Graciously descending from the heights of the Seventh Circuit bench and his post as King of every intellectual compost heap, Judge Richard Posner granted an interview to viewpoint, hosted by Eliot Spitzer. For those who have followed the judge’s pronouncements over the past few years, there is not much new here. But you still have to see it to believe it, or my comments below. Keep controlled substances within reach: the content would make the Good Humor man go postal, and the wanton self-destruction of a good man is never a pleasant sight.
Judge Posner articulates his well-known position that originalism is “fake”—not just because the historical materials are ambiguous, but also because the world has moved on. The Founders were “very able people,” the judge concedes (in a tone in which one would describe law clerks who can’t quite hack it). But theirs is eighteenth-century stuff, and completely outdated. Like the malapportioned Senate.
[Mr. Madison, objecting from his grave: Your Honor, I may have missed a ton of stuff that would happen two centuries later, and I knew I would. However, the malapportioned Senate is not among them: I have this here contemporaneous Federalist essay (62) on precisely this question. May I enter that into evidence—or have you updated those rules, too? Would you read my submission, assuming you still read anything at all?]
Obviously, an archaic document whose meaning we can’t know in any event is useless. Whence the judge concludes that judges should simply make up the rules that they think would work best, and be candid about it. Presumably all the judges will be perfectly well-intentioned, informed, and as smart as Richard Posner.
Inquiring minds (especially lawyers who practice in such courts) want to know: as smart as Richard Posner thinks he is, is he now as smart as he once thought he was? The question matters because Judge Posner volunteers that he made a “fundamental mistake.” The deregulation he advocated, he says, works fine in industries that do not matter. It does not work in the financial industry, which undergirds the entire economy and where undue risk taking and profiteering in a free market could bring—and in 2008 did bring—the entire system to a fall.
The mea culpa—hedged with a supercilious “I may have started it but conservatism got out of hand” aside—fails to satisfy minimum standards of intellectual coherence and empirical evidence.
The suggestion that the markets that produced the 2008 financial crisis were “free”—in the sense of unregulated—is charitably described as contrary to fact. The money that juiced the markets wasn’t supplied by some reckless profiteer; it was supplied by the Fed. The GSE’s that by everyone’s admission contributed (and on many accounts caused) the disaster operated (and are still operating) with government guarantees.
Similarly, but more broadly: the financial system operated and continues to operate against the rule that depositors—unlike shareholders, bondholders, vendors, employees, or anybody else—will in the event of failure get 100 cents on the dollar. That arrangement encourages banks to play with somebody else’s money. It is not a “free market” rule. It is a law and a regulation, and the source of a convoluted system that desperately tries to cope with the risks of its own creation by piling layer upon regulatory layer.
It’s true that if you “deregulate” one piece of a market that’s already shot through with government regulation, subsidies, guarantees, and warped incentives, you can increase risk further and get very bad results. Maybe that’s what happen in the run-up to the crisis. But if this is Judge Posner’s position, he should say so. He doesn’t. It’s all “deregulation increases risk, and regulation reduces it.”
It does? Dodd-Frank has done nothing about the GSEs. It has, however, accelerated an already-dangerous concentration in the financial industries; institutionalized the bailout culture; created a gargantuan rulemaking apparatus and a world in which no one knows what might happen next; and armed hordes of officials—folks like Eliot Spitzer—with criminal and civil enforcement authority over “abusive” lending practices and other undefined infractions. In his prime, General Spitzer never won a serious case against a financial firm in court. He didn’t need to because he had a better enforcement model: “Nice insurance company you have there. Would hate to see anything bad happen to it. Would you care to hire my tennis partner as CEO, or would you like to tango?” Mr. Spitzer grins like a Cheshire cat through the Posner interview, perhaps because he comprehends that Dodd-Frank institutionalizes his idea of market oversight by goons with badges. Now do you feel safe?
More often than not, it seems to me, regulators don’t reduce risk; they are the risk. How about the geniuses who designed capital standards that are (1) politically manipulated and (2) drive banks to load up on supposedly “risk-free” sovereign debt? (Oops: another “fundamental mistake.”) Or how about the Fed—which, in its role as the economy’s chief puppeteer, maneuvers the interest rate to effectively zero so that Congress can keep borrowing and, in the process, pushes retirees and pension funds into chasing yield way out on the risk curve?
I’m not an economist of Judge Posner’s caliber; in fact I am no economist at all. But from my unsophisticated perspective, both sides of the Fed’s policy look exceedingly risky. And I do know this: when the system comes down, as surely it will, I will not be mollified by an economist-judge’s confession that it was all an honest mistake.