Where Fun Comes to Die

Richard Posner, writing about “Capitalism in Crisis,” begins by reiterating exactly what are the potential issues of the $13 trillion the government is spending in its plans to improve the economy:

Much of this sum will not be spent (the guarantees), and probably most will eventually be recovered. But a commitment of such magnitude — stacked on top of enormous budget deficits enlarged by sharply falling federal-tax revenues — could lead to high inflation, greatly increased interest costs on a greatly increased national debt, much heavier taxes, the restructuring of major industries, and the redrawing of the line that separates business from government.

He follows this framing of the issue by an overview of how we have come to this, then finishes with several lessons that he has learned from the crisis, first that the Fed needs to do a better job looking for bubbles and gradually deflating them: “Our central bank failed us.” “The second lesson is that we may need more regulation of banking to reduce its inherent riskiness.” But he concedes:

[I]t is unclear how banking should be regulated. Banking in the broad sense of financial intermediation (borrowing capital in order to lend or otherwise invest it) is immensely diverse. It is also international. If one nation reduces the riskiness of its banking industry, business will flow to other nations, just as a bank that decides to be cautious will lose investors to its competitors because of the positive correlation of risk and return. So international regulation of banking is needed in principle, but international regulation tends to be lowest-common-denominator regulation and so may be ineffectual.

He concludes with some blame throwing:

Finally, let’s place the blame where it belongs. Not on the bankers, who are not responsible for assuring economic stability, but on the government officials who had that responsibility and failed to discharge it. They failed even to develop contingency plans to deal with what everyone knew could happen in a context of escalating housing prices (it had happened in Japan in the late 1980s and the 1990s). Lacking such plans, the government responded to the crisis with spasmodic improvisations, amplifying uncertainty and mistrust and thus retarding recovery.

And let’s not forget to apportion some of the blame to the influential economists who assured us that there could never be another depression. They argued that in the face of a recession the Federal Reserve had only to reduce interest rates and flood the banks with money and all would be well. If only.

So let me get this straight — the government is engaged in risky behavior ($13 trillion) that may sink the entire economy. The government is doing this in response to the dire consequences of it engaging in risky behavior that actually did sink the economy (manipulating interest rates to keep them artificially low).  Dastardly economists have been leading us astray (who knows for what purpose — conspiracy?).  Posner’s solution to all of this? Presumably based on the advice of a few influential economists, more government involvement in the form of regulation that Posner admits is at best tricky and at worst impossible to accomplish.  In other words, risky behavior by the government that could sink the entire economy.  More of the same, but better…  somehow…

Frankly I find George Selgin‘s solution of a free banking system a lot more coherent and promising then the disenchanted-libertarian rantings of Judge Posner.