Objectivity and Knowledge: So Vital

Nothing like stating the blindingly obvious, right? It is to me, and, hopefully, to my readers. Of course, it also depends if you understand objectivity as a connection to reality and knowledge as the integration of what is provided by that connection, which is known by very few today.

I am reminded of the importance of objectivity and knowledge in considering the relative virtues of three of my favorite books on the 2007 financial crisis. I recommend all three. Each has its own virtue and benefits to the reader. But, one book is in a different class because of the objectivity and knowledge of the author. He is an accomplished businessman and a serious student of Ayn Rand’s philosophy, Objectivism.

The difference between the books written by economists and journalists and a banker can be huge. The difference is especially large when neither the economist or the journalist actually understands what it means to understand and know a subject, i.e., to know it objectively – tied to reality. This is the difference, in today’s culture, between a person whose method of thinking is objective, subjective, or intrinsic (the corresponding order would be a banker who understands their subject, the journalist who thinks anything goes and there is no actual truth, and the economist who thinks that laws themselves are part of reality and thus his ideas float). Obviously, only one of these three has a sound grasp of the morality of the individuals they write about.

The book by the journalists, Reckless Endangerment: How Outsized Ambition, Greed, and Corruption led to Economic Armageddon by Gretchen Morgenson and Joshua Rosner, does offer a well-researched account of some parts of the crisis, which is to say that they are trying to be objective. But they have no clue about several issues: how banking functions, how regulators function, how a functioning economy works and why, and what is morality. Consequently, at times they make wildly impossible accusations, misrepresent events, and hold the innocent accountable (they do point at some truly guilty people, too, which is one reason the book is worth reading). If you don’t have a better understanding than they do, the book may lead to some poor conclusions. (You could recommend this book if it was read after the other two books.) In that the book offers a lot of information that wasn’t published before, you do learn important details.

Then there is Meltdown by Thomas Woods, who is an economist with a foundation in modern Austrian economics (post-Hayek, libertarian). He also makes many very good points. His understanding is better than that of the journalist, and although he has some obvious intrinsicist leanings, he makes no real bloopers. He is known to be religious and believes in self-sacrifice, which results in a rather flat support for the capitalist economy that he sees as better than the command economy. His justification is the benefit of the consumer. He tends to ignore the businessman. It is also worth reading because of the details he offers of the crisis and his decent understanding of the economics. But when compared with someone with an objective understanding of the crisis, it is obviously deficient.

So, the place to begin, and the one to read whether you have or have not read any other book on the crisis, is John A. Allison’s The Financial Crisis and the Free Market Cure. Mr. Allison has done the work to understand what objectivity means, i.e., connecting one’s ideas to physical reality. He also has years in the banking industry. Thus, he offers a fact based, conceptual analysis of what happened, why, what the consequences are, what the supposed cures are that Congress and the regulators imposed, and what we should actually do about it. This is what real explanation and analysis should look like.

Allison concretizes important points: the impact of regulation; the attitude and style of regulators; the destruction of independent action by the banker; the elevation of political pull over the blindingly obvious; etc. Ayn Rand and her followers have been asserting the destructive nature of government controls for decades. In this book are some specifics.

In future posts I will mention some of John Allison’s observations.

Meltdown by Thomas Woods, Review

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.