Richard A. Posner

In this second part of a two-part entry, I discuss two far-reaching reforms that, it has been suggested, might help prevent a repetition of the financial crisis: regulating the compensation of top management of financial institutions that pose systemic risk; and tightening regulation of derivatives, including credit-default swaps. The first proposal, in the form that I will consider, is the brainchild of Lucian Bebchuk, a very able lawyer and economist who teaches… More »

In my June 24 and 29 blog entries, I made a few very modest suggestions for financial regulatory reform: a 9/11 Commission type of study of the causes of the financial crisis (and ensuing depression); a plan for rotating financial regulatory staff among the different financial regulatory agencies; the creation of a financial intelligence and contingency planning capability in the Federal Reserve; knitting the state banking and insurance regulators into a national… More »

The law schools were caught by surprise by the financial crisis of last September and the ensuing descent into what, realistically, must be regarded as the first depression (as distinct from merely a recession) since the Great Depression of the 1930s. (This is not--so far, at any rate, a repeat of the Great Depression--but it is a depression.) When I say they were "caught by surprise" I mean first of all that the training and research of academic lawyers have not… More »

I would like to draw my readers' attention to four recent important contributions to the debate over our economic crisis. The first, which unfortunately will not be published until the fall, is a book by Robert C. Pozen entitled Too Big to Save? How to Fix the US Financial System. A lawyer, a lecturer at the Harvard Business School, and the chairman of a large asset-management firm, Pozen is an immensely experienced and acute student of the financial system. His… More »

On June 24, in "Financial Regulatory Reform: III," I blogged on the proposal in Financial Regulatory Reform--the Administration's blueprint for revamping the regulation of the financial industry--that Congress create a Consumer Financial Protection Agency. A few days ago the Administration issued a 152-page draft of a proposed statute establishing such an agency, and the draft helps to clarify the Administration's thinking and in doing so it reinforces the doubts I… More »

It is 18 month since the official onset of the current depression (as I continue to regard it), and almost six months since the inauguration of President Obama. It is a good time to take stock--to take the pulse of the economy, but also of the new Administration's efforts to speed economic recovery. A few statistics will help set the stage for analysis. On January 20, inauguration day, the Dow Jones Industrial Average was 8300; it closed that day at 7900. Today,… More »

I am surprised by how quickly the media publicity concerning the Administration's blueprint for financial regulatory reform, issued on July 17, has dissipated. Does this mean the plan is DOA (dead on arrival)? The plan has serious flaws, as I have argued in my previous blog entries in this series, and we should not be sad to see it die, and the entire reform program deferred until the causes of the financial crisis have been studied in greater depth than has been… More »

In my book I suggested a moratorium on financial regulatory reform: wait until the economic recovery is well under way and the causes of the financial crash have been well studied. There is no urgency about financial regulatory reform because there is no imminent risk of another crash. For a time at least, the world's central bankers, and the financial industry itself, will be hyper-alert for another housing or credit bubble. The wisdom of delay is confirmed, in my… More »

The most questionable proposals in Financial Regulatory Reform--the 88-page blueprint for regulatory reform issued by the Treasury Department on June 24--concern the protection of investors and consumers from false, misleading, or "unfair" practices by the banking industry (as always, broadly construed to include the "shadow banking" industry, consisting of financial intermediaries that provide services similar to banking) and the credit-rating agencies. I shall… More »

In this entry I discuss two reforms of banking regulation proposed in Financial Regulatory Reform: A New Foundation: Rebuilding Financial Supervision and Regulation, which the Treasury Department issued on June 17 and which I'm calling the "Report." The first proposal is to vest the Federal Reserve with responsibility for regulating "systemic risk." (As usual, I define "banking" to include all financial intermediation--and this turns out to be particularly… More »

Last week I blogged on the Administration's ambitious proposals for altering the regulation of the financial markets, proposals set forth in the 88-page report Financial Regulatory Reform: A New Foundation: Rebuilding Financial Supervision and Regulation, which the Treasury Department issued on June 17. (I'll call it the "Report.") The proposals require a fuller analysis, which I shall conduct in four parts published this week. The first--the subject of this blog… More »

There were a number of interesting comments. I cannot discuss them all and my failure to discuss a comment should not be construed as criticism. I pick out a few to discuss where I think a restatement or response may be useful, and I shall discuss these in the order in which they were posted, rather than grouping them by subject matter. I would like to note at the outset, however, my policy on approval of comments, in light of a comment in this batch criticizing… More »

The Administration's proposals for altering the regulation of the financial markets are found in an 88-page report entitled Financial Regulatory Reform: A New Foundation: Rebuilding Financial Supervision and Regulation (Treasury Dept., June 17, 2009). This is a well-written report but suffers from two grave weaknesses: prematurity and a failure to address objections. Now it is true that it is not always necessary to understand a cause in order to be able to… More »

Lawrence Hillibrand is a well-known, experienced, and highly intelligent financier. He sent me a very interesting email on May 22 commenting on my book A Failure of Capitalism. He makes several points, some critical, all insightful. I quote the message in full, and then respond briefly to his points. I number his paragraphs to make my response clearer: "1. At its broadest level I [i.e., Hilibrand] agree with the thesis that the process of credit extension has… More »

Conservative economists believe that the most serious problems facing the economy are budget deficits, the threat of a future inflation, and the government's aggressive economic interventions in the economy, which include the stimulus package, the health care plan, and the takeover of General Motors. Liberal economists believe that the most serious problems facing the economy are that the depression may deepen and that the recovery from it, when it comes, will be… More »

I mentioned briefly in my most recent blog entry the Obama Administration's recent appointment of a "pay czar" to regulate executive compensation in companies that receive federal bailout money. I expand on my discussion here. There are two distinct compensation issues arising from the current economic crisis. One involves the compensation of executives of firms that are owned or controlled by the federal government, such as General Motors, American International… More »

It is now five months (less a week) since the new Administration took office. Let's see how the economic situation has changed in the last five months and how (so far as anyone can judge) the Administration's plan of economic recovery is working. When Obama took office, the unemployment rate was 7.2 percent and the underemployment rate (which includes workers who have given up looking for work and workers working part time involuntarily) was13.5 percent. Those… More »

The quotation is from a review by J. Bradford DeLong, a well-known macroeconomist at Berkeley, of Sidelsky's great biography of John Maynard Keynes. Riding his witch's broomstick, DeLong has written a review of my book A Failure of Capitalism for his blog, The Week. The review, called "The Chicago School is Eclipsed," appeared on May 29 and can be found at www.theweek.com/article/index/97134/The_Chicago_School_is_eclipsed (visited June 10, 2009). I have been… More »

This may seem like a dumb question. An abnormally high rate of unemployment is often treated as synonymous with a depression, as by those economists who insist that until the unemployment rate reaches 10 percent (or some other number), the economic situation cannot be described as a depression. This method of distinguishing depressions from recessions is unsound; they should be distinguished on the basis of total costs, of which unemployment is only one. But the… More »

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… More »