Professor Eric Posner also reads Edward Conard's new book about American capitalism. While he finds a lot to recommend, he ultimately comes away unpersuaded by the main thesis.
The important point of Posner's review is that Conard wants to have it both ways: he wants unfettered capitalism, but he also wants it to be supported by a government guarantee to prevent massive failure. This is a difficult position to hold:
A government guarantee at the heart of capitalism means that regulation is necessary, and Conard does not deny this. If all people (and firms) know that their short-term savings will be guaranteed by the government, they have no incentive to put their savings in safer, better-run banks. Riskier banks will offer higher interest rates on deposits and attract short-term savings, so the government must step in and force banks to lend prudently. This, too, is conventional wisdom, and reflected in the law. Conard gestures at some market-based solutions to this problem, but he ultimately embraces government regulation as he must, insisting correctly that the government must price deposit insurance, regulate the balance sheets of banks, and forbid them to make excessively risky loans. He even praises the Bush administration for closing a loophole in capital adequacy rules in 2001.
Where does this leave us? Conard presents himself as a defender of the market. At the start of the book, he asks portentously, “Do free markets optimize on their own, or can private investors put our economy at risk for their own gains? Nothing less than the credibility of capitalism is at stake.” It is clear where Conard thinks he stands. Throughout the book, he rails at regulation, blaming it for the financial crisis and other problems. He attacks Dodd-Frank and many other regulatory initiatives. Yet at the level of theory Conard is just as much in favor of regulation of financial markets as, say, the “ultraliberal” (Conard’s word) Paul Krugman. Indeed, the regulatory system he favors could be massive. It is impossible to reconcile his Manichaean vision and his endorsement of regulation.
In a revealing passage, Conard tries to square the circle: “The widespread failure of banks from temporary withdrawals is not a failure of free markets. It’s a consequence of a logical policy decision.” The policy decision he is referring to is the decision not to give banks an explicit government guarantee. In other words, the widespread failure of banks is not a failure of free markets; it is the result of insufficient government intervention! The passage makes no sense, and perhaps should best be understood as an attempt to reduce cognitive dissonance, an effort by a free-market advocate to persuade himself that his support for massive banking regulation is not a rejection of free market principles.