Richard A. Posner

At this writing, the economy is still in a severely depressed state, with the unemployment rate at 9.4 percent (the "underemployment" rate, which includes workers who have stopped looking for jobs and workers who are involuntarily working only part time, has risen to 16.4 percent), with a continuing surge in the personal savings rate (now 5.7 percent, up from 4.2 percent a month ago and 1 percent at this time last year), and with other shoes expected to fall soon:… More »

There is much criticism of the banking industry for having failed to take account of "tail risk." The reference is to parts of the normal distribution and of variants such as the student t distribution. These probability distributions form a bell-shaped curve. The ends of the bell, or "tails" of the distribution as they are called, denote very small probabilities. If the mean of a normal distribution is 500 and the standard deviation from the mean is 100, then 99.7… More »

Paul Krugman is a first-rate economist who has written perceptively about the economic crisis. He is also an unabashed Democratic partisan who often goes overboard in his hatred of the Republians, as in his June 1 New York Times column entitled "Reagan Did It." He means that Reagan is ultimately responsible for the current crisis: "Reagan-era legislative changes essentially ended New Deal restrictions on mortgage lending--restrictions that, in particular, limited… More »

In his New York Times column today, Paul Krugman derides what he calls "the big inflation scare." He writes that "stern opinion pieces warn that hyperinflation is just around the corner." He acknowledges that the Federal Reserve "has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves," but he claims that this is not an inflationary threat because "banks aren't lending… More »

It now seems certain that General Motors will declare bankruptcy on Monday, that the federal government will as part of the reorganization in bankruptcy acquire more than 50 percent of the common stock of the reorganized company, and that the government will invest perhaps $30 billion in the new company, bringing the total cost of the GM bailout to a shade under $50 billion. These developments raise three questions: 1. Should GM have received any government… More »

There were a number of interesting comments; rather than try to respond to them individually, I will group them into themes and respond to each theme. One theme is that, contrary to my argument, the unhappy situation of the economy today should not be viewed as a "failure of capitalism" but as a failure of government. In fact both characterizations are correct, because capitalism and government cannot be separated. You cannot (here I part company with… More »

One of the reasons, as I explained in my book, for calling our economic crisis a "depression" is that, as was already clear on February 2, when the book was completed, the government was spending trillions of dollars--on top of all the normal expenses of government--to try to arrest the downward spiral and speed recovery. Since then, the expenditures, commitments, and guarantees--all of which represent costs, actual or expected, though many or even most of them… More »

This is my last entry subbing on Andrew Sullivan's blog, but I will continue blogging about the economic situation on my Atlantic Correspondents blog, http://correspondents.theatlantic.com/richard_posner/, next week. The movement to alter the regulation of banks, and the financial system more generally, is gathering steam. I think it is premature. Congress rarely does anything in haste without screwing up, and as I have emphasized in my previous blog entries,… More »

In the business section of today's New York Times, Greg Mankiw, a prominent economist at Harvard, offers the following defense of his profession's disappointing performance with regard to the current depression: "It is fair to say that this crisis caught most economists flat-footed. In the eyes of some people, this forecasting failure is an indictment of the profession. But that is the wrong interpretation. In one way, the current downturn is typical: Most economic… More »

My last entry described a simple pattern in which the expansion of the money supply by the Federal Reserve and borrowing by the Treasury Department to finance soaring government debt--measures resulting from the depression--create a risk of inflation, which impels corrective action that can trigger a recession that would thus be an aftershock of the current depression. I need to be more precise about inflation, and in particular to avoid an implication that zero… More »

I have received an email from Alan Greenspan in which he expresses regret at what he describes as my "rather thin analysis of the source of the current financial crisis." He states that his "view is different," and by way of explanation prints excerpts of three pieces written by him. The first is from remarks, entitled "Risk and Uncertainty in Monetary Policy," that he made at a meeting of the American Economics Association in January of 2004, while he was still… More »

In judging the severity of an economic downturn, one ought to include the costs of fighting it, as well as the costs in lost output and employment that are incurred during the depression. The costs of fighting a depression have two components: the costs of fighting it that are incurred during the depression itself, and the costs incurred after the depression ends--what I call the "aftershock." The difficulty of predicting the form and severity of the aftershock is… More »

There is enormous speculation in the media, fed by statements by government officials, with regard to the question whether the current economic downturn has reached, or will soon reach, its bottom and start upward. I believe this speculation, and the data and opinions on which it is based, are of little value, probably too little to guide individual or business decisions. People got tired of reading about economic gloom and doom, so the media were happy to play up… More »

In his first inaugural address, at the pit of the Great Depression in March 1933, Franklin Roosevelt famously said: "This great Nation will endure as it has endured, will revive and will prosper. So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself--nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance." This was considerably overstated, since there was more to fear than… More »

In an article in Monday's Washington Post, David Cho reports that the Treasury Department is having a good deal of trouble implementing its ambitious program of recovery from the depression. Cho and the people he has interviewed attribute the problem to delays in appointments of high-level officials (the number two man in the department has yet to be confirmed), but also to an excess of cooks spoiling the broth, the excess consisting of White House officials, such… More »

The housing bubble is so central to our current economic troubles, and such a mysterious phenomenon from an economic standpoint, that I want to elaborate on my brief remarks in the previous entry. A few figures: At the beginning of 2000, the federal funds or overnight rate--the short-term interest rate that the Federal Reserve focuses on influencing through its purchase and sale of Treasury bonds--was 5.45 percent. Though short term, this rate influences long-term… More »

To understand the role of the Federal Reserve in the causation of the current depression, we must understand its influence on interest rates, and how interest rates influence economic activity. The Treasury Department borrows money to finance government activities by issuing bonds, which are bought by banks and other investors, and also by the Federal Reserve. When the Fed wants to stimulate economic activity, it buys Treasury bonds from banks and other investors,… More »

The tendency in the media and the Congress has been to blame the current depression on "stupid, greedy, and reckless" bankers. I believe that that is a mistake. I know bankers. They are not stupid; most of them are smart, and many of them are brilliant. If they are "greedy," it is largely so in the sense in which most Americans (most anyone, I imagine) could be called "greedy": they like money a lot. I read somewhere recently that bankers (a word I use loosely to… More »

My book contains a short list of suggested readings, which I hereby supplement with (1) a list of additional books and articles that are both accessible to nonexperts and helpful to an understanding of the current economic mess, and (2) a very short list of blogs or other online sources that I find helpful in keeping up with events and ideas relating to the mess. Books and Articles: Acharya, Viral V., Irvind Gujral, and Hyun Song Shin, "Dividends and Bank… More »

I reply here to some (in fact all but one) of last week's comments. Since each commenter is listed together with a link to his or her comment, I do not need to summarize the comments. Stevens. I did not say that nationalizing the banks would create a more acute problem of evaluation of the overvalued assets (various forms of securitized debt, first misleadingly called by the government and the media "toxic assets," now absurdly called "legacy assets"), but only… More »