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Rick James

Dear Judge Posner

Received your book yesterday and found it a very good read. While I tend to agree with most of what you wrote there are few aspects that I do take issue with.

First: Your suggestion that the business media was warning about the crisis it totally misleading. While there was a limited amount of coverage in the business media about the impending crisis it was by far and away overwhelmed by the cheerleading that the business media engaged in before the crisis. Perhaps the most pathetic example of this was the FOX business channel host glowingly asking (the now discredited) Alan Stanford whether or not it was fun to be a billionaire. This almost total lack of oversight or coverage from the fifth estate made it practically impossible for those that had concerns about the market to be heard, let alone taken seriously. By chance I met with a senior executive of Reuter Europe in December of 2007 and asked him why Reuters had not exposed the sub-prime problem earlier. His response was first that there were no warnings and second that it was not their responsibility investigate such matters as all they did was report results. Clearly this sort of ambivalence in the business media was common place or we would have been hearing warnings much earlier. As such I would add a media failure to your list of failures.

Second: I find it interesting that in the early part of your book you point to the prohibition of usury interest rates as a method of forcing financial institutions to do proper risk assessments before making loans but you fail to include their reintroduction as one of the possible solutions. My own view is that it is sometimes the government’s job to protect people from their own stupidity. Just as Food and Drug; protects people from snake oil salesmen, Commerce; should protect people from predatory lending and there is no better way to do that than usury rate prohibition. While I appreciate that such a prohibition would lessen the available credit to low income earners, allowing them to take loans on terms they can not afford is not doing them or the economy any favours. Needless to say the only way this could be done would be through a phased reduction of existing rates on mortgages and credit cards.

Third: You failed to mention anything about the recent changes to bankruptcy laws which dramatically strengthen the position of the lenders with respect to their defaulting creditors. It seems to me that financial institutions honestly believed that the only reason why people did not pay was because they did not want to pay and the changes in bankruptcy laws blinded them to the possibility that the overwhelming majority of defaults were because people simply could not pay. While I am unsure on whether or not the changes should be rescinded it certainly did play a big part in the story.

Overall I found it to be a very insightful and useful book but it raises one question which I would really like you to respond to. Does your recognition of market failure and the need for better regulation in the financial sector change your views on antitrust matters or do you still think that non-financial markets are sufficiently self-correcting?
Best Regards
Rick James


Congrats on the new book!

Phil Henshaw

There actually has been a sound theory that addresses this whole problem, been around for 30 years, but it's physics that addresses complex systems and clearly draws the physical limits of our learning and choices. As a result it forces some clear thinking about our most highly political choices, and no one has had the courage to discuss it.

Judge Posner makes a good point, that the 250 PhD economists of the Fed should get about the business of finding some indicators of economic fragility, so we can see these things coming. That would be a start.

The one indicator that does that best is watching the divergence of credit and real product, or unearned and earned income, which have been diverging exponentially since the 70's. To those who watched those indicators grow apart the coming trouble was obvious. The real conflict, though, is that it amounts to being the central purpose of regulation to stabilize what causes that divergence. What is really missing from our plan is what to do other than stabilize the divergences till they collapse or collapse them early enough while they can still be stabilized. There being a big hidden "silver lining" and all, though, has not been enough to get people to sort through the choices. www.synapse9.com/issues/concept$.htm

Joe mcmullen

With respect, consider the current returns of banks in Brazil and in India whose shares trade freely here (+20% roe). They put up good numbers because they are good bankers - know their customers and do not buy deposits. Buying deposits and investing in credit enhancements as we have done is not banking. Blaming the government for the stupidity of our bankers is unlike your remarkable existing body of work.


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It is academic dishonesty to ignore Government's role in the current financial mess.

-Government gave GSE's implicit guarantees.

-Government allowed GSE's to get too big on that guarantee.

-Government sponsored the unsustainable business model of subprime lending.

-Government (the Fed) brought interest rates to artficially low levels.

As we debate why our economy is nothing but one of bubbles and busts, why isn't anyone considering the impact of Government interference in free markets...?

We have a President racking up $10 trillion deficits. We have a federal reserve printing money. Will Posner make money on a new book villifying free markets 7 years from now when this bubble pops...?

It is artificial wealth. Our economy is a fraud.


If it is nothing but Keynesianism (which is all we have left in the USA...), how can you blame capitalism and free markets...? Keynesianism is an interference in free markets, and markets won't function properly with Government interference. When bubbles form and pop, look to the interference...!

The only thing left in Detroit is the UAW. We all know this is another unsustainable business model..., so don't blame capitalism the next time they need Government. Don't villify capitalism here ever again. This is your baby...! Best of luck to you.

The jig is up. We know you are COMMUNISTS in disguise. After all these years, the disguise isn't very good.


Check out this article from 1999:


And now check out today's news on Fannie Mae:


People who ignore Government's role in this mess are either very uninformed or deeply dishonest. You cannot blame capitalism and free markets for everything.








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Great comments from Rick, Phil and Joe.

Rick I too wonder about the whole anomaly not being spotted by either the financial press, the legions of economists of the fed and other governing bodies.

Being somewhat close to the housing industry their was a whiff of something rotten in Denmark, or Denver, Vegas, CA and Florida as "investors" were flying in with $100 checks to "buy" new homes with the sole intent of flipping them once they were finished. These added to the unsold inventory but let the builders go to their bank and borrow the money to build another one.

At a more fundamental level, or at least one more subject to measurement, there was the obvious departure of median home prices from a VERY long term trend of about 2.5 times median income.

The top of these graphs shows the bubble peaking at FIVE times our, flat, median income and that income being chipped away by energy related inflation and soaring H/C costs. Few economists or writers seem to have looked into "the market" out running the ability to pay.


If not "noticed" by lethargic financial writers while the Chamber of Commerce would much rather look the other way, surely savvy Wall Street traders who spend their days looking for low risk opportunities to profit MUST have seen the crumbling fundamentals and chuckled over their afternoon gins, but if so why were the stock valuations vast multiples of what they should have been? Has reading 10K's also become too much work? Though I suppose the answer is that if the "assets" were valued as if the loans had been made in good faith by real bankers, it would take a W. Buffet to spot the flaws.

Bankruptcy laws? It IS interesting that virtually at the peak of what I can't help call a cleverly concealed Ponzi scheme that the bankruptcy laws were changed to the advantage of precisely those sinking America lip-deep in debt.

Phil, you make a good point of our living on stock returns in the 90's and after getting creamed in 2000 using home appreciation as our extra "job" or ....... last shot?

Ha! for years, no decades! I've wondered about economists or even regular folk thinking that a "biz model" of selling one's home to their neighbor at an inflated price, then spending the proceeds on imported cars, other products or vacationing abroad was sustainable. I guess we found the answer, experimentally, in the last few years. Surely the science of econometrics has advanced to predict the worst of these waves before we just dive into them? To be fair, Gspn in his cryptic way told Congress years ago that the model of huge trade deficits and balancing current accounts by borrowing and selling off chunks of America was "not sustainable".

Now who gains from an unsustainable model? Certain corporations that apparently swing all too much weight in Congress and perhaps with the Fed's governors.

Annoymous: As frustrating as it may be, I've yet to see ANY engine that runs efficiently, or even w/o self-destructing that does not have a governor or series of limit switches and controls. "Capitalism" is one of those engines. Tuned well it can get the most from its fuels, but both in theory and practice it will NOT run without controls and oversight.

There are whole internal sectors that make up much of our economy but do not even respond well to "laws of supply and demand" such as medical care, generic commodities and low or moderately skilled labor. Today, I'd add the massive inefficiency of CEO pay that has gone from 80 times working folk pay in 1980 to over 400 times today, seemingly with no gain in quality or productivity. Or? perhaps the entire financial sector that has been gleaning 45% of ALL corporate profits in recent years. Have they created a significant contribution to society and our well-being? or even GDP?

Then there is the inherent nature of capitalism to breed rogue waves and tsunamis. The thing simply will not work on a basis of "set it and forget it". One way or another we'll always have to put up with human intervention and tolerate its fallibility.


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Charles N. Steele.

I just listened to you on NPR. It's ridiculous & shameful that you blame the free market for this mess. The Fed has pursued a low interest rate policy, the Federal Government has given us consistent (and understated) deficits and also encouraged & subsidized subprime lending, the Madhoff scheme and the like are examples of fraud, not free markets... You seem to be entirely clueless as to what the free market is.

You ought to read Mises' "Human Action." Whether you like the book or not, it would at least enable you to understand the difference between the free market and government intervention.

Charles N. Steele.

I just listened to you on NPR. It's ridiculous & shameful that you blame the free market for this mess. The Fed has pursued a low interest rate policy, the Federal Government has given us consistent (and understated) deficits and also encouraged & subsidized subprime lending, the Madhoff scheme and the like are examples of fraud, not free markets... You seem to be entirely clueless as to what the free market is.

You ought to read Mises' "Human Action." Whether you like the book or not, it would at least enable you to understand the difference between the free market and government intervention.


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Rick James


As an aside I wonder if you have noticed that there always appears to be a get rich quick book behind many of these bubbles. During the tech bubble it was the Gorilla Game, while for the property bubble it was Rich Man Poor Man. Do you think that these books inspire the bubble or are just capitalizing on it? Have you seen any new books that point to the next get rich quick phenomena?


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Hi, nice post. I have been wondering about this topic,so thanks for sharing. I will certainly be subscribing to your blog.

John Stanton

Judge Posner--

Very much enjoyed the new book A Failure of Capitalism. An eloquent treatment indeed.

Still, I'm left with the impression that you seem to imply: all the players--financiers, bankers, consumers, regulators, politicians--were all pursuing their "natural" instincts whether that be risk taking/gambling of investment bankers for profits, or consumers practicing the same for the chance to own a house.

That being the case, no "one" is accountable because everyone was gambling at the card table wheel driven by instinct. A similar rationale was used for the failure to deter the 911 attacks (which were the result of decades of misguided foreign policy). Indeed, even though forewarned by NOAA about the devastating impact that Katrina would have, key private and public sector elements remained constrained by disbelief.

We live, I think, in an era of great unaccountability. Political and military leadership--and most leaders in commerce--are seemingly immune from the type of basic responsibility and actions-have consequences that we attempt to teach our young people. You write in your book of a lack of discipline in today's world but yet you chalk up the depression in most respects to "natural instinct". What to do?

I think that you misuse Darwinism to describe the marketplace. Here is a passage I think that helps clear up the matter. It refers to weapons but that's easily replaced by money/access to capital (human too).

"Social Darwinism, however, is hardly the same as the theory of evolution by natural selection that Darwin published in “On the Origin of Species” in 1859. For one, social Darwinism employs not natural selection but artificial selection, where instead of the natural conditions of the environment selecting for the best traits, certain people with some degree of power get to decide who lives and who dies [profits]. As such, the ideals being selected are completely arbitrary and up to the ones with the weapons, because as you know, in the normal course of evolution, traits that were before useless can become highly selected for when the environment changes. This means that social Darwinism cannot be the sole justification for any action: you have to have a particular bias already installed against a particular group of people for anything to happen."

Anyway, thank you again for your effort. Most appreciated. I teach an advanced high school course in Washington, DC metro titled Military Diplomacy in the 21st Century. Next winter semester ('10) I will introduce some further elements of economics as national security based on your excellent work. If you are in DC in 1st quarter of '10 + May, come and visit with us. We've had former CENTCOM CG, ambassadors, interest group heads, USMC, USN, USAF flag officers.


--John Stanton


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That time I was interested in the causes of depression, those who want to know what the problem! Previous novels in the network point of view when it is seen to introduce a number of related or that! But not many! You do not know the books inside the analysis in this regard did not!

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