The View From Here . . .

By Bob Morgan, Jr.

I've been reading a very topical book about the recent financial crisis, Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked and Government Bailouts will Make Things Work by Thomas E. Woods Jr. (Regnery 2009).

Mr. Woods' book is a counterpoint to analyses that blame "deregulation" for the crisis. In lucid prose, Mr. Woods argues that the cause was a housing bubble that lasted from 1998 to 2006 and names a number of "culprits."

Mr. Woods' culprits include Fannie Mae and Freddie Mac, the quasigovernmental enterprises that buy loans from banks, and was involved in the "politically instigated move to lower lending requirements"; the Community Reinvestment Act and affirmative action in lending, which imposed unrealistically low lending standards on banks; the government's artificial stimulus to speculation, which promoted weak loan standards even for prime loans; the pro-ownership tax code, which gives major breaks to homeowners; Mr. Woods' favorite target, the Federal Reserve Board and its very soft monetary policy; and the "too big to fail" mentality . As for deregulation, Mr. Woods argues that lenders were doing exactly what the federal government (including both parties) and its central bank told them to do.

Mr. Woods then takes us through an analysis of prior panics and depressions in the United States and abroad and persuasively argues that most of them were prolonged by government attempts to shore up the money supply or lending and borrowing, rather than allowing the necessary correction to occur. Indeed, the one example of a downturn that ended quickly, the short but severe depression of 1920-21, there were virtually no government efforts at stimulus.

Not surprisingly, Mr. Woods' prescriptions for the financial crisis would be regarded as draconian by many. He favors letting companies, including banks, go bankrupt. (He argues that other forms of financial intermediation would quickly replace banks.) Also, he supports the abolition of Fannie Mae and Freddie Mac, with their assets auctioned off to private mortgage guarantors. In his view government spending and "all other forms of government predation on the economy" must be scaled back swiftly and radically. He points out that massive increases in spending did not lower unemployment during the Great Depression. He favors ending "government manipulation of money," and the institution of a much harder currency, including the use of precious metals as money.

Mr. Woods favors putting the abolition of Federal Reserve Bank on the table. In the author's view, the Fed is responsible for more economic instability than any other institution and also he also points out that the institution has refused to identify the recipients of many of loans involved in the 2008 bailout or what it is accepting as collateral. He believes that the Fed's special lending windows should be shut down.

Meltdown is not a mainstream book. The author is a Senior Fellow at the Ludwig von Mises Institute, a free market oriented group that seeks to promote libertarian economic ideas and particular the Austrian school of economics. The forward in the book is by Congressman Ron Paul, the fringe Republican candidate in the 2008 election. Nevertheless, this is a provocative and highly readable analysis that provides a great deal to think about.