According to Posner
Surprisingly for someone appointed by Ronald Reagan, Posner blames not speculators, or regulators, or greed for the current problem, but capitalism itself.
This from the NYT review:
The current crisis, Posner maintains, is a depression. True, it is not (we hope) a great depression. But the typical postwar recession is a partly self-correcting disinflationary contraction that soon subsides, often leaving the economy healthier. The present downturn is a self-sustaining deflationary contraction whose costly aftereffects will linger for years. The Great Depression led to World War II. Today’s depression presumably won’t be that bad, but it may cause a huge loss of output, an immense increase in the national debt, a swing to excessive regulation, a nasty bout of inflation, a decline in America’s economic and geopolitical power, and increased political instability abroad.
A typical recession is a market correction, usually of inflation or other economic imbalances; a depression is a market failure. And it is a failure (here is grenade No. 2) that the market is powerless to prevent. “An interrelated system of financial intermediaries” — a banking system, broadly defined — “is inherently unstable,” Posner writes. Think of it as “a kind of epileptic, subject to unpredictable, strange seizures.”
Populists and libertarians will hate this book, though I wouldn’t want to predict which group will hate it more. A perfect storm of irresponsibility? Hardly. The crisis came about precisely because intelligent businesses and consumers followed market signals. “The mistakes were systemic — the product of the nature of the banking business in an environment shaped by low interest rates and deregulation rather than the antics of crooks and fools.”
Were a lot of people reckless and stupid? Of course! But that cannot explain why the whole system crashed, since a lot of people are always reckless and stupid. The problem, fundamentally, is that markets cannot, and rationally should not, anticipate their own collapse. “A depression is too remote an event to influence business behavior.” Any single business can rationally guard against its own bankruptcy, but not the simultaneous bankruptcy of everybody else. “The profit-maximizing businessman rationally ignores small probabilities that his conduct in conjunction with that of his competitors may bring down the entire economy.”
. . . And so — here is the part libertarians will hate — markets, entirely of their own accord, will sometimes capsize and be unable to right themselves completely for years at a stretch. (See: Japan, “lost decade” of.) Nor can monetary policy be counted on to counteract markets’ tippy tendencies, as so many economists had come to believe . . .
. . . By the last page, not a single lazy generalization has survived Posner’s merciless scrutiny, not one populist cliché remains standing. “A Failure of Capitalism” clears away whole forests of cant but leaves readers at a loss as to where to go from here. In other words, it is only a starting point — but an indispensable one.