Posner’s A Failure of Capitalism (from June 7, 2009)

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 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 as a participant; 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.

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