In his book Meltdown Thomas Woods Jr. seeks to analyze and explain our current economic crisis by analyzing its causes while also providing solutions based on his views of economic thought. By looking at the role of government institutions and other organizations closely tied to politics and the government, analyzing our current crisis by looking at it from a historical perspective, and scrutinizing the country’s current monetary system, Woods looks to explain why things are the way they are, and how they can be fixed. Throughout the book Woods is a constant proponent of the conservative, libertarian, free market, thoughts and ideas of the Austrian school of economics, and he uses them both to decry the errors of the modern school of economic thought, which he attests are responsible for our economic crisis today, and also to suggest the remedy of the crisis.
According to Woods, a significant part of our current economic crisis can be explained by the actions, or lack thereof, taken by government officials and institutions closely linked to the government such as Fannie Mae and Freddie Mac, both of which collapsed and fell under government control when numerous Americans defaulted on their mortgages, and additionally, the Federal Reserve, which will be discussed here briefly and in detail with the role of our nation’s monetary system on today’s economic crisis. Woods compares the actions of government (or lack thereof, in some cases) to acting like an elephant is in a living room A rather crude analogy that illustrates the blindedness of said officials who seek their own political interests, rather than those of their constituents, and aim to please their constituents only to the extent that it keeps them in office. While the elephant, comparable to our current economic crisis, is in such a small place it will cause a great amount of damage. Yet the people in the room with the creature, call them the politicians and government officials, continually seek to blame the damage on a less-than obvious cause, and act accordingly, ignoring the real culprit. Woods explains that the culprit, in our economic case, is the Federal Reserve, a private institution that gets little attention from the media and is run by appointed government officials that control’s the nation’s money supply and interest rates among other things. By relying on fiscal policy, bailouts and spending in order to solve our Nation’s economic woes, Woods goes on, government official are ignoring the real problem, the Federal Reserve, which has the ability to expand the nation’s money supply at will through open market operations (among other things such as interest rates and bank reserve requirements), resulting in an artificial boom not reflective of consumer preferences due to an artificial credit creation. These effects caused by the fed can most evidently be seen in the boom and bust of the housing market, as explained by Austrian business cycle theory, which resulted in the collapse and government takeover of the two mortgage giants Fannie Mae and Freddie Mac who purchase mortgage backed securities from banks. Woods explains this crisis with another analogy. He asks the reader to consider a homebuilder who believes he has a certain number of bricks. greater than he actually has, with which he can build a house, and to assume no additional bricks other than those he has are accessible to him. Believing he has a great number of bricks the homebuilder will endeavor to build a very large house, and will continue to do so until he realizes the actual number of bricks that he has. At the point he sees that his resources are too few to complete the project, the endeavor must stop, the house being built must be torn down and the labor and resources put to use for the completion of this project are squandered. Such was the effect of artificial credit creation on the housing sector of the market (amongst others, like the financial sector) by the fed through a lowering of the interest rate. In the early 2000s a reduction of the interest rate complemented by legislation such as the community reinvestment act, focused at a “nation of homeowners” mentality made it easier for people to buy a home, and provided homeowners with a great opportunity to refinance their mortgages, make improvements and/or renovations or move into a bigger house, as borrowing became more affordable. Home values began to soar, as more and more homes were being built. This however, could not last, as the increased access to credit was not complemented by a reduction in consumption and an increase, per the requirements of Austrian Capital Theory as an indicator of growth. In 2006 the bubble popped, and home values began to plummet as the public “realized” this artificial growth could not be sustained. Numerous people defaulted on their mortgages which resulted in the collapse and government takeover of the mortgage giants Freddie Mac and Fannie Mae. In parallel, nearly the same thing occurred in the financial sector where numerous banks reached the verge of collapse because of malinvestment and imprudent lending during the artificial boom, only to be bailed out by the federal government, because of the “too big to fail” mentality. To summarize, then, Woods criticizes the government for attempting to treat symptoms when looking to solve and prevent the nation’s economic woes, rather than assessing causes, such as the Federal Reserve. He compares it to looking to treat a person for the cold when he really has internal bleeding. Only by assessing causes, rather than symptoms, can a nation ever hope to achieve prosperity and limit economic downturns significantly.
Woods also makes the point to compare our current economic crisis to those that have occurred in our nation’s past, most significantly the great depression. He explains that many of the ideas that are associated with the great depression and the events afterwards are myths that conform to that which he describes as the Official Version of History™, and, although they fall right in line with the views of modern economists and historians, they are not necessarily correct. Woods first explains that aggregate spending by the government, and, to an extent, by the consumer, cannot accurately describe a nation’s wealth, although both of these are essential components of what the modern macroeconomist defines as gross domestic product. Woods calls this noting more than taking an arbitrary number and adding it with other arbitrary numbers to do nothing more than amount to an even bigger arbitrary number. He decries the works of presidents Herbert Hoover and Franklin Roosevelt, both of whom promoted the use of government spending on public projects and credit expansion to boost the nation’s economy as prolongations of the Great Depression rather than means by which the nation escaped from it, calling it absurd to think that the production of massive steel ships being sent out to the pacific ocean to be destroyed during World War II , the point at which modern historians claim the nation was restored to economic prosperity, could add more to a nations welfare than an increase in savings. To justify this, he cites a minor depression in our nation’s history that occurred in the early 1920s. For a certain point during that time, soon after the creation of the Federal Reserve which brought on an abrupt expansion of the money supply, the nation experienced a slight economic downturn and a severe reduction in production. Unlike, in previous cases through history though, the FED raised the discount rate (the rate at which it lends to other banks) and the economy quickly readjusted in line with Austrian business cycle theory. Here, the free market itself was allowed to make its own necessary corrections without any government intervention and in no time the economy was back to setting production records again at a constant and soon increasing pace up until the point of the great depression. In short, according to Woods, nearly all of the economic downturns in American history have occurred as a result of some artificial credit creation, and were prolonged by government intervention and public works projects that added little or no benefit to the welfare of society as a whole. While this was especially true of the Great Depression in the late 1920s, Woods asserts that it was also seen in other economic crises in our nation’s history before the creation of the Federal Reserve for the same reasons. Woods cites particularly the Panic of 1819 which was brought about because numerous private banks were at that time creating their own excessive supply of seemingly worthless paper money, as well as the Panic of 1873 which was brought about as a result of the National Banking Acts of 1863 and 1864 which sought to establish some form of sound monetary system for the nation. The result was, of course, an inflationary pattern that set into motion the Austrian business cycle of boom and bust.
In order to understand our current economic crisis and prevent future ones from occurring as a result of the same negative effects, Woods also explains that is necessary to have a firm knowledge of money as well as of our nation’s monetary system. Money, then, has three functions. It serves as a medium of exchange, a unit of account and a store of value. However, what money is and what it has been throughout history is defined differently from time to time and from culture to culture. In general, before the existence of money occurs, people tend to barter in a very primitive sort of economic system, that is, they exchange goods for other goods. This system is considerably ineffective, as it requires the participants in a transaction to have a double coincidence of wants, that is, each person must be willing to accept what the other is offering in exchange for his or her goods and/or services. Because of this inefficiency some uniform commodity ultimately arises that becomes generally accepted for the payment of goods and services. In more primitive societies these commodities can be shells, stones, etc. and in more advanced societies they tend to be precious metals such as gold, silver and copper. Both must be easily divisible, and easily transferrable. Once some commodity becomes generally accepted, people begin to seek a place where they can store this commodity. Such an institution ultimately evolves into what we today call a bank. Once stored, people are also able to issue notes to others which can be taken to the bank and exchanged for stores of some commodity. Ce Such facilitation ultimately became known as a note, a check or a demand deposit, and was the genesis of fiat money. As time progressed, banks saw that they needed only to keep a fraction of the commodity stored at hand, and could also make loans to others once they gained the trust of their clients. If, at any point, a bank could not make due on the demands of a client, a run on the bank would occur, where clients would seek their money from the banks and store it elsewhere. At this point, money is circulating mostly in the form of paper notes and commodities, and is backed 1:1 by some generally accepted commodity, it is completely subject to the supply and demand schedules of the free market which determine a market interest rate by which banks lend, but do not lend more than they have. Governments then, seeing that participation is exceptionally lucrative, involve themselves within the monetary process. Paper money and debased coin currencies would often take the place of commodities as forms of money generally accepted for transactions. In ancient times, the face of a ruler, for example, would be placed on coins as a “stamp of validity” for use of commodities in transactions. In the United States this intervention ultimately took the form of a central bank in the Federal Reserve, which monopolized the nation’s money supply by the imposition of legal tender laws which force people to accept federal reserve notes for all debts public and private, controls the reserve requirements of banks across the nation and sets various interest rates for different purposes. In turn then, after some intervention has occurred and the imposition of a paper currency along with debased coin currency has been put into place the result is inflation. Although inflation is considered a normal phenomenon defined as a general growth in the price level by modern mainstream economists, it is defined by the Austrians as a growth in the money supply, something which, contrary to general economic though, can often be prevented. Woods, for example, describes the errors or misconceptions in preferring paper money to one backed entirely by a commodity, gold. In contrast to inflation there is also deflation. While seen as having a negative effect on the economy and as a precursor to depressions, Woods takes the time to explain how this general fall in the level of prices benefits the consumer, and is a necessary step in bringing a nation out of economic turmoil.
To conclude, the ideas of Thomas Woods show that it is important to consider a situation from different angles and from all perspectives before drawing a conclusion and taking action (my view of the material presented).Woods, devotes the final chapter of his book to looking towards the future and extrapolating at what can be done to solve our current economic crisis and prevent future ones of the same sort from occurring. In short, Woods emphasizes here, as he did throughout his entire book that in order to restore prosperity the nation must reduce its consumption and support more means towards voluntary savings, which is the basis of true growth in Austrian capital theory. In the long run, Woods also suggests the need to stop bailouts and to cut government spending, another important step towards growth and prosperity. Finally, Woods suggests that we end government manipulation of our currency, end the “monopoly money” a paper fiasco, and put the FED on table to be held accountable for its actions, and its misdeeds, should it be necessary. Woods ideas are, then, both rational and worthy of being considered in terms of his explanation for our current economic crisis today. Although there may not be validity in some of the ideas of the Austrian school of economic thought, the same must be said of Mainstream Economics. While neither alone may be able to predict with absolute and correct certainty what has caused today’s economic crisis, the ideas of both and others must be considered. It is only by combining our ideas, making concessions, and sometimes admitting that we are wrong, that we can ultimately achieve a solution to our economic problems.
Trends in blogging
Some trends I have begun to notice in my own blog as well as in the blogs of others is that posts seem to follow different patterns.
Posts seem to be produced in “clusters” where many are put out at once, after which the blogger seems to go into a period of recluse for some period of time, after which he or she gets an idea which “sparks” creativity and leads to another series of posts, after which the trend repeats itself. (As a good aside note, this trend can also explain why may bloggers create pages which later become abandoned dead zones that take up space on the internet proving how useless and meaningless most blogs really are.)
There are how ever some bloggers who, however, mantain a perfect consistency with their pages, some of which can provide very useful information, others that are just silly (pardon my lack of ”professionalism”).
It is safe then to conclude, based on these trends, that the only safe blogs to devote a substantial amount of time to reading are those that are both consistent and intellectual. I cite, but do not promote, that of Harvard economics professor and textbook writer Greg Mankiw, whos blog is both consistent and intellectual. Only these blogs have any truly useful information with which one look to better oneself.