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Understanding the Roots of the Economic Crisis

April 21, 2009

The New York Review of Books has a long and substantial exploration of the causes of our current economic troubles. Robert M. Solow reviews Richard A. Posner’s “A Failure of Capitalism: The Crisis of ’08 and the Descent into Depression”. Posner is a noted jurist and intellectual heavyweight who was at the center of the conservative “law and economics” movement while he was a Law Professor at the University of Chicago. That’s what makes his take on the causes of the crisis, which he calls a depression, all the more surprising,

Some conservatives believe that the depression is the result of unwise government policies. I believe it is a market failure. The government’s myopia, passivity, and blunders played a critical role in allowing the recession to balloon into a depression, and so have several fortuitous factors. But without any government regulation of the financial industry, the economy would still, in all likelihood, be in a depression; what we have learned from the depression has shown that we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails. The movement to deregulate the financial industry went too far by exaggerating the resilience—the self-healing powers—of laissez-faire capitalism.

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