Sunday, July 05, 2009

Meltdown by Thomas Woods

Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse
By Thomas Woods

No topic is more timely for a book than the state of the economy. Dr. Thomas Woods managed to make it first to market with Meltdown.

Woods is a history professor and a culturally conservative libertarian who has written past bestsellers such as The Politically Incorrect Guide to History. He is a staunch adherent of the Austrian school of economics, a highly libertarian school opposed to government control of money.

In Meltdown, Woods asks pertinent questions, such as why we should look to the same people for diagnosis and solution of our economic problems who failed to predict the crisis and in many cases actually helped to cause it. He also takes on the conventional wisdom that the free market is to blame for the crisis.

Woods identifies the real causes of the meltdown. There was the bipartisan push for more lending to poor and minority borrowers, regardless of creditworthiness. There were Fannie Mae and Freddie Mac, the government-sponsored corporations that specialized in buying mortgage loans from banks, thus subsidizing more lending. There was the Community Reinvestment Act, which favored diversity ideologues in bank mergers, leading to them running the then-biggest, now-bankrupt banks like Countrywide and Washington Mutual.

But the biggest culprit was the Federal Reserve, which responded to the collapse of the dot-com bubble in 2000 by setting interest rates far below market levels. This upset the workings of the free market, leading investors to engage in projects that there were not the corresponding real resources to complete.

Artificially lowering interest rates also increases the money supply. Woods explains the Austrian theory of the business cycle, which blames government interference with money for the boom-bust business cycle.

He also examines the system of fractional-reserve banking. Woods argues that it is not a true market institution, as it is insured by government against bank runs. Allowing banks to lend more than they actually have in the vault also increases the money supply and leads to the boom-bust cycle.

Finally, Woods examines historical myths about the Great Depression. Herbert Hoover did not 'do nothing' about the stock market crash; he intervened greatly in the market. After being elected promising to roll back Hoover's interferences, FDR imitated and extended them. The New Deal brought all manner of perverse policies, such as destroying crops and prosecuting businessmen for charging prices that were 'too low'.

The New Deal cannot in any way be said to have ended the Depression. The Depression lasted sixteen years. Other countries which experiences similar crashes recovered much more quickly. America had experienced a major crash in 1920, but quickly recovered after President Warren Harding really did 'do nothing'. World War II didn't end the Depression either, as Woods aptly documents.

Overall, Meltdown offers a compelling explanation of America's ongoing financial crisis.

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