The Economic Meltdown: Its Cause and Cure
Free-market capitalism has taken a beating of late, even by some who generally support the free market. We have been told that the economic meltdown is the fault of greed, speculation, unregulated markets, business cycles, and market failure — even capitalism itself. "We Are All Socialists Now" proclaimed a recent cover of Newsweek magazine.
These recent attacks on capitalism are not only wrong they are misdirected. One of the greatest myths about the free market in the United States is that we have one. The U.S. economy — after a hundred years of Progressive Era reforms, the Square Deal, the New Deal, the Great Society, and, most recently, government ownership stakes, rescue packages, stimulus packages, and bailouts — is a mixed market economy. Behind the façade of the free market is a myriad of government prohibitions, restrictions, and regulations.
So, if it is not the failure of the free market, then what is it that has caused the worst economic crisis in this country since the Great Depression? More importantly, what is the cure?
According to Thomas Woods, the author of the 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 (Regnery, 2009), the current and former administrations, both parties in Congress, the mainstream media, and most economists have things backwards. Government intervention is the cause of the current economic meltdown, not the cure.
Woods' diagnosis of our economic woes is a simple one, even as his prescription for a cure is a radical one. Woods writes, "The current crisis was caused not by the free market but by the government's intervention in the market."
Woods considers the Federal Reserve's previous interventions in the economy "to push interest rates lower than the market would have set them" to be "the single greatest contributor to the crisis." He equates the Fed's money and interest rate planning to the now-discredited economic central planning of the Soviet Union. And even though government and Fed intervention is the cause of the crisis: "There is nothing the government or the Federal Reserve can do to improve the situation, and a great deal they can do to prolong it," he writes.
Woods holds degrees from both Harvard and Columbia, is a senior fellow at the Ludwig von Mises Institute in Auburn, Ala., and is also the author of the New York Times bestseller, The Politically Incorrect Guide to American History.
Although his most recent book contains many timeless truths about money and markets, it could not be more timely. Woods promises, and delivers, "a layman's overview of where the economy is and what should be done next." An appendix giving books and online resources for further reading is provided to guide the reader on the path of economic self-education. The book contains no novel or earth-shattering pronouncements, since Woods considers his ideas to be "for the most part, old ones" that have "simply been neglected."
Woods also discusses the housing bubble. He believes that the standard account of the crisis neglects the ultimate cause: failed government policies. The culprits are all connected with the government: Fannie Mae, Freddie Mac, the Federal Housing Administration, the Community Reinvestment Act, affirmative action in lending, the political goal of increasing home ownership, the tax code, HUD, and as always the interest rates set by the Federal Reserve. The solution, then, is not more government oversight, but less, since "more and riskier loans are what the government wanted."
And then there is the great Wall Street bailout. American taxpayers know all too well about AIG, Bear Stearns, Fannie Mae, Freddie Mac, Citigroup, Bank of America, General Motors, Chrysler — all bailed out because they were deemed to big to fail. Woods stands this reasoning on its head: "These firms we're told are too big to fail are in fact too big to be kept alive. The longer they are kept on life support, the more they drain capital and resources away from fundamentally sound firms."
The business boom-bust cycle is not "an inherent feature of the market economy," argues Woods. Following the Austrian economists Ludwig von Mises and F. A. Hayek, he singles out the central bank as the culprit — "the very institution that postures as the protector of the economy and the source of relief from business cycles." Additional government interference is then exactly when prolongs the bust and delays the recovery.
A historian by training, Woods is at his best when he debunks the great myths of the Great Depression. The Great Depression was not caused by the Hoover administration's laissez-faire economic policies. To the contrary, Hoover's "unprecedented interventions took the 1929 downturn and made it into the Great Depression." This was then prolonged by FDR's New Deal.
Woods also discusses in depth the topic of money, covering clearly and succinctly the origin and nature of money, the gold standard, the money supply, inflation, deflation, the Federal Reserve, and how governments throughout history have monopolized the production and eventual destruction of the value of money.
Woods gives his perspective on some cures to restore the economy to health: let firms go bankrupt, abolish Fannie Mae and Freddie Mac, stop the bailouts, cut government spending, end government manipulation of and control over money, and put the actions of the Fed on the table for review — the institution "responsible for more economic instability than any other."
The message of Meltdown is clear: Government intervention in the economy is always part of the problem, but never part of the solution.
This article originally appeared in Atlanta Life magazine (July/August 2009, pp. 27—28), and is reprinted by permission.
July 17, 2009
Laurence M. Vance [send him mail] writes from Pensacola, FL. He is the author of Christianity and War and Other Essays Against the Warfare State. His newest book is The Revolution that Wasn't. Visit his website.
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