Posner on Financial Industry Deregulation, Greve on Posner


“I was an advocate of the deregulation movement and I made — along with a lot of other smart people — a fundamental mistake, which is that deregulation works fine in industries which do not pervade the economy,” he said in the appearance on Spitzer’s viewpoint.” “The financial industry undergirded the entire economy and if it is made riskier by deregulation and collapses in widespread bankruptcies as what happened in 2008, the entire economy freezes because it runs on credit.”

Michael Greve [my GMU colleague]:

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.

UPDATE: Bonus from the same (Law and Liberty blog): Mike Rappaport takes on Posner’s claim that the original meaning of “freedom of speech” in the First Amendment did not include symbolic speech like flagburning, citing our own Eugene Volokh.