Judge Richard Posner of the U.S. Court of Appeals for the Seventh Circuit speaks candidly (if not controversially) about the current economic crisis and the financial markets in the United States at the Judicial Conference for the First Circuit held on May 13-14, 2010. What’s the relevance for Law 75?

What relevance could a conference about economics by a distinguished jurist have with the regulation of dealer contracts in Puerto Rico?

I was critical in my blog recently about the position espoused by an economics professor at another judicial conference a few weeks back favoring the repeal of Law 75 because of it allegedly causes artificially high consumer prices and hampers economic progress. My criticism was that proposals to amend or repeal legislation must be substantiated with reason in the facts and sound economic analysis.

Judge Posner seems to favor the Keynesian theory that market forces act on their own to correct irregularities in the financial markets and that more (or hastily-enacted regulation) is not the right answer.

Judge Posner described three fallacies that have been named to explain the situation with the financial markets in the United States, one, that the collapse was caused by over “greedy bankers”, second, that the recession ended last fall, and third, that there is a need for more regulation. In his view, Posner opined that the financial collapse was caused by various factors, including a freeze in consumer spending, heavy debt and unequal distribution of wealth, bad monetary policy, bad regulatory policy, and bad economists.

Judge Posner pulled all the stops when he blamed top-level regulators for the current financial crisis. He blamed Congress for an inept reaction or overreaction to the crisis. All congressmen and senators, except Barney Frank, know little or nothing about economic theory, Posner said.

Posner believes that the root of the current financial crisis (and the worst recession since the 1930’s) dates back to 2001 when the Federal Reserve substantially reduced short term interest rates. This caused mortgage rates to fall. Housing prices increased. A “bubble” was formed when adjustable rate mortgages made 100% financing possible and increased artificially the demand for housing. When the bubble burst in 2004, housing prices fell and this sent millions of people who had no equity to abandon their homes they could no longer afford. The banking industry and the financial markets that had heavily invested in housing collapsed. Posner opined that the government bailout of the financial institutions was necessary to prevent a bigger crash.

Finally, Posner believes there are impediments to short term economic recovery:

---Credit remains tight.
---Housing prices remain low.
---Unemployment remains high.
---The European financial crisis (and Greece’s financial collapse) will impact the U.S. economy.
---With the value of the Euro declining, U.S exports become more expensive.
---States and Cities in the U.S. remain in precarious financial positions or are bankrupt.
---The national debt in the U.S of 8 trillion dollars continues to rise.

In short, Posner believes there is no need for the creation of new government regulatory agencies and to pass hasty regulations to address the current economic situation.

As to Law 75. The same concern applies to those that are quick to single-out Law 75 as an evil for economic development in Puerto Rico and should be repealed. To state what should be obvious, no legislation should be passed or repealed without sound and reasoned analysis.