March 19, 2009
"Meltdown" Blames Feds For The Crash
New Book By Thomas Woods Says Bad Government Policy Caused The Economic Meltdown
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Former Federal Reserve Chairman Alan Greenspan is shown in this July 16, 2002 file photo. (AP)
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Opinion Other People's Money Declan McCullagh writes on politics and the economy.
Figuring out how we've reached this point is not easy. One choice is to blame laissez-faire policies, an argument that's been invoked by everyone from notoriously pessimistic economist Nouriel Roubini and reporters at the New York Times to French President Nicolas Sarkozy.
On the other hand, the number of pages of federal regulations has swelled, not shrunk, over the last decade. The number of employees at the relevant agencies (SEC, FDIC, FINRA, OCC, NCUA, FFIEC, OTS, FHRA, and the FRB) has continued to grow. It was regulatory failure, not market failure, that gave us the spectacles of Darrel Dochow, Bernie Madoff, and taxpayer-funded bonuses at AIG.
Another explanation is that unfettered greed, especially on the part of Wall Street and mortgage lenders, is the culprit. But human greed and avarice are not unique to the last decade, when housing prices skyrocketed beyond what fundamentals permit, making that explanation less satisfying than it should be.
A new book by Thomas Woods called Meltdown (Regnery Publishing, 2009) provides a more fulfilling account of what went wrong, why it happened, and who's to blame. Woods holds a doctorate in history from Columbia University and is the author of the bestselling, iconoclastic The Politically Incorrect Guide to American History.
Woods' latest book makes a strong argument for laying the blame squarely on the shoulders of Washington politicians and regulators. One chapter is titled "How Government Created the Housing Bubble," and points to special privileges granted to Fannie Mae and Freddie Mac, a federal law allowing tax-free capital gains, and the Community Reinvestment Act's incentives for banks to make bad loans.
The ultimate culprit, in Woods' view, is the Federal Reserve. In 2001, he writes, "Fed chairman Alan Greenspan sought to reignite the economy through a series of rate cuts... the new money and credit overwhelmingly found its way into the housing market, where artificially lax lending standards made excessive home purchases and speculation in homes seem to many Americans like good financial moves."
This is not a unique criticism. Many economists, including Stanford University's John Taylor, have charged that the Federal Reserve kept interest rates artificially low and that the housing boom and bust could have been avoided with more prudent government policies. At a congressional hearing last fall, some Democratic politicians made similar allegations.
(For his part, former Fed Chairman Alan Greenspan responded in a Wall Street Journal op-ed article last week titled "The Fed Didn't Cause the Housing Bubble.")
Woods is a senior fellow at the Mises Institute in Auburn, Ala., a non-profit group devoted to libertarian scholarship and championing what's known as Austrian business cycle theory. The idea is that a central bank's low interest rates expand the money supply, therefore creating malinvestments (because, say, real estate or dot-com entrepreneurs believe there's immense demand for what they have to offer), an unsustainable boom, and an eventual correction. Nobel laureate F.A. Hayek, a leading proponent of that theory, was a founding board member of the institute.
The Austrian explanation remains a minority one among economists -- Times columnist Paul Krugman likened it to the "phlogiston theory of fire," and the late Milton Friedman claimed it has done "a great deal of harm." Woods' solutions to today's economic woes are the opposite of the U.S. government's (or Krugman's) approach: he would let firms go bankrupt, ditch Fannie and Freddie, halt bailouts, and question whether the Federal Reserve even needs to exist.
Woods says Austrian theory is worth studying because it correctly predicted what's happening today. "It's about time we listened instead to people who have a coherent theory to explain why these crises occur, saw this crisis coming, and have something to suggest other than juvenile fantasies about spending and inflating our way to prosperity," he writes, perhaps a little too optimistically given the current political climate in Washington.
Woods' work -- the complete title is Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse -- is in the vanguard of the first wave of books dissecting the Crash of 2008. (Rep. Ron Paul, the Texas Republican and former presidential candidate, said in a foreword that "there is no better book to read on the present crisis than this one.")
Other volumes include Taylor's Getting Off Track, Richard Posner's forthcoming A Failure of Capitalism, NYU's forthcoming Restoring Financial Stability, and William Cohan's House of Cards.
Meltdown will not be the last word on the slow-motion crash we've been waking up to every morning. But it has the virtue of being published early enough, and written accessibly enough, to make a difference. Assuming, that is, anyone in Washington besides Ron Paul reads it.
I encourage you to bookmark the home page for my Other People's Money column. An RSS feed is available too. If you have questions, feedback, or other suggestions, please feel free to e-mail me at declan.mccullagh@cnet.com.
Declan McCullagh is the chief political correspondent for CNET and an EconWatch contributor. Previously, he was Wired's Washington bureau chief and a reporter for Time.com and Time magazine in Washington, D.C. He has taught journalism, public policy, and First Amendment law. He is an occasional programmer, avid analog and digital photographer, and lives with his wife in the San Francisco Bay area.
By Delcan McCullagh
© MMIX, CBS Interactive Inc. All Rights Reserved.
Add a Comment See all 17 Comments
- Phil Gramm has to take his share of the blame as well. He did more for creating the train wreck that we now suffer than any one person. He has been so misguided and reckless, that it defies belief. The only thing worse is that people actually believed him and thought that he knew what he was talking about.
- Reply to this comment
- To Teh_Gav: Ever hear of central banking, which might be slightly responsible for why money was so cheaply available, and thus treated so cavalierly? Last I checked, the Federal Reserve was not part of the free market.
Way to keep an open mind, though! We sure do need more people who ask no questions and just believe the tripe they're fed. What a shortage of such people we have. - Reply to this comment
- Nice! Great piece. Follow the money! The hedge fund managers who made money in 2008 and so far this year follow Austrian Economics. We have a lot of answers. Tom Woods does a great job simplifying Austrian Economics. Austrian economics is not heartless - please continue to cover our point of view! Thanks. TC
- Reply to this comment
- So wait. Entities such as AIG were somehow allowed to make mega-leveraged bets with trillions of dollars that they didn't have, causing a chain-reaction of insolvency, and this is somehow the fault of government interference in the free market?
I have an idea. Let's take down all the stop signs and traffic markers and let people drive according to rational self-interest. Obviously, there could be no accidents!
And if any accidents did happen, there would be think-tank denizens like Woods to argue that the problem was too many stop signs.
And there would be people who would believe it. - Reply to this comment
- Amusing fact about clear thinkers: Liberals call them kooky conservatives, and conservatives call them kooky liberals.
- Reply to this comment
- I like Austrian economics because, 1) it makes perfect sense, 2) it preserved my life savings. I made money during the meltdown.
In 2005, my boss's wife, the real estate agent, tried to sell me a McMansion in Silicon Valley. I was renting. Luckily, I recently had discovered Tim Woods, Peter Schiff, Ron Paul, et al., and had read prodigiously at mises.org. Well, I no longer have a job, but I don't have a mortgage either. I'm still renting. And my erstwhile boss and his wife are my good friends.
Funny thing is, I didn't buy a house when they told me to, (when tacky houses were going for $700,000), and they didn't buy gold when I told them to, (when shiny yellow ounces were going for $700). - Reply to this comment
- I agree wholeheartedly with Woods! And it is good to see Austrian economics getting mainstream attention as the first I learned about it was through the Arbitrary Vote site. The concepts really do bring clarity to muddled messages from the mainstream and government.
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- Exempting home sale proceeds from capital gains taxes, while at best a marginal contributor to the real-estate bubble, was a typical case of Washington, in an attempt to fix a problem they caused by legislation, cause a whole new problem. The first problem is that because of government and Fed-caused inflation, the majority of home-price "appreciation" over the last 50 years has not been "appreciation" at all, but simple, value-destroying inflation. It is the height of insanity to tax a person on these "gains", which are not "gains" at all, but hidden taxes! So Clinton pushing through the capital gains exemption was a solution to a real problem, but one, unfortunately with unforeseen consequences.
When the housing boom hit, due to the Fed keeping interest rates low and pumping MASSIVE amounts of money into the economy (inflation), of course there were people who saw this unprecedented increase in real-estate prices as an opportunity for some tax-free "gains". But only a handful of owner-occupants of houses could ever be in a position to actually "live" in the houses they were flipping. If anything, many of the people who realized "gains" from the sale of their houses either didn't "gain" at all (since they had to pay inflated prices for their new homes), or perhaps do not really qualify as legitimate owner-occupiers of the houses, and maybe the IRS needs to ((((shudder)))) investigate some of them.
But the fundamental cause of the housing boom is, and has always been, Fed-created money. Securitization of mortgages made the damage worse, and destroyed the financial industry, tax policy marginally increased speculative behavior on the part of buyers, but the problem begins and ends with the Fed and the federal government. - Reply to this comment
- Any suggestion of a relationship between Tom Woods and Rush Limbaugh is preposterous.
1. Limbaugh is an unrepetenant warmonger. Tom Woods co-wrote "We Who Dared to Say No to War: American Antiwar Writing from 1812 to Now".
http://www.thomasewoods.com/books/we-who-dared-to-say-no-to-war/
2. Limbaugh is not an advocate of the Austrian Business Cycle Theory and I doubt that he has ever even mentioned it on his program. Indeed, one of Limbaugh?s functions seems to be steering the dittoheads away from the Libertarian philosophy of those such as Professor Woods. - Reply to this comment
- I did Not lose any money in this bust.
I was not sucked into the housing bubble.
I have not been suprised by any of these events.
I owe it all to Tom Woods and his bunch, they steered me clear... I can't say the same for any others. Fact is, most other people tried to drag me in like all those who have lost fortunes. - Reply to this comment
- It's a typical trick of politicians to screw something up and then blame the "free market" or "greed" when really it is they who have caused the problem. This is generally all we hear about in the mainstream media.
Those absurd home loans would have never been made without Freddie/Fannie and their charter from the Federal government. Banks would have never made such outrageous bets without the moral hazard that FDIC presents. Government is the real cause of this mess. It's not just Bush or Obama - it's the entire system, and I applaud CBS for finally giving a voice of reason some time to speak. - Reply to this comment
- declanm-2009:
I am making a comment based on all economies on the basis people keep referring to the global economy and the so called credit crunch.
I do not consider your story to be the only story to read in this world and it was not a personal attack on you.
I generally refer to modern politicians or bankers or the pretentious who need bailouts as the dumbest people in history. - Reply to this comment
- timothyww: Can someone who opposes the Iraq war and would (I believe) oppose an attempt by Congress to ban porn, or gambling, or prostitution really be considered a right-winger?
Chris_Butler: I'm talking about the duration of the recession in the United States. - Reply to this comment
- Yes, someone besides Ron Paul has read the book. It has been on the NYT best sellers list for awhile.
Meltdown is a wonderful book that is easy to read for people with little knowledge of economics. I also had the pleasure of hearing Tom Woods speak a few weeks ago. The Austrian school is great at pointing out the problems in our monetary system but I am not entirely convinced of all of their solutions. They shouldn't be ignored anymore or treated as fringe. They've been consistently right for decades.
This isn't about right or left and is definitely not about Limbaugh. He is just an entertainer who latches on to others ideas when it becomes convenient to him. - Reply to this comment
- So is it any wonder we crashed. Lots of people predicted a crash like this 20 years ago. The housing bubble was just that, a bubble. And bubbles burst. Thats why I didn't borrow alot of money to buy an over sized over priced home. Instead I put it in FDIC insured bank accounts. I watched as thousands of people told me how rich they were with their home values climbing. Now there broke. Do you realize the constitution forbids the creation of the very monetary system we created. It requires it to be backed by gold and SIlver. We back it with nothing. We need to go back to the gold standard. Gold and silver coins. Back to the basics of money.
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- "Milton Friedman claimed it (Business Cycle Theory) has done "a great deal of harm"
Milton Friedman said, as late as 2005, that the economy is in its best shape ever. check his interview with Charlie Rose on youtube. So who cares what Milton Friedman said?
Timothyww,
Woods in NOT a "Right Winger". Stop labeling all those who oppose the economic policies of the left (and right for that matter) as a right winger and a Limbaugh associate. The world is more complex then Left and Right! - Reply to this comment
- "Not only is our current recession unusually deep and severe, but it's about to become the longest since the Great Depression."
The Irish are claiming that they are going to have the longest recession.
The British are claiming that they are going to have the longest recession.
The Americans are claiming that they are going to have the longest recession.
Are the dumbest people in history proud of their achievements and turned their stupidity into a competition. - Reply to this comment
