111 of 122 people found the following review helpful
If one is to believe the mainstream print media, the current economic crisis is all about a lack of regulation in the financial markets and we need massive government spending to "stimulate" the economy. Keynesian ideas, which have in fact guided US monetary policy for decades, are suddenly receiving a public revival despite the 1970s stagflation debacle, their failure to bring the US out of the Great Depression, and their dramatic failure in turning around the Japanese economy over the last two decades. Indeed, just today (Feb 21) President Obama announced middle class tax "refunds" will quickly find their way into consumer hands so they can "spend" more. He is also planning a massive increase in public works spending while commentators like economist Paul Krugman are suggesting he should augment these totals with 50% more spending yet. And still, the markets, which had recovered slightly in January, continue to drop. If there were any validity to Keynesian thought at all, the US would be beginning the greatest economic revival in history. But it appears instead that we are beginning the long process of turning a housing recession into a full blown depression, with hardly a whisper of alternative analysis. Still, for those with ears to hear, as it were, Thomas Woods offers here an alternative "free market" appraisal of the current economic crisis. However, in doing so he has violated one of the cardinal rules of history by writing a quick analysis of events. As an example of immediate historical anaysis, I think this one is pretty good, but the book does have a few deficiencies.
In brief, Wood's argument is that "conservatives" do in fact share a significant portion of the blame for the present crisis. This is not because, as the cannard goes, they "deregulated" the economy. Indeed, regulatory spending during the Bush presidency went up 65% in real terms, a fact that I am amazed escaped any notice in this book. (See Jan Reason Magazine, "Is Deregulation to Blame?") Nor is it because the Democrats somehow prevented them from providing enough oversight into Fanny Mae and Freddie Mac, two supposedly private companies which would never have existed were it not for their creation by government fiat. The real reason is because they allowed, and even collaborated in, a massive increase in currency inflation under Chairmans Greenspan and Bernacke and refused to heed warning signs about the consequent housing market bubble. Despite Republicans' recent discovery that the Community Reinvestment Act has been used of late to offer loans to people who obviously were not qualified for them, the fact is that "conservatives" have been just as guilty about manipulating markets as liberals have for the last two decades and neither will own up to real problem: our Federal Reserve System does not limit crises like these. It creates them.
In fingering the Fed as the cause of the current crisis, Woods is siding with a long line of dissenting economists popularly known as the Austrian School. These economists argue, in brief, that the boom and bust cycles of free economies (command economies avoid the cycle by remaining in virtually permanent depressions) are due to artificial increases in and contractions of the credit market, usually caused by government manipulation of the money supply. In Austrian theory interest rates are important because they reflect what consumption a person is willing to give up in the present for some future gain. One would not "borrow" to create a new product unless one had a reasonable expectation that the return would be greater than the interest rate. Of course, an entreprenuer could be wrong in her analysis, but the prevailing intrest rate still guides investment in the economy as a whole. Bad investments are quickly liquidated, and capital flows to new opportunities. But if markets are manipulated, say by inflationary policies, it is difficult to know if new investments are really that valuable, or just appear to be. Once money circulates through the economy and prices rise, it becomes obvious which investments were legitimate which were not, but in the meantime, there is a massive misalignment of resources, a problem the market "solves" with a recession.
Austrian theory does a very good job, as it happens, of explaining both the "dot com" bust of 2000 and the housing crisis of 2007-08. But the solutions Austrian theory proposes are politically unpopular, or perhaps more honestly, they are unpopular among the political class. The ideal solution is for government to stay out of the way and let the economy heal itself. Alas, that solution has not been tried since the 1920-21 depression, where it worked wonders in turning around a moribound economy. Instead, government officials like to take action and "do something" (ie. reward their political cronies under the guise of promoting the public good) and so they soak up useful capital for wasteful spending projects (more windmills anyone?) at precisely the time that capital is at a premium even for profitable pursuits. Governments also encourage more consumer spending (saving would do more good) and generally tax healthy businesses to subsidize those that should have been allowed to go bankrupt. Naturally, such policies accerbate the depression, but at least a few individuals benefit from them and government officials can proclaim their "successes" with these public examples. The private suffering their policies provoke are largely unnoticed and rarely connected to these policies.
To make sure that these consequences are brought home to people, Woods examines the two instances in history when Keynesian policies were most thoroughly employed: the Great Depression, and Japan from 1989 to the present. In both cases, Keynesian policies were practiced to the hilt and yet in both instances, the depression lingered on with no "real" success changing the economic crisis. This is because the problem was not with the crisis per se, but rather with the misallocation of resources from the preceding artificial "boom." A steadfast refusal to permit the reallocation of resources will simply prolong the situation, but that is exactly what governments do. There is, of course, a modern myth that the failure of the New Deal to solve the problems of the depression is just a modern right wing fantasy. The reality of course is that the New Dealer's themselves recognized their policies were a failure, and I was pleased to see Woods quote Secretary Henry Morganthau to this effect, "We have tried spending money. We are spending more than we have ever spent before and it does not work..." (p. 149) But just to make sure the point is not missed by naive revisionists like Paul Krugman, who is if anything even more of an embarassment to the Nobel committee than Al Gore, Woods goes on to recount the experience of Japan with their 10 bailouts, decades of 0 interest rates, and a depression that is now worse than our own of the 30s. None of which will make any difference to the true believers. Indeed, Krugman insists Japan should have spent even more, though how much more he cannot specify.
And that leads to the ultimate problem with this otherwise nice little book. It is a rush job hoping to influence a debate that is already pretty much over. People overwhelmingly opposed the first 700 billion dollar bailout and it was voted through with strong bipartisan support. Many opposed the second as well, but it is even larger and already signed into law. Yes, House Republicans suddenly rediscovered their small government principles now that they are such a tiny minority their vote no longer matters. This hardly inspires much confidence in their future probity. But in the meantime, we have years of mismanagement (at best) before us and the likelyhood is decent for a prolonged recession, at the very least. Woods of course provides a few modest suggestions for real change: allow businesses to fail, cut government spending, deregulate, but "change" was never an actual goal of the electorate this last election. Had it been, we would have Ron Paul as President. But in trying to influence a debate that is for the most part over, Woods did not do his thesis the justice it deserves. As I noted at the start of my review, he does not touch upon the massive regulation of the economy under the Bush administration which contributed to this crisis. And he barely mentions the wild misappropriations of the first 700 billion package. How could he? Despite the fact we all knew they were coming (and this latest "stimulus" is probably worse) we are only now finding out the details behind this scandal. Part of the problem with writing history as it happens is that many of the most important details will be left out, either due to haste or necessity.
Thomas Woods is a top notch historian. He is certainly a better writer than the majority of American historians today. But valuable as this book is, it is incomplete. We know the effects of Bush Obama policies will be detrimental to the economy--indeed, they already are. But we do not know how this detriment will play out. Indeed, Americans are probably the preeminent entreprenuers in the world. A new industry in an as yet unrecognized, and hence unregulated, field may develop that will save this economy, much as the internet came in on the heels of federal mismanagement following the Savings and Loan debacle. The resulting wealth creation overwhelmed the government mismanagement that could have lead to a deeper recession or depression. And something similar may yet happen. It is more likely here than in Japan, I would suspect. Careful historians do not have to debase themselves into public pundits like Krugman does. I suspect that in two years time, this good book could have been a great book, explaining (not predicting) either a great depression, or a miracle of American individualism that somehow avoided it, and in either case it would have been a more effective warning against the failed policies of the past than this one, good as it is, could ever hope to be.
74 of 82 people found the following review helpful
on March 16, 2009
Deregulation. Market failure. Greed. Not enough government oversight. All kinds of fallacious explanations are being trotted out as primary causes of the economic meltdown that dropped like a bombshell on baffled Americans. After all, weren't they basking in the most prosperous years of their lives? They were indulging in a soaring stock market, buying extraordinary houses, and going on fantasy vacations. Wasn't that the American Dream? What happened?
The "American dream" is a phrase attributed to American author James Truslow Adams in his 1931 book, _The Epic of America_. He wrote: "It is not a dream of motor cars and high wages merely, but a dream of social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position."
In view of that, the modern interpretation has strayed far from the original meaning. In fact, the "American Dream" represents something more than the cars and big money that Adams warned about. Central planners and social engineers misappropriated the term, a long time ago, and put it into use as a slogan to convey a sense of entitlement and equality as they began to shape and subsidize the home ownership nation that started with the creation of Fannie Mae in 1938.
A new book by Regnery author Thomas E. Woods, Jr., _Meltdown_, suggests that the American dream became an American bubble brought on by the reckless, self-serving actions of government institutions that commenced a series of interventions that culminated in a collapse of the stock market and financial institutions, along with the rapid disintegration of the US economy. Ergo, the American nightmare.
Woods at once puts his finger on the unmistakable "elephant in the living room," the Federal Reserve System. As he points out, other than a few assorted rumblings, there has been almost no discussion in the mainstream media of the Federal Reserve's role in launching this crisis. The Federal Reserve, which centrally plans monetary policy and interest rates, sparked the crisis by drastically reducing interest rates beyond levels that would otherwise have been set by a free market. "Making cheap credit available for the asking does encourage excessive leverage, speculation, and indebtedness," Mr. Woods writes. He adds, "Manipulating interest rates and thereby misleading investors about real economic conditions does in fact misdirect capital into unsustainable lines of production and discombobulate the market." This begins the authors' explanation of the boom-bust phenomenon and how an artificial boom, and the financial holocaust it leaves behind, can be perfectly clarified and understood in terms of the Austrian theory of the business cycle.
--Turn on the Bubble Machine--
Thanks to the Fed's easy-credit policies, the housing bubble became ground zero for the catastrophe. Mr. Woods points out several factors that contributed to this mess, all of which were significant government interventions that emerged in order to fulfill a specific agenda. First there were Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs) that had the benefit of an implied government backing, thus giving investors the appearance that their investments in these entities were essentially risk-free. Both entities were created for the sole purpose of intervening in the housing market and subsidizing home ownership, especially for the politically favored classes. Besides easing credit requirements so that banks could loan to dubious buyers, both Fannie and Freddie helped to spread the bubble's aftermath by buying mortgages on the secondary market and pooling and selling the mortgages in the form of mortgage-backed securities. Soon everyone was getting their mitts on these securities and holding them as investments, creating conditions that were ripe for disaster.
Another factor in the housing bubble that Woods points to is the Community Reinvestment Act, a law born in 1977 that was given a new lease on life from Bill Clinton. The CRA was a crusade to jettison traditional lending standards in favor of an equality-based agenda aimed at putting minorities and the poor into homes they couldn't afford. Woods points to a study by the Federal Reserve Bank of Boston that concluded, "even allowing for differences in creditworthiness, minority applicants were still getting mortgage loans at lower rates than whites." Consequently, it was determined that the mortgage banking industry was engaging in discriminatory lending policies and a massive government intervention was needed to stamp out the disparity. The result was the birth of the CRA, and the beginnings of a massive lending spree to unqualified, or subprime, borrowers.
In spite of the obvious problem of granting long-term loans to high-risk individuals, perhaps one of the more illuminating points made by Mr. Woods is that the subprime loan mishap may have been overemphasized while the flurry of impractical lending innovations, such as 100 percent loans, ARMs, and interest-only loans, were given less attention.
The push for relaxed lending standards for low and middle-income borrowers was so pervasive and systemic, persisting for a full decade, that it is no surprise that it should have spilled over into the standards for higher-income borrowers as well.
"...Not only were these easier mortgage terms available to speculators, but the surge in demand for housing caused by the much easier access to financing also led to increases in home prices that had the unintended effect of enticing speculators into the market in the first place."
Alan Greenspan, as chairman of the Federal Reserve, publicly put his stamp of approval on ARMs , thereby leading people to believe that they were reasonably safe options. Woods points out that the foreclosure crisis has not been confined to the subprime sphere, and in fact prime loan foreclosures increased in unison with subprime foreclosures.
--Weekend at Ben and Hank's--
In the spring of 2008, Treasury Secretary Hank Paulsen claimed "we are closer to the end of the market turmoil than the beginning." Rather, it was just the beginning, as Bear Stearns had collapsed and the Fed set up a bailout arrangement with JP Morgan so it could acquire the investment bank. What followed was a meltdown of the entire financial system that had been incorrectly assessed time and time again, by both Paulsen and fed Chairman Ben Bernanke.
The government seized control of Fannie Mae and Freddie Mac just a couple of months after it placed IndyMac Bank into receivership. Lehman Brothers filed for bankruptcy, Merrill Lynch was rescued by the Bank of America, Washington Mutual was seized by the FDIC, the government poured billions into the failing giant AIG, and Wachovia was scooped up by Wells Fargo. The White House responded by announcing its Emergency Economic Stabilization Act of 2008 that would give unprecedented powers to the US Treasury. This bailout bill was sold to the American people via repetitive, tactical scaremongering. Woods notes that the public was told:
"...all kinds of horror stories of what would happen to them if they failed to do as their betters told them: the decimation of their retirement plans, the collapse of housing prices, the inability of small businesses to make payroll (as if a healthy small business borrows to make payroll), and on and on. The bailout had to be passed right away."
This epic bill that was too big to read and passed too quickly for debate to take place, was put forth as necessary to breathe life back into an expiring economy that only the Fed-Gods could save with their collective financial genius and business acumen. Of course, once the Feds decide something is a "crisis," that opens the door to inescapable solutions, and only government can ever provide those solutions. Crisis, then, becomes the doorman for a massive series of government interventions. The "do something" mentality of the bureaucrats acted on impulse, and they made things up as they went along, changing their minds whenever it was convenient. This produced, in Mr. Woods's words, "a Weekend at Bernie's economy, with sunglasses and Hawaiian shirts on zombie companies supposed to give the impression of life and health."
The housing mania wasn't the only hiccup, however. The Federal Reserve had successfully ushered in a "No Adult Left behind" policy for the credit-intoxicated, consumption-crazed masses with its years of low interest rates. Government had created a credit dependent society in which people did not want to give up their newfound "prosperity" quite so easily. With the average American saving little or no earnings and living dangerously on the edge of insolvency, it became apparent that life in a bubble did not reflect real prosperity. Thus we witnessed the birth of a nation of Two-Thousandaires - those with a Hummer and a decked-out Chrysler 300, a huge house, all the latest toys, vacations that Bernie Madoff would envy, and $2,000 in the bank.
Soon thereafter came the nationalization of the banking system so that the credit markets could be propped up so the extravagant lifestyle people had come to depend on could be sustained indefinitely. Loan! Spend! Don't Save! Or so said the Keynesians who saw spending as being the key ingredient of a prosperous economy. Paulsen even lamented the illiquidity that was said to be "raising the cost and reducing the availability of car loans, student loans and credit cards." The lesson is this: give rise to more of what caused the financial mess in the first place.
--Government is to Blame--
After Mr. Woods lays out the house of cards that became the meltdown, he launches into an ample explanation of the government's boom-bust business cycle, along with an entire chapter of challenges to the conventional wisdom concerning the Great Depression and the countless fallacies that surround both its causes and cure. By invoking F.A. Hayek's theory of the business cycle, he aptly explains to the reader the basics of how things work in a free market and what happens when the visible hand of the Federal Reserve manipulates interest rates, distorts the supply of credit, and misrepresents investment opportunities for entrepreneurs, thereby leading them to commit clusters of errors that lead to the misallocation of resources. The Austrian theory of the business cycle, Woods says,
"Exonerates the free market of blame for the boom-bust cycle, since the factors that bring the cycle about - the artificially low interest rates that provoke the boom, and the foolish government interventions that prolong the bust, - are all examples of interference with the free market."
The other piece of evidence that the Fed's fingerprints are on this calamity is the money problem. Woods calls into question a monetary system that devalues the dollar, expropriates through the hidden tax of inflation, and manipulates the money supply in order to achieve specific political agendas. He refers to the Federal Reserve Act of 1913 as "special-interest legislation masquerading as a public-spirited measure." As a follow-up, Woods puts forth the notion that a monetary system based on precious metals, or a commodity standard, is the only system available that will return America to a sound monetary policy free from entrenched political privileges and central planning machinations.
--Throw the Bums Out--
Readers oftentimes don't like reading a whole lot of abysmal revelations unless there are some promising solutions that follow. Tom Woods doesn't disappoint those who want to hear how the current system can be rescued from the grip of despots and placed onto a free-market foundation for building genuine prosperity. He speaks clearly to the free-market reforms that are necessary to convert America from a bankrupt nation to a free and flourishing republic. The solutions, however, are radical, and in fact, so radical that Ron Paul, who also sought the same reforms, was disavowed by his Republican Party members for the crime of endorsing the intellectual roots of this country's Founding Fathers.
Toss the too-big-to-fail baloney, says Woods, and let insolvent, inefficient, bloated giants fail, because the free market will take the best of what's left and make good use of it without having to poach the taxpayers' pockets for Friday night beer money. As to Fannie and Freddie, say goodbye, and as to all government bailouts of private institutions, good riddance. "Problems caused by excessive spending and indebtedness," says Woods, "cannot be cured by more spending and more indebtedness, any more than the cure for excessive lending is more excessive lending."
Finally, since "money is the most socialized sector in the American economy," it must be liberated from the hands of tyrants. Thus the subject of the Federal Reserve, then, must be put up for debate. The Fed generates economic instability through its monopoly on money, advances moral hazard, and conducts much of its affairs in secret, notes Woods, so it is time to put some new ideas on the table and allow the market to function as the bedrock for a free society.
Connoisseurs of Austrian economists, along with newbies to the freedom movement and everyone else in between, will find _Meltdown_ to be a compelling account that sheds light on the darkest economic times our generation has ever encountered.
48 of 54 people found the following review helpful
on February 9, 2009
As the mainstream media pundits struggle through their shallow and predictable attempts to blame the free market for the economic collapse, Tom Woods rides in on a metaphorical white horse to put these myths in their final resting place. Their are innumerable reasons why everyone needs to read this book, but I'll mention just a few, in no particular order:
1. It gives a broad and deep overview of America's current economic situation, and who got us here. For example, Chapter 2 is organized as a series of short yet powerful jabs at whom Prof. Woods has identified as the "culprits" who caused the housing bubble, ranging from #1 - Fannie Mae and Freddie Mac, to #2 The Community Reinvestment Act, to #5, The Federal Reserve, and so on.
2. It is one of the most readable books on economics ever written. Cover to cover, this book takes maybe 4 hours to read and digest.
3. Prof. Woods fully utilizes his mastery of both economics and history to dispel myths about the Great Depression, the creation of the Federal Reserve, and the causes of economic panics prior to the existence of a central bank in America.
4. It explains what inflation is, and why it is bad.
5. It explains the absolute lunacy behind these massive bailouts being passed out to Fortune 500 companies like candy on Halloween. Throughout the book, Prof. Woods points out the serious flaws in the reasoning of various officials who supported these bailouts. For example, he writes: "According to [Henry] Paulson, "millions of Americans" were facing rising credit card rates or reduced access to credit, thus "making it more expensive for families to finance everyday purchases." That made even less sense than the usual Paulson rationalization. Think about it: is it sustainable in the long run for families to make everyday purchases on Credit? How can that go on?"
6. Perhaps most importantly, anyone who reads this book will have a whole arsenal of ideas to bring to the table when popular politics and current events are being discussed around the water cooler. After all, everyone wants to sound informed, right?
33 of 37 people found the following review helpful
on February 10, 2009
I find that the H.L. Mencken quote in the Afterword is especially apropos in/for this book (and obviously why Mr. Woods chose to use it): "The truth, indeed, is something that mankind, for some mysterious reason, instinctively dislikes. Every man who tries to tell it is unpopular, and even when, by the sheer strength of his case, he prevails, he is put down as a scoundrel."
As a libertarian/budding anarcho-capitalist, this book is especially poignant given the current events facing our country and the world economy. It's an excellent telling of the truth of economic matters, and how we got to the state we're in with the "credit crunch" and the housing bubble. The Federal Reserve and our elected representatives, through socialist interference in the free-market are largely to blame for the current crisis. Yet they blame the free-market (when our markets have not been close to free for at least about a hundred years now) and the populous by and large swallows the need for further interference when that will only exacerbate the problem. As pointed out in the chapter on the Bailout, the market economy is held up for ridicule in a rigged debate that it can't win since they pose our current regulated market as "deregulated" and then call for more regulation!
The chapter on how the government causes the Boom-Bust Cycle is worth the price of the book alone. It contains some of the clearest language I've ever seen to explain this phenomenon, and does so with a minimum of economic jargon. In particular, the explanation of what an interest rate actually is (a coordination of production across time) is a concept at once so powerful and so simple that I'm surprised I hadn't seen it expressed in those terms before. Contrasting how it should work with how it works as the Federal Reserve manipulates it paints an extraordinarily strong picture of just how damaging the Federal Reserve is to the economy.
The book also expels a good number of myths about how things work, and how they have worked in the past, including The Great Depression, Hoover, and FDR, and the still-relevant example of the Japanese government's disastrous track record of interference in the Japanese economy. (In particular, I enjoyed the rebuttals of Keynesian economics theories, which as the book points out (and which I have noticed) are seemingly becoming popular again at exactly the wrong time with all the wrong people.) Not content to dispel negative myths alone, it also argues for several tenants consistent with freedom - truly free markets, and the freedom of competing currencies. And it's not all theory - the final chapter proposes a list of solutions to bring about a quicker end to the crisis we're in than we would get with continued government interference.
If people could be convinced of the correctness of these theories quickly, then the pain of our current economic issues would be lessened, and we would all be better off. Anyone familiar with Ron Paul's campaign for president knows that while there are a significant number of people of Libertarian bent, the vast majority of people tend to view anything having to do with freedom - expressed as such - with scorn (see the Mencken quote above). I suspect that the book will sell well - but I hope it enjoys the sucess it deserves.