Free A Failure Of Capitalism: The Crisis Of ’08 And The Essay Example
Type of paper: Essay
Topic: Market, System, Management, Crisis, Capitalism, Administration, Bush, Politics
Descent into Depression
Descent into Depression
"A Failure of Capitalism: The Crisis of '08 and the Descent into Depression", a book by American judge Richard Posner, is a critique of institutions and a host of government policies that the author believes led to the financial crisis of 2008. The author criticizes and apportions most of the blame for the crisis to the capital system and on President George Bush's administration, who he says was greatly uninformed on economic matters. He also adds that the previous administration led by Bill Clinton set the stage for the impending financial crisis by championing progressive government policies that the Bush's administration did little to monitor its after effects.
Posner seeks to dispel two popular schools of thought; that the financial crises are caused by either greed among participants in the capitalist system or ignorance and stupidity by individuals mandated to monitor market dynamics. He argues that as for the case of 2008, consumers, business people and other market players responded appropriately to market dynamics and the society but the capitalist system itself failed on its own demands. Posner (2009) explains the shortcomings of the capitalist system that makes it difficult to monitor market trends that led to the financial crisis. He also adds that only well-informed decision makers are capable of noticing such trends and averting them.
Posner (2009) dismisses arrogance and stupidity on the part of market players on grounds that everyone involved was aware of their actions. Home buyers, after being misled by the housing bubble, were borrowing in a frenzy and the lenders, aware of the implications of huge borrowings and lending, still sought to gratify the risky borrowing fiasco. Wall Street financiers were also aware that bonds resulting from dubious mortgages were unsafe but they too did nothing because they thought any decision made to curb the menace would have been against the capitalist system itself (Posner, 2009). Everyone was left to hope that the housing prices would go up, which was the genesis of the downfall.
Posner (2009) firmly maintains that in the current economic model, people will always be reckless and stupid in a number of their business dealings but that alone does not suffice to explain all major financial crises. Mistakes that arise from poor decisions in a capitalist system are systematic as people will always seek to follow correct market signals in arriving at their decisions. It is thus possible for independent, rational decisions of each individual to turn out to be irrational and catastrophic when viewed collectively. This flaw of the capitalist market being unable to rationally anticipate its own problems is its undoing.
In addition to his views on how the capitalist system is failing, Posner (2009) also apportions a fair share of the blame to key decision makers and, to a little extent, market players. In as much as markets will at times capsize of their own accord and be unable to recover for a while, Posner argues that key policy and decision makers need to be intelligent enough to prevent the capitalist system from going off rails. Posner points out that there were early warning signs to the crisis, but absence of smart regulators in government and key public sectors resulted in the warning signs being ignored and the downturn kicking in.
His first tirade at incompetence in decision and policy making starts with President George Bush's administration and management of Wall Street by Allan Greenspan in his tenure as chairman of the Federal Reserve. Posner (2009) states that earlier attempts by Allan Greenspan to introduce favorable market conditions by lowering interest rates to increase stock prices are to blame for the housing bubble. He states that harmful subprime mortgages that later led to the economic downturn were fueled by the borrowing boom that ensued from the advent of Greenspan's policy. In Posner's view, Greenspan was merely seeking to evade political heat rather than helping the market grow by propping up stock prices.
In criticizing President George Bush, Posner states that most of his policies, and especially the policy on "Ownership of Society", were the underlying cause of the depression. In the Author's telling, Bush and his administration fostered a culture of deregulation that resulted in the market and everyone going wild. He further adds that Bush chose, in final years of his presidency, to be distant from his constitutional mandate of stabilizing the domestic economy and rather spent his time in unimportant trips abroad. Posner is also displeased with Bush's demeanor and attitude towards solving domestic problems and sees him as totally uninterested, which shouldn't be for a president.
Posner continues to add that the proposed privatization of social security, which was rigorously being pushed by Bush and his administration, would have led to a worse depression. He states that the administration had a non-existent distinction between the private sector and the government, which hindered any insight they could have had into the underlying problems. The Securities and Exchange Commission was misled to be too trusting of the current state of the securities industry which was as a result of Bush's administration pushing forward its pro-business philosophy (Posner, 2009). The author lays it out rightly that there may never have been a depression if Bush and his administration had managed the economy appropriately.
Like Allan Greenspan, Rubin went for lowering interest rates so as to increase stock prices, a move he believed would result in a vibrant market by increasing the activity at Wall Street. This false assumption later turned out to be the bubble that was experienced in housing, stock and banking sectors during the time. He also faults the concept of limited liability advocated by Clinton's administration as increasing risk to the system and criticizes the administration's obsession with short-term profits with no regard to long-term stability. Clinton, in Posner's telling, should not have encouraged home ownership by persons with bad credit. He would rather have urged them to remain tenants.
Posner (2009) concludes his book by citing that the capitalist system will survive the woes of the current downfall like it survived the great depression, only that this time there will be no far-reaching consequences. He also offers several suggestions on how to possibly turn things around, which include re-regulating the banking industry. Other reforms he believes might be helpful are completely doing away with home ownership promoted by the government and let market prevailing dynamics control home ownership. He also states that banks and other financial institutions should be required to disclose their full compensations to senior executives and that the government should introduce usury laws to de-motivate issuance of risky loans.
Posner (2009) also warns that some measures are not feasible at current and suggests waiting for "calmer days" to strategize on effecting them. He argues that critical financial regulations and institutions may need a major overhaul to be able to avert future crisis, but suggests that this be taken as a long-term plan to give the economy time to recover. He also hints at a possible re-organization of the Federal Reserve Bank and the Treasury and again suggests this be done at a later time to avoid destabilizing an already imbalanced economy. Posner's work does a lot in illuminating the crisis of 2008, and while it may not find a huge significance in public policy, it surely points to where our major financial problems lie.
As a member of United States Court of Appeal since 1991 and author to a host of impressive scholarly works that span three decades, Posner is undoubtedly, uniquely qualified to write a book of this stature. His approach to issues which involves laying out the problems out rightly and seeking the truth in them rather than just defending a belief system is exemplary. His act of also admitting that a system he has promoted for a greater part of his yesteryears can have inherent flaws is an attest to his rationality. The methods employed in his book in connecting cause and effects of the depression are enlightening and will even appeal to a lay man whose understanding of markets and its dynamics is shallow.
Posner, Richard A. 2009. A Failure of Capitalism: The Crisis of ’08 and the Descent into
Depression. Cambridge, MA: Harvard University Press