Reading Posner on the financial crisis

The books are The Crisis of Capitalist Democracy, which preceded A Failure of Capitalism: The Crisis of '08 and the Descent into Depression. Here is Robert Solow's reading of the latter. Both books have a feel of being written in a hurry and as such sounds disjointed in its narrative. The first book is essentially an impression formed as the crisis evolved and is light on prescription and heavier on description though not quite as moving as other books on the crisis. I detected a shift from the earlier book in terms of causes of the financial crisis. The first book concludes as most onlookers did at the time that excessive leverage was one of the prime causes of the crisis. While not blaming leverage per se, Posner discusses this as well as other factors that may have brought about the crisis. In the latter book, he argues that the causes of the crisis stem from low interest rates which caused a bubble to form, as well as lax supervision in the belief that markets would be self-regulating since the ideology of efficient markets had taken hold.

At least, this is my reading of it and I am surprised that Solow did not touch on this aspect at all. (See also a review from the NYT which has a similar interpretation as this.) Coming from Posner who is a well known conservative and from the bedrock of free markets of the University of Chicago, I found this to be quite a turn around and in parts of the latter book he admits this freely. All the other 'causes' such as greed, CEO pay, excessive leverage, creation of new derivatives can be explained rationally from these two factors. (See also here.) In this sense, the second book is better than the first and what is also refreshing is his admission that he really does not see anything from current or pending legislative reforms that would avoid another crisis. While he admits there are many good ideas out there such as counter-cyclical leverage requirements, he is not optimistic that these will come to pass.

In all, the second book is better than the first though it could have been a better book had it been more tightly edited. In some passages, he sounds as though he is rambling and going off on a tangent.