America's judge, "Dopey Dick" Posner, discovers Keynes -- as "Chicago School" econ artists turn to macramé and flower-arranging

Here come da judge: In that pose of pontification (with his mouth closed, no less! if only he'd actually learned to keep his trap shut), where else could this photo come from but charlierose.com? America's judge has a hot tip for your economics reading list: some guy named Keynes.

"Until the banking crisis erupted, Posner hadn't bothered to investigate [Keynes's] 'General Theory.' When he picked it up, he was greatly impressed by the economic insights and practical detail it contained. 'Even though it is kind of loose -- it doesn't dot all the"'i"s and cross all the "t"s,' Keynesian economics 'seems to have more of a grasp of what is going on in the economy,' Posner said to me. Much of modern economics, by contrast is 'on the one hand, very mathematical, and, on the other hand, very . . . credulous about the self-regulating power of markets. That combination is dangerous.'"

-- from John Cassidy, "After the Blowup," in Jan. 11 New Yorker

(article abstract here; article online only in digital edition)

by Ken

I've never gotten the Richard A. Posner Industry. Here's this guy who's maybe a sixth-rate intellect and has somehow set himself up as the world's greatest judge and authority on all matters political, legal, and economic. (I've probably left out six or a dozen of his areas of supposed supreme expertise. This could wind up on the midterm, so you might want to check out his book titles. You gotta be a expert to write a book, right?) And an entire industry of make-believe journalists and academics have gone along with the gag.

I'm sure in Dopey Dick's mind, the only reasons he's not on the Supreme Court are:

* He's too smart.

* He's too outspoken.

* Any court he's on is already as supreme as it can stand to be.

Of course what he really is is a dismal, grinding hack regurgitating mindless right-wing platitudes. Maybe the one thing that's truly remarkable about Dopey Dick, that one-man morass of intellectual mediocrity, is that he's managed to pull off this scam of scams with so little to back up his claims to attention. About all I could ever figure out was the sheer audacity of his lack of self-doubt. In the land of the pseudo-intellectuals, the phony who banishes all lack of certainty from his vocabulary has a shot at being king. It's the sort of thing that made Rudy Giuliani, well, Rudy Giuliani. Mediocrity with a bullwhip.

But we're not here to bury Dopey Dick. Oh, we're here to make fun of him as opportuniity presents itself, but our real business is the slash-and-burn job John Cassidy has done on the once-lordly "Chicago School" economists, whose shining star sank out of sight along with the economy in August 2008, in a modestly presented "Letter from Chicago" in this week's New Yorker.

It's Cassidy who, in a fit of mad inspiration, leads off with "Dopey Dick" Posner, who, especially since the departure from this vale of tears of Milton Friedman, the Chicago ideological supremo who made tyrants tremble, or more likely cream in their pants, has emerged as something between the intellectual godfather and the furry mascot of the Chicago School. In the wake of Icky August, it appears that Dopey Dick has done what rats have been celebrated for doing since time immemorial: jumped ship.

Here's how Cassidy presents Posner:

A lawyer by training, Posner is also one of the country's most influential economics writers. In his 1973 treatise "Economic Analysis of Law," he applied the maxims of free-market economics to the courtroom, arguing that enforcing economic efficiency ought to be a primary goal of judges. Posner, who was then a young professor at the University of Chicago Law School, helped create the law-and-economics movement, which has populated many of America's courts with judges of similar mind. In 1981, Ronald Reagan appointed him to the Seventh Circuit Court of Appeals, and since then he has written more than two dozen books, including one defending the 2000 Supreme Court decision that gave George W. Bush the Presidency.

Earlier this year, Posner published "A Failure of Capitalism," in which he argues that lax monetary policy and deregulation helped bring on the current slump. "We are learning from it that we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails," Posner writes. "The movement to deregulate the financial industry went too far by exaggerating the resilience -- the self-healing powers -- of laissez-faire capitalism." Posner also accuses professional economists, including some of his Chicago colleagues, of being "asleep at the switch." In September, he came out as a Keynesian; in a long piece in The New Republic, he hailed "The General Theory of Employment, Interest, and Money," which John Maynard Keynes published in 1936, as a "masterpiece," saying that "despite its antiquity, it is the best guide we have to the crisis."

It seems that in A Faillure of Capitalism, the new book, Dopey Dick names names, meaning those of a number of his Chicago colleagues of the "After Milton" era.

During our conversation, Posner questioned the entire methodology that [Chicago economist Robert] Lucas ["one of Friedman's most eminent successors"] and his colleagues pioneered. Its basic notions were the efficient-markets hypothesis, which says that the prices of stocks and other financial assets accurately reflect all the available information about economic fundamentals, and the rational-expectations theory, which posits that individuals and firms are hyper-intelligent decision-makers who have a correct model of the economy in their heads. In rational-expectations theory, the economy is represented in very simplified and spare fashion. Many models, includng some relied on by the Fed and other central banks, don't even feature banks or other financial intermediaries. In Posner's view, older, less dogmatic theories better explained how the problems in the financial sector dragged down the rest of the economy.

Lucas, it turns out, declined via e-mail ("I don't want to do this") to participate in Cassidy's inquiry. And Cassidy found a couple of Chicago old guardsmen, Eugene Fama and his son-in-law, John Cochrane, who, like crusty old Bolsheviks long after the fall of Communism, continue to cling to the one true credo. Fama actually takes pride in having theories he believes in criticized by Paul Krugman. "My attitude is this. If you are getting attacked by Krugman, you must be doing something right." Cochrane, pressed on the subject of Keynesian economics, points out, "We threw it out for a reason. It didn't work in the data." Ah yes, the precious data.

But then there's Nobelist James Heckman (Cassidy notes that since 1974 "more than a dozen scholars associated with the U. of C. have been awarded the Nobel Memorial Prize in Economic Sciences"), who told Cassidy: "Everybody here was blindsided by the magnitude of what happened. But it wasn't just here. The entire profession was blindsided."

The first statement ("Everybody here was blindsided by the magnitude of what happened") is easy enough to believe; the second ("But it wasn't just here. The entire profession was blindsided") is nonsense. Apparently by "the entire profession" Heckman means people like him -- and certainly not people like, say, Paul Krugman or Joseph Stiglitz, not to mention Dean Baker.

Gary Becker, a 1992 Nobelist, was a little more careful.

There are a lot of things that people got wrong, and I got wrong, and Chicago got wrong. You take derivatives and not fully understanding how the aggregate risk of derivatives operated. Systemic risk: I don't think we understood that, either -- at Chicago or anywhere else. Maybe some of the calls for deregulation of the financial sector went a little too far, and we should have required higher capital requirements.

However, Becker quickly noted, "That was not just Chicago. Larry Summers when he was at Treasury supported deregulation." As indeed he did. At least Becker doesn't try to pretend that "the entire profession" supported deregulation. He just doesn't choose to think about the economists who didn't.

Eventually Cassidy found his way to Raghuram Rajan,

a forty-six-year-old Indian-born scholar who is one of the few economists who warned about the dangers of a financial crash. At a conference organized by the Fed in 2005, he said that deregulation, trading in complex financial products, and the proliferation of bonuses for traders had greatly increased the risk of a blowup. Senior Fed officials and other prominent economists dismissed his concerns. Lawrence Summers said that Rajan's critical tone supported "a wide variety of misguided policy impulses."

Rajan, who was chief economist of the International Monetary Fund from 2003 to 2006, describes what happened as "a systemic breakdown, and we need to look more broadly at why it happened." He argues in the book he's working on "that the initial causes of the breakdown were stagnant wages and rising inequality," which created "an urgent demand for credit" among middle-class households "lagging behind the cost of living." Are you hearing this? Once upon a time Uncle Miltie would have had you run out of Chicago for mouthing left-wing claptrap like this.

Ironcially, the panic that ran through the Chicago gang a year ago has in good part subsided, because of government intervention. (Take that, Uncle Miltie!)

Thanks to government action on an enormous scale, the banking system has been stabilized and the U.S. economy is expanding, if at a moderate pace. Ironically, the rescue program has taken some of the heat out of the economic debate. In Chicago, as elsewhere, most economists have returned to their own research projects. "If this recession had got a lot worse, we would have seen two major things," [Gary] Becker said to me. "Much more government involvement in the economy and a lot more concentration in economics on understanding what went wrong."

Huh? You mean the boys, at Chicago and elsewhere (and they do seem to be all boys), are not concentrating on what went wrong? Of course we already knew that Becker's economic universe doesn't extend much beyond people who think the way he does.

"Dopey Dick" Posner knows better.

"Rational expectations and strong views of efficient markets have taken a terrific hit," Posner pointed out to me. "Keynes is back, and behavioral finance is on the march." Outside of Fama and his followers, it is hard to find anybody, even in Chicago, who believes that speculative bubbles aren't a serious problem, or that the U.S. economy automatically adjusts to full employment. And even most of the diehards now support efforts to regulate Wall Street more effectively.

I'm guessing that this will still come as news to the great minds of the Republican Party, and to many of the economically captive minds in Congress. And this comes only from the mouths of what's left of the Chicago gang. We never do hear from or about economists elsewhere who were saying all along that these people were full of shit.

And I do wish Cassidy had taken one more careful look through his notes. Surely at some point in their conversations Dopey Dick said something along these lines: "You know, man, until this mess I really had no idea how full of shit I was. I've been sounding off for decades now without a damn clue what the hell I'm talking about. It's a wonder anybody paid the slightest attention to me! I was so full of shit all these decades, I was a walking plumbing emergency waiting to happen."

Could you just give it one more look-see, John? Surely the judge must have said it at some point. Here, let me just riffle through your notebook. It's got to be there, wouldn't you think?

#

Trapped in the meltdown (continued): As the Bush economic miracle plays out, we have deeper and wider cutbacks, and nonprofits in freefall

“When [Milton] Friedman’s Platonic ideas of free-market virtues are put into practice, they have too often generated a systemic orgy of competitive greed -- whose remedies, ironically, entail countermeasures of nationalization.”

-- Marshall Sahlins, University of Chicago emeritus professor of anthropology, quoted by John Lippert in a Bloomberg piece on the apparent collapse of "Chicago School" socioeconomics in its nest

by Ken

Am I the only one who's creeped out when Chimpy the Prez (you remember him, don't you?) emerges from his rathole and blithers about the non-existent "free market" and sneers sanctimoniously at "failed companies" that under normal circumstances should be allowed to fail? Is this the Twilight Zone, or what? George W. Bush pointing a finger at failed companies? Have we all taken leave of reality? This is a dunderhead whose history in business consisted of turning one company after another to a pile of shit. Anyone who would listen to anything he has to say about business or the economy should be in a straitjacket.

And so, given eight years at the helm -- and boy, do the people who voted for him have a lot to answer for -- of course he's done what he always does: turned everything around him to shit. With, true, the small exception of the family, friends, and cronies who piled up fortunes as immediate beneficiaries of his blithering incompetence. (In fairness, some of these must have been the same people who kept bailing Chimpy out of disaster after disaster through his so-called "business career," who may be presumed to have done so as an investment in the future, or rather their future.)

It still boggles my mind to think that so many people could have been so knuckle-draggingly stupid as to fall for a creature whose every cell screams out, "Fraud!" But more importantly, at least some of those people have to learn that the moronic bullshit he poured down their throats is in large measure the same bullshit that's been fobbed off on them for generations by "the business party."

Yessiree, what we needed to do was throw off all that awful regulation, which was holding business back and preventing us from achieving real prosperity. The reality, of course, was that all that regulation, by creating in some measure at least a sort of level playing field for business and providing for some of the basic needs of society, made possible both sustainable prosperity and a measure of civilization.

Business, of course, always wants the shackles removed. And when they get it, the result is always disaster, because there's no one to protect them from themselves. This time, with Cheney the war-maker (and war is always good for business) and regulation-stripper they bought themselves the pro-business government to end all pro-business governments. And naturally the result is economic catastrophe unprecedented since the Great Depression -- and we're still counting.

It's what doomed the McCranky campaign, though there are much better reasons why that campaign should have been routed. But in the end, it really had nothing to do with the lies and imbecilities Young Johnny was spewing. Voters just knew instinctively that the people in power had to be gotten out of power. It remains to be seen what happens once they discover that President Obama can't wave a magic wand and make everything OK. But will they look in the mirror, those people who voted for a lying simpleton not once but twice, and see the people who hate America so much that they twice voted for a man whose life's work was to destroy it?

Undoubtedly a lot of the people who voted to put Chimpy in the White House are now paying the price. After all, it's only the people who engineered his career and bankrolled his candidacy who made out like bandits from it. It would be nice to think that at least some of those people have come to understand what they did, in the hope that they won't be such easy prey the next time some huckster tells them what we really need is a government that's good for business. (There's some consolation in that at the academic level "the Chicago School" -- the slash-and-burn school of Friedmanite economic and social policy -- seems finally to have come into disrepute, as recorded in the Bloomberg piece quoted up top.)

And sad to say, we no longer have just one "business party." The lesson that Democrats like Rahm Emanuel have learned since the Dems were unceremoniously dumped out of power is that it's important to show those corporate wheelers and dealers that Democrats can be just as good friends as Republicans, maybe even better.

So now we survey the wreckage, as we wonder how much worse it's going to get. And how are we feeling the pain?

Here are some headlines pulled off the New York Times website which seem to speak for themselves:

* Home Sales in November Fell at Faster Pace Than Expected

* In Budget Crises, States Reluctantly Halt Road Projects

* As Economy Dips, Arrests for Shoplifiting Soar

The Washington Post, meanwhile, has a story that shouldn't surprise anyone, on the crisis facing charities and nonprofits generally, with a disastrous dropoff in giving. It begins:

For Charities, a Season of Need
With Donations in Free Fall, Groups Try to Capture Holiday Generosity

By William Wan and Brigid Schulte
Washington Post Staff Writers
Tuesday, December 23, 2008; B01

In the world of philanthropy, December is everything. It's the one month when people are at their most generous, when procrastinators rush to beat the year-end tax cutoff for donations, and when charities count on collecting as much as a third of their annual contributions.

This year, with rising unemployment and a tanking economy, donors have already informed at least one-quarter of nonprofits in the Washington that they will be giving less, according to the Center for Nonprofit Advancement. As a result, more than 40 percent of nonprofits plan to reduce programs or cut staff, and most are reevaluating the way they do business to weather the year ahead.

The piece surveys a number of D.C. charities and nonprofits that are scrambling desperately this month to make up for gigantic shortfalls in their operating budgets, without a great deal of success. However --

Earlier that day, in Northwest Washington, organizers of another kind of event were suffering the opposite problem: overwhelming interest.

Washington's top nonprofit leaders had called an emergency meeting downtown to try to figure out how to survive the economic crisis. It was supposed to be an intimate gathering of a few dozen leaders, but so many nonprofits registered that organizers had to create a waiting list. The meeting was dubbed "Nonprofit 911."

At times, the 500-person town hall meeting resembled tent revivals of old. There were prophecies of doom, messages of hope and testimonies from people struggling in hard times.

"If you think it's a storm, you just batten down the hatches and wait for it to pass," another said. "But this is more like climate change . . . like the coming of the ice age."

"As bad as this year has been," the Post writers write, "experts say, 2009 might be worse."

"No one knows what's going to happen, the kind of choices we're going to have to face," said Adam Tenner, director of Metro TeenAIDS. For weeks, anxiety over his group's finances has gnawed at him so much that his stomach started hurting.

"When the choice becomes which service we're going to cut, who we're going to stop helping," he said, "any choice is going to be a bad one."

The Post also has a piece that attempts an overview of the deepening recession:

Deeper Cuts, Widespread Pain
Few Industries Are Immune as Companies Shed Jobs in 'Serial' Downturn

By Annys Shin
Washington Post Staff Writer
Tuesday, December 23, 2008; D01

Recessions can be notoriously uneven. They can wreak havoc with the livelihood of factory workers but not that of bank tellers or nurses. Whole industries can see jobs washed away forever, while others hum along and even grow.

This time, however, the pain is more widespread, economists say, affecting the investment banker, the auto worker, the warehouse manager and the toy store clerk.

So far this year, companies have announced layoffs that affect more than 1 million jobs, according to job placement firm Challenger, Gray & Christmas. Bank of America, the Dow Chemical Co., Anheuser-Busch InBev, General Motors and Circuit City are among the growing number of companies that are letting people go.

Another key difference with past recessions has been the downturn's "serial nature," said Jerry Nickelsburg, an economist with the UCLA Anderson School of Management.

In other words, the recession has not affected industries and regions at once, but has rolled out in spurts.

Industries with some of the steepest job losses include construction, financial services, retail and manufacturing. The regional differences in job losses reflect how large a role those industries play in a given area's economy.

Among the states most immediately and devastatingly hit have been California, which was hardest-hit by the bursting of the housing bubble (we haven't talked about their impending state-government crisis -- I assume everyone has been tracking that story), and Michigan and the Midwest, Ground Zero for the domestic auto-industry collapse. Shin notes:

Many of those who have been or are about to be laid off will have to find a new line of work, several economists said, because they won't be able to go back to their old one.

The construction industry has shed 780,000 jobs since September 2006 according to the BLS, and it isn't likely to go back to bubble-like levels any time soon, experts said. Further, an anticipated decline in the construction of office buildings, apartments and shopping centers is likely to spur more layoffs in 2009.

Rebecca Blank, an economist at the Brookings Institution in Washington, said she expects manufacturing jobs to keep vanishing steadily from the U.S. economy, including in the auto industry. "It's been a downward trend since the late 1970s," she said. "They are not coming back by and large."

#