A New Take

On the economic crisis. He argues we are in a depression:

A typical recession is a market correction, usually of inflation or other economic imbalances; a depression is a market failure.

and

Were a lot of people reckless and stupid? Of course! But that cannot explain why the whole system crashed, since a lot of people are always reckless and stupid. The problem, fundamentally, is that markets cannot, and rationally should not, anticipate their own collapse. “A depression is too remote an event to influence business behavior.” Any single business can rationally guard against its own bankruptcy, but not the simultaneous bankruptcy of everybody else. “The ­profit-maximizing businessman rationally ignores small probabilities that his conduct in conjunction with that of his competitors may bring down the entire economy.”

During the housing bubble, for example, sitting out the mortgage boom meant forgoing large profits. “Even if you know you’re riding a bubble and are scared to be doing so,” Posner writes, “it is difficult to climb off without paying a big price.” So people made decisions that were individually rational but collectively irrational. To see the crisis through populist spectacles, as President Obama does when he attributes it to “irresponsibility,” is to misunderstand the whole problem by blaming capitalists for a failure of capitalism.