Meltdown: It’s the Federal Reserve, stupid

The stock market has crashed, the nation’s major banks have imploded, the housing market is in a depression, foreclosures are accelerating, personal and business bankruptcies are rising, the real unemployment rate is in double digits, the federal budget deficit may top $2 trillion this year, the Federal Reserve is creating money at an unprecedented rate, and federal spending is skyrocketing to “stimulate” the economy. In short, the economy is in the tank.

Left wingers and other sorted big government advocates typically blame “greed,” “deregulation,” and “capitalism” for the financial meltdown and the deep recession we are in. Not so fast, according to Thomas E. Woods, Jr., in Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked and Government Bailouts Will Make Things Worse. Dr. Woods, with a Ph.D. in history and a prolific scholar as well as one of America’s “public intellectuals,” demonstrates that the current meltdown on both Wall Street and Main Street is caused by government intervention in the marketplace, specifically, the easy money policies of the Federal Reserve and the fueling of the housing bubble by Fannie Mae and Freddie Mac, two government created and institutions.

When the dot-com bubble burst ten years ago after the easy money policies of the 1990s, Alan Greenspan, chairman of the Federal Reserve, with George W. Bush’s blessing, opened up the monetary spigot in 2001 to “stimulate” the economy. And after the attacks on September 11, 2001, the Fed went into overdrive to prevent the economy from slumping further. By keeping interest rates at artificially low levels until 2004 and keeping the fed funds rate-the benchmark interest rate the Fed controls directly-at one percent from June 2003-June 2004, the banking system was flooded with an enormous amount of excess liquidity.

The Fed’s huge injection of liquidity fueled the housing market boom, while Fannie Mae and Freddie Mac did their part to make sure single family houses became more affordable to low income families, i.e., marginal buyers. In addition, middle and upper middle income families got caught up in the housing frenzy and bought houses and found themselves “over their heads.”

Woods does an outstanding job recapping how Fannie Mae and Freddie Mac, two of the most politicized organizations in our economy, were the number one culprit in the housing market’s collapse (pp. 13-17), and how the Community Reinvestment Act and affirmative action played a major role in getting buyers into houses they could not afford (pp. 17-21).

In a fact filled heavily footnoted seven chapters, Dr. Woods takes the reader on a historical journey from the earliest debates and battles about money and banking in 19th century America to the myths about the Great Depression, namely that Herbert Hoover’s

“laissez-faire policies” prolonged the depression and FDR rescued the economy with his enlightened, far sighted vision of public works, deficit finance, and cheap money.

Woods reveals how history has been turned on its head by the “court historians,” the ones that dominate Meet the Press, Hardball, and other outlets for the punditocracy. Despite the enormous body of scholarly research to the contrary, historians and politicians still sing the praises of FDR’s “strong leadership” while they decry Hoover’s “do nothing” administration. In fact, it was President Herbert Hoover who “launched public works, raised taxes, extended emergency loans to failing firms, hobbled international trade, and lent money to the state for relief programs” (p.99).

In other words, Hoover was an interventionist. He decried laissez-faire policies as a thing of the past. Hoover deserves to be rated as one of America’s worst presidents not because he was a radical proponent of free enterprise and a “do nothing” chief executive, but because he was a statist-an unapologetic proponent of big government. Even FDR’s 1932 running mate, John Nance Garner, asserted that Hoover was “leading the country down the path to socialism,” (p. 99). In today’s sensitive political climate that would be called “negative campaigning.”

Dr. Woods explains that prior to the Great Depression economic downturns ended without government assistance after the excesses of the previous unsustainable booms were liquidated, setting the stage for the economy to resume its “natural” growth. In the century before the Federal Reserve was established (1914), artificial booms were caused by banks inflating the supply of money and credit, mainly with the help of the federal government (see pp. 88-94).

Woods also reveals that the depression of 1920-21, occurring a few years after the Federal Reserve was created to end-or at least dampen the extent of depressions–was over quickly because the federal government did not “stimulate” the economy nor did the Federal Reserve manipulate interest rates to boost spending and investment.

After nearly one hundred years since President Wilson signed the bill enacting the Federal Reserve, we know the following: a hypothesis has been offered, the experiment has been conducted and the results are in: a fractional reserve banking sector and paper money system create the boom-bust cycle. Moreover, government intervention-spending, taxation, borrowing and unnecessary regulations-prevents the people from achieving their peaceful and most highly valued goals. In short, the current state of affairs is because statism, the exact opposite of laissez faire economics, is the overriding policy of the federal government

America’s political and financial elites, most pundits and the overwhelming number of academics have been infatuated with statism. Statism meanwhile has failed wherever it has been tried, whether in the Soviet Union, Nazi Germany, Communist China, Castro’s Cuba and North Korea. The mixed economies of the democratic “capitalist” nations of the world–the “softer” versions of statism–are in distress because of central banking, paper money, and fractional reserve banking.

In America, the Greenspan era of cheap money and Bush’s massive budget deficits is over, replaced by the Bernanke era of incredibly cheap money and Obama’s frenetic government spending and multi-trillion dollar deficits to “stimulate” the economy. The New New Deal of the 21st century will fail just as the Hoover-FDR New Deal failed miserably in the 1930s

America must return to free markets, limited government, 100% reserve banking, no bailouts and real money (gold and silver)–the policies that will create sustainable prosperity. By continuing on the current path of cheap money and massive government spending, the interventionist ideology of the political and financial elites will assuredly result in an inflationary depression.

Dr. Woods has written one of most important books about how the federal government fuels the unsustainable boom phase of the business cycle, which always ends in a painful bust. Woods also documents how both Bush and Obama have reacted to the financial crisis-more government bailouts, more spending and debt, and cheap money. After reading Meltdown you will finish “basic training” and be ready to enlist as a foot soldier in the cause of liberty and real change–an end to the statism that has gripped America for almost a century.

Meltdown:  It’s the Federal Reserve, stupid