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GUY RAZ, Host:

Richard Posner is one of the most cited legal scholars in America. He's a federal judge, and he's cranked out a new book almost every year for the past 40 years, writing about everything from sex to Kafka to, of course, the law.

Judge Posner is also one of the country's leading libertarian thinkers. He and his compatriots at the University of Chicago put their trust in free, unfettered and barely regulated markets.

Now, Judge Posner's had a recent change of heart. You get a clue in the title of his new book, "A Failure of Capitalism." He says better regulation is necessary because it's our nature to be greedy, and it all boils down to the law of the jungle.

RICHARD POSNER: If you think lions are eating too many zebras, you don't go to the lions and say, look, you're eating too many zebras. It's really not in your interest because if they become extinct, you'll lose a source of protein. So, you ought to build a fence between you and the zebras. That is ridiculous.

If you want to protect the zebras, it has to be, you know, the government or the zoo or something like that. It can't be the animals. We shouldn't blame businessmen for being businessmen, and we shouldn't blame consumers for wanting to have a house or a bigger house or second house. I mean, that's fine, that's our culture.

RAZ: What about the bankers who are leveraging at 30 to one ratios. Weren't they greedy?

POSNER: Well, when you have opportunities like that, of course, people will take advantage of it. They know it's risky. They know, you know, you have - the downside risk is equal to your upside prospects. So...

RAZ: But the government has to police these things.

POSNER: The government has to police, and government fell down.

RAZ: And you wouldn't have said that two years ago.

POSNER: Right. I wouldn't have said that because if I'd read the newspaper - well, I do read the newspaper - but if I'd been reading the financial pages assiduously, I would have discovered there were some people warning about a possible crash. But most people were saying, including, you know, the Federal Reserve, they say, no, everything's fine, you know? We needed more government vigilance, and the challenge now is somehow to modify the system to reduce the probability of further crashes of this sort.

RAZ: You've said you wrote this book because, as you say, you really didn't understand what was going on with the markets.

POSNER: Right, right. Last September, when the banking industry went into its tailspin, I really - I didn't know a great deal about it. I didn't know what these - what a mortgage-backed security was or a credit default swap. So, I felt I'd missed a very important part of the economic picture. So, I've spent a lot of time trying to educate myself, and I thought, you know, I learned a lot, and I thought I could explain it in a simple way.

One of the things I stress in the book - well, I have been disappointed in discovering that the economists who do study the macro economy, the finance system, the Federal Reserve and so on, really were asleep at the switch when this crash came. They hadn't anticipated it, didn't know what to do about it. They are still, I think, very uncertain as to what to do and what is coming next. So, that was somewhat disillusioning.

RAZ: You say this crisis actually has a silver lining. What is it, in your view?

POSNER: You learn things you hope that might prevent repetition. Also, you know, the earlier the bubble bursts inside, the better. The longer it goes on before the crash, the more serious the crash. And one point is a great crack by Warren Buffett that - who's a real wit - who said that until the tide goes out, you don't know who's been swimming naked.

So, when you have a crash like this, all sorts of things that have been going on that have been kind of masked by the sort of phony prosperity come to light, like the Madoff scheme. And that would have continued for years and would have drained more money from people if it hadn't been that the crash generated demand for redemptions by his investors, and that's when his Ponzi scheme collapsed.

I think also, we may have an over-investment in the finance industry. It may too large. It may be that too many talented people have been drawn into it because of the money, and maybe we'll have a better allocation of human resources if the financial industry shrinks.

I don't mean to suggest the silver lining is, you know, commensurate with the losses. I mean, I think the silver lining is a small fraction of the losses caused by this crash.

RAZ: Judge Richard Posner sits on the Seventh Circuit Court of Appeals and is the author of "A Failure of Capitalism." He joined us from Chicago. Judge, thanks so much.

POSNER: My pleasure.

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