Wall Street WARZONE

Judge Posner Reverses Himself: After Torturing America for 29 Years with “Free-Market” Reaganomics, He Finally Warns Capitalism Is Out-of-Control, Threatening American Democracy

by Paul B Farrell, JD, PhD
| | 5/2/2010

The judge’s reversal is clear but disturbing. His decision reminds us how much damage a generation of Reaganomics has done to American democracy and capitalism. Judge Posner’s new book echoes the self-repudiation of another long-time defender of free-market Reaganomics, former Fed Chairman Alan Greenspan, who admitted before Congress last year his assumption that “the self-interest of lending institutions” would ”protect shareholders’ equity” failed in 2007 when the “modern risk-management paradigm that held sway for decades … the whole intellectual edifice … collapsed.” Killing the Glass-Steagall Act was a disaster of monumental proportions. Now, another long-time defender of free-market Reaganomics has reversed his position. Check out Paul Barrett’s BusinessWeek review of The Crisis of Capitalist Democracy, the new book by Richard A. Posner, “prolific federal judge and University of Chicago economist.”

Posner has steadfastly fought the regulation of markets—until now … Posner ”argues that competitive forces inspire financiers to take irrational gambles—especially when they’re betting other people’s money. We cannot trust them to put the common good ahead of profits, says Posner. As a result, government must step in to limit the risks bankers take and, occasionally, repair the damage they inflict.”

Yes, Posner, long-time defender of the Reagan/Bush era “free market” capitalism now admits “we cannot trust Wall Street to put the common good ahead of profits,” the “government must step in” … and regulate! Get it? The judge is admitting in open court that Reaganomics’ “free-market” capitalism failed American democracy.

Posner, who less than a year ago began his dissection of the crisis of 2008 with A Failure of Capitalism (Harvard, May 2009), has enormous credibility when he casts a skeptical eye on Wall Street. As an influential free-market thinker, he helped shape the antiregulatory ideology that inspired so much public policy since 1980. Belatedly he admits error. The Chicago School and all its powerful acolytes blundered, Posner writes, “by persuading themselves that markets were perfect, which is to say self-regulating, and that government intervention in them almost always made things worse.”

That was a crude misreading of history. Laws inspired by the Great Depression helped achieve a half-century without catastrophic meltdowns. The dismantling of those laws and emasculating of the agencies established to enforce them—without the enactment of new regulation suited to today’s Wall Street—go a long way toward explaining our recent brush with disaster. …

Posner regrets the oversight. He concedes that he personally succumbed to the fallacy of market perfection in some of his writings on solving legal disputes with economic analysis … He echoes those, including former Fed Chairman Paul Volcker, who would reestablish the Glass-Steagall Act’s separation of commercial banking from proprietary trading and other forms of high-risk finance … Good ideas, all. In his final pages, though, the author can’t muster much confidence that America will overcome its splintered politics, the “quasi-bribery” of campaign money, or the bipartisan myth that we can thrive indefinitely on low taxes and profligate public spending. Posner may have shaken off old shibboleths—and hurray for that—but at present he sees no reason to expect that courage or fresh thinking will prevail.

Unfortunately, the damage to democracy and capitalism is irreparable. Put in context, Posner’s book exposes how for a generation, 29 long years, free-market capitalism — the misguided ideologies of Reaganomics, Greenspanomics, Posneromics, Bushonomics – ran America deep into a $12 trillion debt ditch, after starting with surplus. And now, making matters worse, Obamanomics, Bernankonomics and their neo-Keynesians ideologies are piling on an estimated $23.7 trillion of new debt for future generations … meanwhile, Posner, Greenspan, Bush, Paulson and Wall Street’s “too-greedy-to-fail” CEOs walk away very rich thanks to their greedy brand of capitalism … with just a few arrogant apologies … when they should be doing hard time for the irreparable damage to American democracy.

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