is fragile, must be
regulated, Keynes needs to be taken
seriously and economists need to rethink
macroeconomics with bias toward objective
realities rather than mathematical
formulae and their personal political
preferences. The third section considers
the way forward and sets out a list of
things to be done. It was
reading Posner’s reinforcement of the
relevance of Keynes and what stems from
Keynes when I first worried about the
wider morality of the economical world
being accepted as the norm. Posner
reinforces the thinking of Keyne’s The
General Theory of Employment, Interest
and Money, 1936 for the very good
reason that, unlike other theories, it
can
predict depressions and respond to them.
Keynes based his economic thinking on the
facts – for example the way people in fact
behave rather than the way a rational
person might. Within
this thinking on the economic facts,
Keynes was concerned, as is many a Western
nation, with employment – or rather the
lack of it. Posner gives principles which
emerge. The first key principle of the
realistic Keynes approach is that
consumption is the sole end and object of
all economic activity. The second is the
importance of not hoarding, but rather
enabling future productive investments
which produce goods and services for
consumption. Spending is income to someone
else. The third principle is the inherent
uncertainty in economics (pages 277 281).
Posner does point out some flaws in the
otherwise helpful thinking of Keynes. As an old
timer who admired Schumacher’s book Small
is Beautiful, I was happy to find
that Keynes does not exclude the
possibility of reductions in consumption.
When there is no longer involuntary
unemployment, further efforts to stimulate
demand will merely cause inflation.
Unfortunately, the world has so far always
had a population of unhappy potentially
dangerous unemployed. The burley beggars
in medieval times have become, according
to the epilogue in Judt’s book (see my
earlier article), under-employed angry
populations in de-industrialized former
urban centres. Posner
reinforces Keynes: consumption is good for
society – saving per se is not. We can’t
get upset with bankers for taking risks
and for requiring huge salaries even when
they cause a public economic disaster
because they were doing what society has
set them up to do – take risks to make
money for bank share holders. US bankers
had to get into novel complex bundled
securities to compete with UK bankers who
were playing with them. To
interfere and require lower pay for the
bank CEO when the government bails out
some bank reduces that bank’s ability to
attract the “best” talent and impairs its
ability to make profits for its
shareholders. Posner’s
reasoning
is valid and he is right to point all this
out to us. But the result is unreasonable.
To
be fair, his key suggestions in the
Chapter “Reform you can believe in” make
sense: find out what happened, tidy up
financial regulation agencies, “regulate
off balance sheet contingent liabilities,”
reform credit rating, return to the Galss-Steagall
Act. These are not big picture
reforms and they are parochially US. To give him
his due, Posner is aware of a wider world
even though he does not look for global
solutions. He considers the role of the
European social security net to mitigate
unemployment and notes it makes business
operations less open to risk hiring. The
role of the Chinese economic policy and
the role of Chinese buying of US
securities in the bank crisis is
considered. Indeed his final chapter
considers America in a world economy, but
it focuses on the US and ends with a
worrying US structural problem around
politics in the US form of democracy and a
mounting deficit. There is no room for
international banking reforms and measures
such as the Tobin tax on international
financial transactions. Similarly, the
global climate change and environment
crisis is touched on, but remains largely
an externality rather than a challenge to
be incorporated in solutions to the
economic crisis. The role of ever more
costly oil in the current economy does not
arise. That is presumably something
economics leaves to the newly saved auto
makers. I have always
had a problem with the broad sweep
structural arrangement that allows
corporate leaders associated with a
corporation gone bankrupt to drive home to
their large houses and keep their yachts
at one of their beachfront condos while
the unemployed workforce struggles to
collect some pension dues. It seems more
galling when the government has had to
step in with public funds to sort out the
mess. I know that in the current economy I
too am personally involved in the
corporate status quo – albeit indirectly -
because my pension savings over the years
were put in a pension plan which invests
in various corporate securities. Perhaps
the government should have a role in
ensuring a pension in an (un)employment
corporate disaster? But doesn’t that just
raise questions about the structure of
corporate pensions? So to
repeat, Posner’s reasoning works.
I just question the result which
is tuned up status quo. On social
justice and maintaining social peace
grounds I want the rules to be improved
in the direction of greater equity.
According to Judt in Postwar, the 20th century
taught us that democracy is sacred. If
competition and large degrees of
commercial freedom are also valuable, as
Posner implies, then the answer is to
work to find more equitable arrangements
that will provide a new framework
governing all banks and other large
corporations - initially for the biggest
economies, but eventually
internationally. Top Click:  |