Over the last two years or so, we, the citizens of the civilized world, have gone through a horrendous period in our economy. We have seen a towering boom in residential real estate turn into a collapse in that area followed by a collapse in the financial industry accompanied by a collapse in the stock market, with high unemployment, high foreclosures of homes, business failures, and amazingly high government spending, debt, money creation, and rhetoric.
What happened? The government talks about greed and risk-taking. They, the Fed and the Treasury, are the heroes.
But if you really want to know what happened and what the consequences of the current “recovery” actions are, read Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse by Thomas Woods..
As opposed to most discussions of the meltdown, this one begins years ahead of the September, 2008 Lehman Brothers bankruptcy. The roots of the bust are in the boom. In fact, as Woods explains, the damage to our economy is done during the boom. The damage starts with the Federal Reserve Board and its policy of low interest rates.
This specific cycle also is rooted in the appeal of home ownership for all. The liberals take this goal as a government policy, without regard to the economic consequences to the country or the individual buyers. Woods recounts the many and varied steps the government took to push home ownership without regard and in spite of the credit worthiness or ability to repay a loan.
Very important to anyone interested in how our economy works is Woods’ discussion of the Fed’s policy of low interest rates and credit expansion and the consequences in the 2008 panic. Woods points out that these activities have consequences, and not the ones that the Fed or either the Democrats or Republicans think. The consequences turn out to be the bust. The Fed’s policies create misallocations of savings and resources into investments that the economy can’t support. When he says “the economy” he means people who have produced and earned income and want to spend their income on their values. The Fed’s policies divert savings from what consumers want. Misallocated resources need to be put to productive uses, and that reallocation occurs during the bust. You get the fake boom and then you get to pay for it in the bust.
But for the bust to work, the assets have to be reallocated, which happens through business failures, lower prices, and movement of employees from bad investments to good ones, i.e., unemployment. These are all viewed as bad by the government and the Fed and they try hard (i.e., they spend money and make regulations) to keep businesses from failing, prices from lowering, and unemployment from rising. The things that need to happen to return the economy to productivity and prosperity are stopped, or at least they try to stop it. Woods points out that the result of stopping the process of reallocation can only be continued recession, as we are seeing, and will probably continue to see.
If you have read my recent blog post you know that I want to encourage people to learn how capitalism works. Reading this book would be a good beginning. It will also give you a good idea as to why government intervention and money manipulation is bad for us. It will help with your understanding of inflation. It will help you understand your own predicament.
Having said that, I must, unfortunately voice my one significant complaint about the book. As clear as he is about the causes of our economy’s current mess and the wrong headedness of the government’s actions today, Woods falls down on his explanation of the Fed’s creation of money and inflation. It isn’t that he is wrong so much as he leaves it muddled. You may come away with a confusion regarding inflation, price inflation, credit expansion, and how it all fits together. He talks about the expansion of credit to business being important in the boom/bust cycles, and then talks entirely about price inflation when explaining the Fed’s manipulation of the money supply. I hope that you can make the connection. [If not you can always ask me. I think that I can show the connections clearly enough for you. (Some of my earlier blog posts may help.)]
I found this book because a friend mentioned that Yaron Brook of The Ayn Rand Institute had recommended it. It was a good suggestion. Allow me to add my modest recommendation. In fact, please allow me to say that if you want to understand the economic world you live in, you will read it.
If I were a wealthy donor… - In *The Power and the Glory: The Key Ideas and Crusading Lives of Eight Debaters of Reason vs. Faith*, I briefly discussed "the rule of inverse interest."...
5 weeks ago