Richard Posner Reviews 'Animal Spirits: How Human Psychology Drives the Economy'

Shorting Reason
Richard A. Posner
The New Republic
April 15, 2009

The economics profession has been greatly embarrassed by the economic crisis. The crisis began last September, with the crash of the banking industry (broadly defined, as it should be in this deregulatory era, to include investment banks and other financial intermediaries besides commercial banks), and of the stock market and other financial markets. It has since grown into the first depression since the 1930s, if one may judge from its global sweep, the pervasive anxiety that it has engendered among government officials as well as the business community and the public at large, and the trillions of dollars that nations have desperately committed to fighting it. The economists had assured us that there would never be another depression in the United States, because economics had discovered how to prevent depressions: if economic activity dropped, the Federal Reserve had only to push down interest rates, for this would induce banks to lend and consumers and businessmen to borrow, and the borrowed money would be used to finance consumption and production, restoring output to its level before the crash. Academic and government economists specializing in the business cycle were as surprised by the September collapse and the ensuing downward spiral of the economy as anyone, and were unprepared with plans for arresting it. Six months later they cannot agree on what should be done to recover from it. Not knowing what will work, the governm