Response to Comments--June 26 to August 4

I have been remiss in responding to comments, many very interesting, that I have received in the past six weeks. I hope that readers of this blog will read the comments as well. Although comments cannot be posted without my approval, I have approved all but a couple that were either irrelevant or unintelligible.


There are too many comments for me to be able to respond to each one individually, but I will note some points that deserve emphasis, and respond to a few individual criticisms.


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I like the comment (by Indy, June 26) that analogizes higher reserve and capital requirements for financial firms that create systemic risk (that is, that could bring down the financial system as a whole if they went broke) to strict building codes for earthquake- and hurricane-prone areas. The problem, as the comment points out, is that if the first line of defense--the reserve and capital requirements--fails to avert a collapse (just as building codes can fail to prevent serious damage from an earthquake or a hurricane), there would need to be "tremendous discretionary powers vested in some agency to respond and shut down [risky financial] activities in order to forestall a crisis." Vesting any agency with such powers is problematic, especially the Federal Reserve (where the Administration wants to vest them) because it would undermine the Fed's properly prized political independence. The comment also suggests that if the agency drafts contingency plans to deal with a future crisis, those plans should be made public so that the business community knows where it stands and can plan accordingly.


In a July 5 comment, the same commenter (Indy) expresses skepticism (as did I) that the proposed consumer financial protection agency would "promote significant changes in behavior among consumers...It is one thing to say 'people should save more, spend and borrow less' and another to add 'and they "would' if only they were better informed in simplified, easy-to-understand ways." Indy adds that "observing the magnitude in which consumer saving, spending, and borrowing behavior has changed recently during the economic downturn (and without any significant change in the types of financial products offered or the manner in which they are marketed) leads me to believe that economic conditions matter much more than anything the proposed agencies and new authorities can do." I agree.


UjK points out (July 13) that consolidating federal regulatory agencies or abolishing the financing of such agencies by fees imposed on the regulated firms will not eliminate shopping for lax regulators as long as banks can continue to choose whether to be regulated by state or federal banking agencies. This argues for preempting state banking regulation, but that is a radical step that will not be taken--at least not until the next financial meltdown.


Indy (July 20) wishes to distinguish between macroeconomic theory and practice, arguing that the failure of the macroeconomists was not noticing what was happening in the housing market. That was a serious failure, but I think the theory itself is defective because of the neglect of Keynes's theory of the business cycle, which I discussed in a blog entry on July 27. That entry gave rise to several interesting comments about the Austrian theory of business cycles. Members of the Austrian school of economics, such as Friedrich Hayek, argued that depressions can arise from unsound monetary policy--a policy that forces down interest rates, creating an artificial boom. Obviously I am sympathetic to that argument. But my impression (no more than that) is that, at least in the 1930s and perhaps still, Austrian economists do not advice any interventions designed to stop a depression--they regard the depression as just punishment for the unsound policy that precipitated it. That seems to me to give too little weight to the immense costs that a depression can impose on a society. But I am no expert on the Austrian school, and invite correction.


Greg Ransom, in a July 28 comment, calls my suggestion that liberal and conservative macroeconomists ignored Keynes until the banking collapse of September of last year "not only false, it's ridiculous." He argues that the tax credits in the spring of 2008 were a Keynesian stimulus and that the Greenspan-Bernanke policy of low interest rates in the early 2000s were Keynesian. I disagree. I tried to explain that what passes for Keynesian theory nowadays (or at least until the crash of last September), left or right, bears little resemblance to Keynes's actual theory of the business cycle, which emphasizes the role of uncertainty, of fear or lack of confidence, of the hoarding of cash in lieu of productive investment, and of recovery through deficit spending on public works (which he believed produced a multiplier effect on income)--not tax credits or other transfer payments.

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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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