After watching an excellent presentation by Thomas E. Woods on the 1920 depression, I decided to check out his website. Among other things I came across his latest book, and New York Times Bestseller, Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse. I was fortunate to have a library nearby which had just ordered the book.
The book begins with a brief overview of the financial crisis of 2008 before diving into the details of the housing bubble. Several culprits are identified, including:
-Fannie Mae and Freddie Mac, whose implicit government guarantees enabled these GSE’s to take risks that would never have happened in a free market.
-The CRA (Community Reinvestment Act) is rightly blamed for contributing to looser lending standards.
-The pro-ownership tax code, which encouraged more demand for housing.
-The Federal Reserve’s low interest rates, which provided the cheap credit necessary to inflate the bubble.
The Wall Street Bailout is the subject of the next chapter. The ‘too big to fail’ theory is rejected and Woods argues they are too big to be kept alive. Bailouts drain productive business of recourses and ultimately destroy wealth. He also points out that bailouts and stimulus visibly create some minimal benefits, but only at the expense of greater and unknown economic activity that would have otherwise occurred.
At this point, an explanation of the Austrian Business Cycle theory (ABCT) is essential- something for which F. A. Hayek won the Nobel Prize in economics in 1974. Woods provides a good overview and shows how it explains recent events such as the housing bubble, the dot-com boom, and the Japanese bust of the 1990’s. Why do otherwise successful businessmen from various industries who have passed the market test year after year all suddenly make a ‘cluster of errors’? Clearly there is some external factor distorting the market, namely the intervention of a central bank in artificially setting interest rates. The interest rate coordinates production across time, but when the central bank plays with this number, massive discoordination is inevitable. Every American needs to have at least a basic understanding of ABCT- and this book provides a solid beginner’s overview.
Moving on, Woods applies the ABCT to the Great Depression, which necessarily busts quite a few myths that have been perpetuated about that era. Additionally, the Panics of 1819, 1857, 1873 are briefly overviewed. The rarely mentioned 1920 depression is also discussed. Despite negligible government intervention, the economy recovered from a deep 1920 crash quite rapidly- wholly contrary to what conventional economic wisdom teaches.
It’s a myth that Hoover was a free market president that did nothing about the depression; in fact, the opposite is true and Woods reminds us that during the 1932 presidential campaign the Roosevelt campaign actually accused Hoover of- socialism and reckless spending! Hoover worked to keep wages from falling, even though it was a deflationary environment with falling consumer prices. Both he and Roosevelt mistakenly thought falling prices were the problem, and it led them to do some pretty stupid things- including destroying crops, reducing competition, and limiting production. Taxes were raised and welfare programs were established. In other words- nearly everything imaginable to inhibit recovery was done. Is it any wonder that the depression dragged on for over fifteen years?
World War II didn’t lift us out of the Depression either. War, after all, is a sometimes necessary but otherwise destructive force, in which resources are squandered- bombs exploded and property destroyed, ships sank, fuel burned, etc. This can hardly be considered to increase a country’s economic wealth; it simply requires a temporary increase in spending, which increases the GDP. Unemployment decreased too- but the men leaving for battle are not in goods producing jobs, but in consumption and destruction jobs. It should be pretty clear that war doesn’t bring prosperity- just like a earthquake or a hurricane doesn’t – even though they require temporary increased economic activity in certain sectors, at the expense of other sectors. How then did we escape the Depression?
Keynesians warned that with the war winding down the economy would nosedive again. Instead, taxes and government spending were slashed, veterans re-entered the labor force, and production returned to making things consumers wanted, which was a recipe for prosperity.
The last two chapters address money and what we should do to get out of this mess. More detail on the monetary system is given, anti-gold fallacies are addressed, and a few thoughts on deflation are given. The book is wrapped up with some advice as to how we should move forward and return to genuine economic prosperity. Among them are, abolishing Fannie and Freddie, stopping bailouts and cutting government spending, and ending government manipulation of money and central banking.
Aside from the awkwardly long title, book is well written and covers most every question you might have about the 2008 economic crash- as well as every objection you might have towards a free market. The 194 page hardback makes great reading for both economists and laymen alike. Find a spot on your book shelf for Meltdown.
About the Author: Thomas Thomas E. Woods, Jr., is the New York Times bestselling author of nine books. A senior fellow at the Ludwig von Mises Institute, Woods holds a bachelor’s degree in history from Harvard and his master’s, M.Phil., and Ph.D. from Columbia University.