Economics

Book Review: Meltdown by Thomas E. Woods

Book Review: Meltdown written by Thomas E. Woods, Jr.

 

Contents

1.0 Introduction

2.0 Summary

2.1 Chapter one: The Elephant in the Living Room

2.2 Chapter two: How Government Created the Housing Bubble

2.3 Chapter three: The Great Wall Street Bailout

2.4 Chapter four: How Government Causes the Boom-Bust Business Cycle

2.5 Chapter five: Great Myths About the Great Depression

2.6 Chapter six: Money

2.7 Chapter seven: What Now?

3.0 Critique

3.1 Criteria 1: An analysis of structure

3.2 Criteria 2: Contribution to its field

3.3 Criteria 3: An analysis of purpose

3.4 Criteria 4: Omitted facts and or evidence

4.0 Conclusion

5.0 Reference list

6.0 Bibliography


1.0 Introduction

Ideas matter, in particular a great idea such as liberty, in all its facets – economics, individual, political, philosophical and historical. However, there remain many challenges to liberty, ever-present under our governments. Therefore, today we must retell the lessons of the past Austrian economists and thinkers and look to writers to understand what is happening. In doing so this paper reviews the book Meltdown by Thomas E. Woods., Jr., who is a senior fellow of the Mises Institute and host of The Tom Woods Show. He holds a bachelor’s degree in history from Harvard and his master’s, M.Phil., and Ph.D. from Columbia University. Woods is the author of twelve books, including this book Meltdown. While writing this paper the book has almost three hundred customer reviews on Amazon with seventy seven percent of the reviews giving five stars, the author is quoted regularly in the world’s English-speaking media; his ideas proving useful and adding weight to arguments.

The all too essential book reveals which few economists predicted – the economic crash and its causes and his proposed solutions toward a path to recovery. The aim of the book is to be an addition to the already huge literary collection of the academic and avid reader of economic, political and historical texts. While, still remaining a book marketed toward the general public and academics at conferences, of whom for those remaining skeptical, the topic of the book at least can offer a historical and theoretical analysis of a free market look at the American economy, including findings on the stock market crash and government bailouts.


2.0 Summary

2.1 Chapter 1: The Elephant in the Living Room introduces readers to the Federal Reserve (FED). Since its creation in 1913, the FED has done everything in its power to intervene with the workings of the free market. “[…] The then-Secretary of the Treasury, William G. McAdoo (who was, under the original Federal Reserve Act, also the Chairman of the Federal Reserve Board) announced the establishment [saying the opening of the banks] will give such stability to the banking business that the extreme fluctuations in interest rates and available credits which have characterized banking in the past will be destroyed permanently.” (Pollack, 2016, p.386) The suggested remedy being more regulation, intervention, spending, money creation and debt.

“Thus, the major control instrument that the [FED] exercises over the banks is “open market operations,” purchases or sale of assets, generally U.S. government bonds.” (Rothbard, 1994, p.79) However, the FED like all central planners, are prone to uncertainty and often experience a time lag in policy actions. While, it is the free market that inevitably gets blamed for the boom-bust cycle, included in the text by a quote from Henry Hazlitt: “[These artificial booms] must end in a crisis and a slump, and . . . worse than the slump itself may be the public delusion that the slump has been caused, not by previous inflation, but by the inherent defects of ‘capitalism’.” (Woods, 2009, p.9)

2.2 Chapter 2: How Government Created the Housing Bubble tackles our current financial crisis and enters into discussion on the loan market. Woods lists several culprits here including: (i) government-sponsored enterprises (Fannie Mae and Freddie Mac), (ii) the Community Reinvestment Act and affirmative action in lending, (iii) the government’s artificial stimulus to speculation, (iv) the pro-ownership tax code, (v) the FED and artificially cheap credit, and (vi) the too-big-to-fail mentality. (Woods, 2009, pp.27-49)

2.3 Chapter 3: The Great Wall Street Bailout woods notes once again that rather these banks should represent true moral hazard, and should be allowed to fail, included in the text by a quote from Ludwig von Mises: “The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” (Woods, 2009, p.60) There is no shortcut to creating wealth, Woods explains how the free market had nothing to do with it.

2.4 Chapter 4: How Government Causes the Boom-Bust Business Cycle introduces the Austrian theory of economics (included a simple summary) and compared to Keynesian economics – in explaining the problems associated with public-works stimulus projects as well the recent dot com boom and the 1980s Japanese bust that lasted for fithteen years. “Government interference, in the form of wage or price controls, emergency lending, additional “liquidity,” further monetary inflation, and so on-all aimed at diminishing short-term pain-exacerbate the long-term agony.” (Woods, 2009, p.76)

“British economist Lionel Robbins argued that this “cluster of errors,” as he called it, demanded explanation: “Why should the leaders of business in the various industries producing producers’ goods make errors of judgement at the same time and in the same direction?”” (Woods, 2009, p.65) The chapter goes on to explain how the artificial low interest rates distort market price signals, and in turn provide the boom, while government interventions prolong the coming of the bust. Market price signals represent scarcity and important information, such as market interest rates, and are relied on to direct factors of production and provide incentives to save.

“Monetary equilibrium might be an ideal policy goal, but there exist knowledge and incentive problems that may make it an uncommon practice.” (Heyne, Boettke & Prychitko, 2014, p.340) The demand curve does not represent present and future effects, and increases in productivity only increase revenue in the short-run. (Rothbard, 2009) Where, there is not time materially available to equal the amount of goods (deficient or excessively supplied and imperfectly employed) to the supply of credit expansion. (Tooke in Marshall, 1920) The supplied capital goods/services has not changed in response, as reliant on the unaltered real pool of savings and complementary factors of production: physical capital, human capital, natural resources, and technological knowledge.

2.5 Chapter 5: Great Myths About the Great Depression presents the fallacies associated with the New Deal, Franklin D. Roosevelt (FDR), Herbert Hoover, World War II, and the Great Depression, all of which has been incorrectly interpreted by poorly written textbooks and the mainstream media. While, the chapter also explains how even before the FED was created, there were economic boom-bust cycles, however these were also caused by credit expansion.

2.6 Chapter 6: Money from precious metals to paper currency. The chapter covers as far back to “Juan de Mariana (1536-1624) [who] wrote a devastating treatise (De mutatione monetae) against monetary debasement, condemning it as a kind of theft.” (Woods, 2009, p.113) Money acts as a medium of exchange, a store of value and unit of account – these qualities give money its importance in the overall economic system. The chapter also notes how the safekeeping of precious metals at a money warehouse, has evolved to fractional reserve banking as it is today, all from the issue of banknotes (warehouse receipts).

“[Acceptance] of fiat money depends as much on expectations and social convention as on government decree.” (Mankiw, 2015) However, fiat money regimes (especially the world currency) are more dangerous than a monopoly on any other good or service, as it allows the possibility of pursuing monetary policy. “[Meaning that Governments] would not effectively suppress at once any development in [the] direction [of competing currencies and] keen on preserving their monopoly […]” (Hayek, 1985). Governments insist taxes be paid in the countries fiat currency to encourage monopoly powers. “Monetary freedom ends where legal-tender laws begin.” (Paul & Lehrman, 2007)

The chapter also covers anti-gold fallacies, such as the flexibility of gold, gold being too bulky, the gold standard is too costly in comparison to paper money production, limited supply of gold. While an additional point to make can be as gold is money, it is therefore unjustly subjected to taxation, of which should be eliminated. (Paul & Lehrman, 2007)

2.7 Chapter 7: What Now? presents solutions to all the problems addressed throughout the book. Woods provides a summary of why spending is not the answer, along with the many Keynesian arguments spoken by past leaders, from massive infrastructure programs of Obama to George Bush’s belief that consumer spending drives the economy. This chapter does explain the difference between production and consumption, and a deserved critique of the Gross Domestic Product (GDP) statistic.


3.0 Critique

3.1 Criteria 1: An analysis of structure

Weaknesses: By the content of the book, it covers a wide area relating to the American economy, however the book is structured in a way to break down larger ideas into a single chapter, making the argument condensed in comparison to reading a book on a specific topic (dependant upon personal preference).

Strengths: All the sections tie back to and are related to the thesis statement: to educate people on previously unapproachable economic topics, exploring first the FED, the housing bubble, wall street bailouts, the boom-bust cycle, the Great Depression and money. Finally, the structure links and summarises all the suggestions into much needed and practical advice.

3.2 Criteria 2: Contribution to its field

Weaknesses: The ideas in this book are, for the most part, old ones. The ultimate culprit, is that the “[…] then Fed chairman Alan Greenspan sought to reignite the economy through a series of rate cuts […]” (Woods, 2009, p.26) As this is not a unique criticism, the exact impact could be relatively insignificant as an economic quoted text in comparison to other more prominent books. As a result of the authors influences, which may significantly affect the author’s point of view, clouding judgement. Additionally, in a few places the author can come across as angry, which might turn off readers not predisposed to the overall message of liberty.

Strengths: Even though, the ideas presented are from past economists, more books should begin to restate the significance of old theories, as proven with Austrian economics, such theories have been overlooked. While writing this paper the book has almost three hundred customer reviews on Amazon with seventy seven percent of the reviews giving five stars, the author is quoted regularly in the world’s English-speaking media; his ideas proving useful and adding weight to arguments. The book offers a complete analysis of the causes of the current recession. In addition, to a critical assessment of the mistakes policymakers have already made, and will likely continue to make.

3.3 Criteria 3: An analysis of purpose

Strengths: The purpose of the book is to educate people on previously unapproachable topics like the FED and the business cycle. As these topics are dissected and reduced to clear and sometimes humorous descriptions. For example: “As several economists have noted, blaming the crisis on “greed” is like blaming plane crashes on gravity […]” (Woods, 2009, p.2) The book has proven to succeed in doing just that, to which none less than Congressman Paul contributed the foreword.

Weaknesses: The purpose of the book to be academic, may become impeded at times of author suggestions and can at sometimes become crowded by many different topics. However, Woods clearly explains the interaction of savings, time preferences, and interest rates under normal monetary conditions in order to compare with expansionary monetary policy. As this is a personal book review, my preference would be to read a book on a specific expert in the field of an economic area such as “monetary policy”, yet the chapter on money had a good coverage of theories and concepts considering. For example, at the beginning of chapter six, there is present a list of specific points, raised either implicitly or explicitly before.

3.4 Criteria 4: Omitted facts and or evidence

Strengths: First, one must consider the marvel as to the speed which the author had put together this book of almost two hundred pages and had got the book to market. Under the circumstances, one might expect the book to lack coverage or depth of analysis, though despite of minor flaws, it is a well written account of the recession. The book also presents a logical responses, such as to the fact that had banks been allowed to fail, their downfall would not have taken the rest of the economy with it, and the role played by the credit rating agencies (which are a cartel protected by the Securities and Exchange Commission) and Woods is noted for pointing out these relevant statistics that many observers have overlooked.

Weaknesses: This is not necessarily a weakness due to the presented evidence to counter personal opinion, however the authors ultimate culprit, in Woods’ view, is the Federal Reserve – the “elephant in the living room,” Woods styles it. Another chapter titled “How Government Created the Housing Bubble,” and points straight to special privileges that Fannie Mae and Freddie Mac are given.

Additionally, throughout the book the Presidents of Bush and Obama are criticised for them being oblivious to the coming crisis, the author could have expanded on the policies or actions taken while providing more reason toward them and rather quoting them personally would be more academic than writing: “A first glance at Barack Obama’s economic team confirms that all the talk of “change” really meant more of the same-more bailouts, more government intervention, more addressing symptoms rather than causes-along with huge deficits and massive increases in government spending, which our leaders superstitiously believe can restore economic health.” (Woods, 2009, p.7)

Likewise, the author did not comment enough that Ludwig von Mises was not so much concerned with money supply as Woods, but rather felt the quality of money was most important. “It was not [realised] that changed in the quantity of money can never [impact] the prices of all goods and services at the same time and to the same extent.” (Mises, 1949, p.396) The purpose of money to Mises was solely a medium of exchange. (Mises, 1949, p.398) “Limited availability and the belief that availability will continue to be limited is a necessary condition for continued acceptability of any functioning medium of exchange.” (Heyne, et al., 2014, p.340) Woods seemingly disagrees, noting that the supply of money should be fixed to the gold stock. “The idea that money must have material “backing” (such as gold) to hold value is not correct.” (Heyne, et al., 2014, p.340) Even though, there are many arguments presented against gold and commodity standards, Woods should have acknowledge that his definitions are from the implicit monetary theory, that is a Rothbardian 100-percent-reserve perspective on money and banking. Omitting other Austrian money and banking theories.


4.0 Conclusion

In conclusion, the Book Meltdown by Thomas E. Woods offers its readers an insightful Austrian perspective on the American economy. Overall, I personally enjoyed reading the book, however I wish it could have focused entirely on a specific topic, that could have avoiding the omitting relevant Austrian alternate theories. However, Wood’s book does make a strong argument for laying the blame rightly on the Washington politicians and regulators, specially the federal Reserve system. Opening the possibility for increased future federal transparency and awareness on monetary/fiscal decisions.


5.0 Reference list

Hayek, F. (1985). F.A. Hayek Interviewed By John O’Sullivan [Television broadcast]. United States: Foundation for Economic Education.

Heyne, P., Boettke, P., & Prychitko, D. (2014). The economic way of thinking, (13th international ed.). Essex, England: Pearson Education Limited.

Mankiw, N. G. (2015). Principles of economics, (7th ed.). United States: Cengage Learning.

Marshall, A. 1890 (1920). Principles of economics, (8th ed.). London: Macmillan and Co., Ltd.

Mises, M. 1949 (2010). Human Action, (Scholar’s ed.). United States: Yale University Press, Ludwig von Mises Institute.

Pollock, A. J. (2016). Does the federal reserve know what it’s doing? The Cato Journal, 36(2), 385.

Rep. Paul, R., & Lehrman, L. (2007). The case for gold: a minority report of the U.S. gold commission. (2nd ed.). Alabama, United States: Ludwig von Mises Institute.

Rothbard, M. (1994). The case against the fed. Alabama, United States: The Ludwig von Mises Institute.

Rothbard, M. 1962 (2009). Man, economy, and state, (2nd ed.). Alabama, United States: Ludwig von Mises Institute.

Woods, Thomas E., 2009. Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse. Regnery Publishing, Washington DC. ISBN 9781596985872


6.0 Bibliography

Bassetto, M., & Messer, T. (2013). Fiscal consequences of paying interest on reserves. Fiscal Studies, 34(4), 413-436. doi: 10.1111/j.1475-5890.2013.12014.x

Bastiat, F. 1850 (2007). The law. Alabama, United States: The Ludwig von Mises Institute.

Böhm-Bawerk, V. E. (1890). Capital and interest. London: Macmillan and Co.

Callahan, G. 2005 (2002), Economics for Real People. 2nd ed. Alabama, United States: Ludwig von Mises.

French, E. D., Herbener, M. J., Rothbard, N. M., Mises, v. L., Garrison, W. R., Kirzner, M. I., & Fetter, A. F. (2011). The pure time-preference theory of interest. United States: Ludwig von Mises Institute.

Glaeser, E. L., & Scheinkman, J.. (1998). Neither a borrower nor a lender be: An economic analysis of interest restrictions and usury laws. The Journal of Law & Economics, 41(1), 1–36. doi: 10.1086/467383

Llewellyn, H., Rockwell, Jr. 2008 (2003). The left, the right, and the state. (September). United States: Ludwig von Mises Institute.

Mariana, de J. 1609 (2002). A treatise on the alteration of money. Patrick T. Brannan, trans. In Chafuen, A. A. Journal of Markets and Morality, 5(2), 523-593.

Murphy, R. (2010). Lessons for the young economist. Alabama, United States: Ludwig von Mises Institute.

Rothbard, M. (2009). The origins of the federal reserve. Alabama, United States: Ludwig von Mises Institute.

Rothbard, M. 1970 (2006). Power and market: government and the economy, (4th ed.). Alabama, United States: Ludwig von Mises Institute.

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