ANOTHER WORSHIPPER OF THE FREE MARKET FAIRY RECANTS

(h/t DougJ at Balloon Juice)

Richard Posner is a Federal judge and a strong supporter of the Free Market Fairy. Or at least he was. Like Alan Greenspan, he's decided that the Fairy has failed too many times and decided to write a book about the problem, "The Crisis of Capitalist Democracy."

Business Week has a review which includes this very tasty morsel:

...competitive forces inspire financiers to take irrational gambles—especially when they're betting other people's money. We cannot trust them to put the common good ahead of profits, says Posner. As a result, government must step in to limit the risks bankers take and, occasionally, repair the damage they inflict.

In an interview in Harper's (h/t James Kwak), Posner expands on his new found apostasy:

1. The general wisdom is that you switched from a laissez-faire approach to one that accepts the role of government regulation to stabilize the economy. What has changed your view of capitalism?

This has really been only since September 2008—since the crisis, when I took another look at everything. There was erroneous monetary policy and much too low interest rates, which encouraged excessive borrowing. And then there’s this very lax regulation of financial institutions, which reflects a failure to recognize that the financial industry is very unstable and requires regulation. It is connected to everything in the economy—consumers and businesses alike depend on it—so when it collapses, you’ve got real problems. A lot of people failed to see that. The financial backbone of the economy is a corner of capitalism that requires more intrusive and careful regulations than a lot of economists thought. Because of the centrality of credit in a capitalist economy, a capitalist economy is inherently unstable. This instability can become catastrophic unless you have something in place to mitigate it. Unfortunately no one seems to have very many great ideas on how to do this.