Response to Comments of May 27-June 5

I received many very interesting comments on a variety of my posts. I regret that I cannot reply to all of them. I will respond to those that I am guessing hold the most general interest for my readers.

A number of comments deal with the question of who is to blame for the economic disaster. I believe it is decisions by the federal government, specifically mistakes of monetary policy by the Federal Reserve in the early years of this decade and a combination of deregulation and regulatory laxity. Several commenters think the major blame should be assigned to the banking industry because it had more information than government about the risks the banks were taking. I think the banks knew they were taking risks that in theory could bring down the industry, but thought the risk small because the government kept telling the industry that the risk was small.

I also disagree that "the regulator never has the job to prevent, only to clean up in a satisfactory manner." That is like saying the government should do nothing to prevent an epidemic, just swing into action after the epidemic hits. On the contrary, the government through production of vaccines, medical research, and early-warning networks right engages in precautionary activity before an epidemic strikes; and the same should have been true, mutatis mutandis, with regard to the financial "epidemic" that brought on the current depression.

One comment suggests that the blame for the current economic situation should fall on Reagan for adopting an economic policy of "borrow and spend" and that Reagan's declaration that "government is the problem" can be "pretty accurately translated as 'grownups are the problem.'" That is well stated, but I think exaggerates the impact of political rhetoric. Politicians generally follow rather than form public opinion. Liberals responded to Reagan by calling the 1980s a decade of greed, yet Clinton chose to adhere to the "Reagan Revolution" in economic affairs--and the deregulation of banking had begun in the Carter Administration.

Paul Krugman, in a column that I criticized, had blamed our current economic troubles on Reagan, and I explained in a recent post why I disagreed. One commenter says that by calling Krugman "partisan" I merely made myself sound partisan. I hope not, for by "partisan" I meant strongly committed to a political party, in Krugman's case the Democratic Party; and I have no party affiliation or loyalty. My point was only that Krugman's unquestioned political partisanship had led him to an oversimplified diagnosis of the economic situation, blaming the situation entirely on the most popular Republican president of recent times.

Several comments focus on the prospects for inflation in the wake of the current depression--one of the "aftershock" dangers that I have emphasized. One comment points out that if interest rates keep rising, and hence the price of bonds falls (which it will do so that the purchaser obtains a higher return than the rate specified in the bond, as otherwise he would buy a new bond rather than one that has already been issued), the Federal Reserve may not be able to sell the Treasury bonds, and the other debt that it has bought, for the amount of cash that it paid for them; and this will limit its ability, by sucking up all the cash that it previously injected into the economy, to prevent inflation.

Another comment ingeniously suggests that if China continues to pursue an export-first policy by keeping the ratio of the value of its currency to that of the United State low in order to increase the demand for the goods it exports, our government will have an excuse for reducing the value of the dollar;. That will create inflation by making imports more expensive; and inflation will reduce the burden of our soaring national debt. (Speaking of national debt, I should offer a clarification of the numbers that I use in my book and in my blogging. The national debt is almost $11 trillion, and that is about 80 percent of Gross Domestic Product. Yet most economists say that the percentage is only about half that. The reason is that they, but not I, exclude from consideration the amount of the national debt that is owed to federal government agencies, for example to the Social Security Administration to fund social security and Medicare payments. That debt could in principle be cut "easily," just be reducing social security and Medicare benefits. But such cutting is easy only if politics is ignored; if it is not ignored, then there can be no confidence that the national debt will be pruned by reductions in highly popular federal benefits programs.

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Richard A. Posner

Richard Posner is an author and federal appeals court judge. He has written more than 2500 published judicial opinions and continues to teach at the University of Chicago Law School. More

Richard A. Posner worked for several years in Washington during the Kennedy and Johnson Administrations. He worked for Justice William J. Brennan, Jr, the Solicitor General of the U.S., Thurgood Marshall, and as general counsel of President Johnson's Task Force on Communications Policy. Posner entered law teaching in 1968 at Stanford and became professor of law at the University of Chicago Law School in 1969. He was appointed Judge of the U.S. Court of Appeals for the Seventh Circuit in 1981 and served as Chief Judge from 1993 to 2000. He has written more than 2500 published judicial opinions and continues to teach at the University of Chicago Law School. His academic work has covered a broad range, with particular emphasis on the application of economics to law. His most recent books are How Judges Think (2008), Law and Literature (3d ed. 2009), A Failure of Capitalism: The Crisis of '08 and the Descent into Depression (2009). He has received the Thomas C. Schelling Award for scholarly contributions that have had an impact on public policy from the John F. Kennedy School of Government at Harvard University, and the Henry J. Friendly Medal from the American Law Institute.

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