Letter from Lhasa, number 202. (Posner 2010): The Crisis of Capitalist Democracy
by Roberto Abraham Scaruffi
Posner, R. A., The Crisis of Capitalist Democracy, Harvard University Press, 2010.
(Posner 2010).
Richard A. Posner
Despite the deceiving title, this is only a useful and compact work on the last economic and financial events with, usefully and perhaps inevitably, some normative suggestions. This “democracy” in the title is just the irrelevant consequence of current brainwashing. Also “capitalist” is not really pertinent, since the author seems to suggest regulations, not some collectivist outcome.
The book analyses the current economic and financial crises and denounces a series of failures at government and intellectual-academic levels.
“The combination of low interest rates and inadequate banking regulation” made the banking system unsafe. (Posner 2010, p. 13).
The mathematization of rationality has put aside psychological, sociological, historical and other elements. (Posner 2010, p. 31). Rational expectations are not really useful. They are deceptive, if used for understanding real dynamics and evolutions.
Somebody created and exploited the myth of housing property.
“Housing debt in the United States is huge – something like $12 trillion, which is roughly the size of the national debt and almost as large as the gross domestic product (the market value of all goods and services sold in the U.S. economy during a year).”
(Posner 2010, p. 40).
When all that collapsed, a lot of people remained without housing properties, although property rights` be inevitably in somebody/something hands.
“Early in 2008 Congress appropriated $168 billion for income-tax rebates to stimulate economy, hoping that the recipients would spend rather than hoard the rebates; in retrospect, the rebates were a first instalment in what in February 2009 became a much larger stimulus program. (...)
“The big financial collapse, however, did not occur until mid-September – after the government thought the situation had stabilized. In a period of weeks the government saved the major banks (plus American Insurance Group) from bankruptcy – all but one, Lehman Brothers.”
(Posner 2010, p. 41-42).
Not only greediness, also the securitization mechanisms contributed to the final collapse. If a mortgage is in some way insured, financial products based on it seem decidedly safer.
“Securitization contributed to the housing bubble in two ways. It attracted foreign capital to the mortgage market, which helped keep mortgage rates down (given the Fed’s complacency about low interest rates). And by enabling credit standards to be lowered, because securitized mortgage debt was thought (not without reason) safer than conventional mortgage debt, it expanded the pool of people who could buy a house.”
(Posner 2010, p. 47).
The author is decidedly for interventionist policies, at least in emergency situations. His arguing does not seem senseless:
“Bailing out an insolvent firm creates not only moral hazard but also inflation. Bailing out a solvent firm does not. When the loan is repaid, the central bank, by retiring the cash that it receives, can restore the money supply to what it was before the loan was made; in contrast, bailing out an insolvent firm may well increase the money supply, because the loan is quite likely not to be repaid. Inflation and moral hazard resulting from bailing out insolvent banks are indeed costs of trying to avert a financial collapse, but they have to be traded off against the costs of the collapse.”
(Posner 2010, p. 66).
When collapses happen, it is easy, because demagogic, to accuse unidentified “speculators”:
“One reason not to demonize speculators is that speculation in credit-default swaps, by revealing changes in default risk, enables prompt adjustment of the amount of collateral to protect the buyer of the swap from a default by the seller.”
(Posner 2010, p. 70).
The author opposes Roosevelt and Obama for claiming that Obama and his policies are decidedly scarce and ineffective.
Obama posed and poses as a new Roosevelt while he actually did nothing and is doing nothing of what Roosevelt massively did and very rapidly. On the other side, the progressive bureaucratization of government does not allow rapid and massive interventionist actions. (Posner 2010, p. 165-166).
The author evidences also other aspects:
“Generally the most effective response to an economic downturn is monetary rather than fiscal-action by the Federal Reserve rather than by the Treasury.”
(Posner 2010, p. 113-114).
Finally, overall, the real problems are at regulatory and at intellectual levels.
“Testifying in Congress in October 2008, Alan Greenspan acknowledged that he had “made a mistake in presuming that the self-interest of organizations, specifically banks and others, were such [that] they were best capable of protecting their own shareholders and their equity in the firms.” That was a whopper of a mistake for an economist to make.” (Posner 2010, p. 168).
This is a self-confession of professional incompetence.
“The Treasury report is scathing about the financial incontinence of bankers and consumers but complacent about regulatory failures, perhaps because officials responsible for the report (to which Bernanke subscribes, though it was issued by the Treasury Department) were implicated in that failure and because the failure was bipartisan; the deregulation of banking had begun in the Carter Administration with the Depository Institutions Deregulation and Monetary Control Act (1980). Since many of the report’s authors are economists as well as officials, it is unsurprising that the report also omits mention of the complacency of the economics profession and its errors of understanding as causal factor in the crisis. Bernanke has been shameless in refusing to assign any share of responsibility for the crisis to mismanagement of monetary policy by the world’s central bankers; he was one of the mismanagers. The failure to cite budget as a casual factor on the crisis may reflect the fact that the Obama Administration’s Program, if enacted in anything like the form proposed, are likely to create immense deficits.”
(Posner 2010, p. 168-169).
“The economic crisis that began in late 2007 has been a calamity the effects of which may be felt for many years.” (Posner 2010, p. 249).
“The responsibility for preventing or remedying disasters that transcend the capabilities of the private market to avoid is a government responsibility, which our government failed to discharge. I continue to be perplexed by how government (except for its promotion of home ownership, a secondary cause of the crisis) has managed to escape most of the blame for our current economic state.”
(Posner 2010, p. 260).
“The financial deregulation movement that began in 1980 primarily involved allowing nonbanks to provide close substitutes for bank services and then allowing the banks to respond by providing the same services as the nonbanks. Even before that, in the mid-seventies, the abolition of fixed commissions rates for stockbrokers – the end of the brokers’ cozy cartel – had encouraged broker-dealers to maintain their profitability by engaging in risky proprietary trading – more dealing, less brokering.”
(Posner 2010, p. 261).
In practice, economists and political scientist were too busy to let government to corrupt them, and also professionally incompetent when capable to influence government. Even the same government and politicians & Statesmen/women were so incompetent in their jobs, and so subordinated to profiteers, that they created the conditions for the current crisis. It was not a question of less or more State, but of an efficient State there was not.
Government, political “science” and politicians & Statesmen/women failed and are failing. Economists and economic “science” failed and is failing. Mathematical models are generally correct relatively to their foundations and assumptions. The decisive point is that they have no connection with reality. Anyway, de facto, an economic “science” too centred on its mathematical models was absolutely incapable not only to forecast anything but even to understand anything.
“The economists assured government officials, businessmen, and the general public that everything was fine – they knew how to prevent depressions; there would never be another one. But when the depression hit, they said that by the way they hadn’t actually known how to prevent a depression or dig us out of one; they had only pretended to have understood depressions – depressions are too complicated for economists to model”
(Posner 2010, p. 330-331).
The author tends to mythicize Keynes. Although intellectually valuable in various aspects, Keynes was an agent and secret agent of the British militarist government in need to justify militarist policies. If one makes weapons, creates armies, devastates Europe and the world, so spending a lot of “public” money, economy goes splendidly while people dies and starves. In addition, since bureaucracies tend to self-perpetuate and to expand, there is the additional damage of a permanent devastation of people pockets and of the progressive destruction of society for imposing an omnipotent State. Finally, in the USA that was and is even worst then in the UK, since the more flexible and “Romanic” model of Empire the UK pursued and is pursuing. If one socialises losses while privatising profits, the same people’s entrepreneurialism is reduced and progressively destroyed. More successful than entrepreneurship is to be connected with a corrupted government and with corrupted officers and officials.
The massive Keynesianism of the US militarism did not avoid neither attenuate the crisis. It is part of it.
The two last chapters of the book are normative.
Chapter 11 proposes “reform”. An Inquiry Commission is an open deception, since how Statesmen-governments create such commissions and drive their works. The other nine points suggest different regulations and mechanisms for a supposedly better government/State working in this field.
Chapter 12 suggests some protectionism.
“But probably the countries harmed by the restrictions will retaliate (...). For countries like the United States that export much less than they import, however, import substitution by domestic producers may more than offset the loss of foreign markets for domestically produced goods.”
(Posner 2010, p. 365).
“And protectionism sometimes works. A good example is China’s policy of maintaining a rate of exchange between Chinese currency and the American dollar that by overvaluing the dollar makes Chinese goods cheap in the United States and American goods dear in China.”
(Posner 2010, p. 365).
This is actually a bad example, because the UK and the US Empire have planned, about China, to build a strong and obtuse militarism willing to dominate the world since the number of its ethnically homogeneous subjects [what actually are not since the deep linguistic divisions in China, within the same Han “ethnicity”], for later triggering an annihilating war against it and against East Asia, a kind of final solution also for Japan, which, not differently from China, has abundant quantities of nuclear weapons secretly built (relevant quantities of nuclear material for military purposes [not] “strangely” disappeared and are disappearing in Japan!). While exploiting China and partially destroying the same US economy for that, finally the USA and the UK do not worry too much of that because there is a [secretly] nuclear Japan facing China, a Japan with a lobotomized population ready to obey whatever insane and criminal order, not differently from China, so ready for a east great Asian clash.
Posner, R. A., The Crisis of Capitalist Democracy, Harvard University Press, 2010.
