Book Brief: The Crisis of Capitalist Democracy
by Ciara Torres-Spelliscy
Former Federal Reserve Chairman Alan Greenspan offered his mea culpa for overestimating the ability of markets to self-regulate. Testifying before Congress in October 2008, at the height of the financial collapse, Greenspan said 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.”
Judge Richard A. Posner, one of the great boosters of free-market economics, offers no such apologies. Absent from Posner’s book, The Crisis of Capitalist Democracy, is his own "Greenspan epiphany", one which would perhaps acknowledge his enormous support for the system now crumbling at a scary speed.
Reading Judge Posner’s latest opus gave me the odd sense of having been dropped, Alice-in-Wonderland style, in into the rabbit hole that is Judge Posner's personal and conflicted response to America’s recent economic crack-up. On one page, Posner offers lucid prose about the toxic mix of a poorly regulated financial industry, cheap money, and enthusiastic home buyers who didn’t bother to read the fine print on their sub-prime loan agreements. Then, on the next, Posner flies into long reveries about Keynes and what all his impenetrable metaphors really meant and the psychology of economic depressions; he peppers the page with perplexing passages about bankers who, in Posner’s view, shouldn’t be blamed for the crisis, since their behavior was professionally rational.
Judge Posner divides his mental universe into two distinct compartment, the worthy and the unworthy. John Maynard Keynes, Milton Friedman, and bankers who take appropriate amount of risk, speculators who speculate just enough, are worthy. Regulators, who didn’t sufficiently account for systemic risk, home buyers who did not understand their mortgage terms, workers who cling to their jobs during economic depression, and post crisis advocates for consumer protection, are unworthy.
Judge Posner saves some his harshest criticisms for the Obama administration’s financial team. Its members had to stop the economic free-fall but did not, in Judge Posner’s view, get the stimulus or the bailout right. Judge Posner isn’t happy about the overlap between the Bush team (who were in control when the crisis hit) and the Obama team (who had to clean up). He is disappointed that Obama didn’t have an economic fix-it plan in hand on Inauguration day – though even Judge Posner admits depression and its causes warrant serious, detailed, and deliberative analysis. Why wants the president or his financial advisers to be shooting the dark isn’t at all clear.
But, despite the hot-and-cold nature of the book, Judge Posner wrestles with the key policy questions of the day:
- How can the U.S. -- which runs a nearly perpetual national debt (45% that is financed by foreign nations) -- ever dig itself out of the economic hole?
- How can we effectively regulate financial institutions when capital and talent can flee to other countries?
- How can we incentivize banks to take risks that don’t cause systemic risks?
- How can we build a more sustainable economy?
- How do we make tough long term economic decisions when politicians are narrowly focused on the next election?
Posner deserves credit for calling what others euphemistically call the “great recession” what it really is: a depression.
It takes him most of the book to get to the democratic problems which to which the title refers. Brennan Center Executive Director Michael Waldman has repeatedly said the financial crisis is fundamentally rooted in a political crisis. Here Judge Posner wholeheartedly agrees with Waldman.
In one of his most damning indictments of the state of American democracy, Judge Posner states:
Campaign contributions -- insulated in the name of the Constitution by a conservative Supreme Court from effective limitation -- make the legislative system one of quasi-bribery. Modern communications technology and marketing techniques, along with the expense of modern elections, amplify the influence the interest groups, especially their influence in blocking change. The short electoral cycle (major federal elections every two years) truncates the government’s policy horizon.
To strengthen our economy, Judge Posner offers 10 possible policy solutions; these include re-enacting Glass-Steagall, to changing the financing of regulatory agencies, to reforming credit rating agencies. But his policy suggestions are full of nuance which would make them nearly impossible to implement given the broken political process.
Judge Posner ends on a sobering note: “The question I want to leave the reader with is whether the United States has an institutional structure and a political culture equal to the economic challenges facing it.” His answer to this question is largely, “no.”
Interestingly, even though Posner puts his finger precisely one of the sources of our predicament -- the way we finance our elections and the exaggerated influence this gives to narrow interests -- he does not explore policy solutions that would remedy this problem. While he is able to imagine reordering many economic structures from regulations to regulators, he views the political norms as static and immovable. He doesn’t consider the possibility that we could finance our elections differently using public funds instead of private ones. There are existing Congressional bills that would provide this option such as the Fair Elections Now Act (FENA H.R. 1826). Perhaps solutions that go to the heart of our democratic crisis, instead of our capitalist crisis, could be the subject of his next book.
Ciara Torres-Spelliscy is an Attorney at the Brennan Center for Justice.
