Books like The Crisis of Capitalist Democracy

Posner's a very smart and objective dude, but this ain't exactly scintillating stuff being analytically rendered for the reader's edification and enlightenment. Thanks, in no small part, to my majority consumption of the Judge's verdict in the airport departure lounge and airplane cabin on my trip back to Ontario for Christmas, I was able to somewhat hold my own in discussions with my elder brother at the dinner table, for which I will most happily deliver unto this excellent-but-exceedingly-utilitarian tome a thumbs-up.This is Posner's second book on the economic crisis of 2008 and its consequences, following-up his original 2009 publication with one that not only analyses what happened from the vantage point of further and clearer information, but allows this inquisitive judge the opportunity to reflect upon what he has learned and determined in order to assemble an (admittedly brief) collection of possible reforms that he proposes could be introduced or amended to existing legislation in order to try and prevent such a catastrophic situation from reoccurring in the future. Posner finds himself in the unusual position of being a Monetarist of the Chicago school persuasion who has now emerged from the disaster of 2008 with a newfound appreciation for the insights of John Maynard Keynes on the actual workings and underpinnings of financial markets and the macroeconomies within which they operate, the requirement for government intervention in the face of slumping demand during a panic and/or crisis. In other words, he has gone from a maths-dominated modeling of efficient and perfect markets to the psychological and inductive determinations of a British polymath who understood that uncertainties and their attendant irrationalities were a commonplace and important part of how human-operated economies functioned. This binary transformation actually allows Posner to come at the material with an appreciable degree of objectivity—the reader can follow his chain of logic upon the page and see how the author can determine both the unintended and/or unwanted consequences of one specific set of actions and then those that would or might take place under the antithesis of the original proposition.The majority of the book comprises Posner's reconstruction of the crisis of 2008, with the relevant major events of each intervening period used as a springboard for the author to describe the workings of the differing financial vehicles and institutions involved and how they related to the intertwined economy of the United States and its major trading partners. Primary blame, in Posner's determination, must be placed squarely upon the Federal Reserve (and, hence, its well-known chairman Alan Greenspan) for allowing the fund rate to remain low for an extended period from 2000-2004, a decision which allowed asset price inflation to blossom, especially in the mortgage market. With monetary inflation well under control, the Fed was loathe to attempt any popping of an inflated asset bubble, preferring to deal with whatever financial fallout might occur when it inevitably imploded on its own; Posner holds this to have been remarkably short-sighted, as the preventative measures, in his calculation (and as we have seen), would have been far less expensive and recessionary than what actually transpired when things went sideways. He also sees a disastrous mixed message sent out by the Fed's decision to enable the rescuing of Bear-Stearns when it went down in March 2008, only to allow Lehman Brothers to collapse without any aide six months later. Posner deems that the Fed should have either helped both or allowed both to flounder; the message sent by the action they did undertake was an ill one—the bailout of Bear Stearns having reassured the finance industry that the Fed would not permit a prime broker to fail, when Lehman did it sent out shrieking alarm signals, to the effect that Lehman must have been insolvent and thus, in all likelihood, the other prime brokers were insolvent or in danger of such, instigating a massive run on the shadow banks. Confidence is such a crucial component of the economy, and in order to shore up the panic instilled by Lehman's implosion, the Fed had to craft quick emergency deals with the other prime brokers that were, perforce, less to the government's (and, by reasoning, the tax-paying public's) stipulations than might otherwise have been the case.Posner provides a well-structured detailing of this shadow banking industry that operated alongside, and ofttimes in competition with, the more strictly regulated commercial banking sector, and the repeal of the Glass-Steagall Act that removed most of the barriers between the two separate financial arms. Posner also provides a lucid explanation of the various financial instruments at play, especially concentrating upon the encompassing diversification of risk that was enabled through such creations as collateralized debt obligations, structured investment vehicles, and credit default swaps, all various mathematically complex instruments designed for speculation and/or hedging against debtors (primarily mortgagors) defaulting on their debt. Most people by now are aware of the intricate tranches of differently-rated mortgages (including the infamous subprimes) parceled out within the CDOs in order to create instruments with attractions to risk-averse investors and those seeking higher returns. This diversification also served to remove much of the hedging activities from the various bank's balance sheets, thus enabling them to leverage themselves ever higher with additional loans; Posner also points out how this diversification removed the lending institutions from contact and involvement with the individual mortgages, leaving them to be collected by third-party agencies with no direct knowledge of the mortgagors. What's more, in Posner's determination the lack of regulation upon the credit-swaps made it extremely difficult to determine how exactly they affected each bank's solvency; and this lack of information was a contributing factor to the meltdown in September 2008, one which consequently quickly proved itself to be a crisis of solvency, not liquidity.Uncertainty does abound here, and for all of the sober presentation of a case to support his own analysis of what exactly transpired, Posner is at pains to make it clear that no exact causation has been determined for the crash of 2008, and that blame has been cast in many directions, ofttimes for political opportunism. He also hesitates to condemn individual actors within the financial industry, putting forth why their actions in leveraging themselves so highly and hedging their bets with intricate instruments were rational decisions upon their part, and stressing that it is only when each of these actors is combined in a mammoth, interlinked whole that the irrationality of their positions and the potential for disaster within them becomes apparent. He lays out why the Fed's case against rescuing Lehman Brothers is non-persuasive, and is critical of the actions undertaken by the Obama Administration, particularly singling them out for not having a cohesive and consistent (and hence confidence-building) plan of action for when the new president took office; for running a stimulus that consisted of too much in the way of tax breaks (ie, money that might be hoarded instead of spent) and spending that might have a low-multiplier or go to stimulating foreign economies in lieu of American; for targeting neither sufficient infrastructure spending nor specifically economically hard-hit areas of the country; for bungling the issue of remuneration in the banking industry, sowing uncertainty and confusion by making stands on legitimate compensation scenarios whilst abandoning those in which withholdings or reductions could be well-argued; and for investing a majority of his political capital into his health insurance reform, one that not only added to the US debt-load at a particularly inopportune moment, but signaled uncertainty and hesitation to a wobbly industry that, instead, should have been provided with reassurances that fixing the economy was priority number one and that the government's full attention and resources would be concentrated on just that. He also laid down a critique of the administration's attempts to influence business decisions at GM and Chrysler during their bailout—one since obviated, I would say—as well questioning their interference within the auto-maker's bankruptcies, setting precedents that Posner believes, while perhaps worthwhile in a period of crisis, could prove economically debilitating moving forward. Above all, though, Posner exhibits frustration with the current state of political discourse in the United States, despairing that any remedial efforts to address the crisis—its causes, effects, and recovery—will be stymied by special interest groups and/or demagoguery. In Congress' refusal to countenance certain spending cuts or any tax increases Posner sees a nation that is not serious about dealing with its economic predicament.This is all of a part of the author's curious intermingling of Monetarist leanings with his newfound appreciation for Keynes: he instinctively distrusts government to make the right decisions in any industry which inherently has better access to information while acknowledging the requirement of government to act in order to stimulate demand when the uncertainties and irrationalities that flower during a depression work to prevent lending and spending, even when banks and corporations are flush with cash. Posner has learned the hard way that there is only so much that can be achieved through lowering the Federal Fund Rate and pumping liquidity into the banking system; government must do everything it can, within reason, to assure and reassure the populace that recovery is both underway and inevitable, in order to stiffen the people's resolve to resume the spending, across the board, that is so vital to moving a nation out of depression and towards a real economic recovery. The danger lies in the probability of rampant inflation when that recovery does set-in, a reality the author feels liberal critics like Stiglitz and Krugman have dismissed far too cavalierly. Indeed, the real problem for Posner, and his efforts to workout regulatory and/or legislative solutions, is that this crisis has transpired at a unique period in the United States' existence, one where its trade imbalance is immense with billions of dollars in foreign loans required daily not for any form of investment, but rather for pure consumption. This is a seemingly untenable situation, the more so with the potential for the US dollar to degrade in value and thus the (still unlikely) possibility that it will be shed as the reserve currency of the world. The vast sums of money involved, together with the growing US debt-to-GDP ratio and, perhaps most fundamentally, the incredibly complex intertwinement and economic importance of the various branches—foreign and domestic—of the powerful global financial industry, means both that the correct regulations to undertake as insurance or prevention against a future economic crisis are problematic to determine without hobbling a nation's portion of an industry vital to the currently configured global trading paradigm; and that the extent of future inflation is difficult to gauge, not to mention the greater peril of a deflationary cycle seemingly lingering in the background and the solvency issues of the shadow banks not having been credibly resolved.