10 Aug Meltdown by Thomas Woods Jr.
I do not know Thomas Woods, but I suspect that if I did, we would get along. My review is going to be mostly critical of his new book, but that is only because the vast array of things I agree with do not warrant a lot of time. And truth be told, I have far bigger problems with much of the camp from which he comes than I do with him. I do not know if Mr. Woods is an accidental recipient of all the hype around this book, or if he helped to create it. But because of that hype, I need to be firm in what I write, lest innocent interested parties be led down a path they ought not venture down. However, there is much more that is right about this book than there is wrong.
From what I understand, Meltdown is being touted as the ultimate free market reply to the disaster of 2008. The book lasted a couple weeks on the NY Times bestseller list, and was spoken of quite fondly by several premier conservative groups. It is certainly in a completely different camp than the various works of Keynesian drivel that are about to hit the shelves. Knowing that Woods is affiliated with the Ludwig Von Mises Institute, I may have skipped it altogether, but a plethora of Austrians have good things to say from time to time (the honest ones), and the hype surrounding the book warranted a read. Granted, this “serious critique” of the 2008 collapse can be read in about 90 minutes (it is a very short 150 pages), so it was my pleasure to add it to my series (the present series I am working on regarding books covering the housing collapse, Wall Street failures, and general economic calamity of the last two years).
I almost put the book down when reading the highly disingenuous foreword by Ron Paul. I already have a strong bias against Paul, knowing him as the radical conspiratorialist and isolationist that I do. But when he hardly waits a few paragraphs to tell us that the Austrian school of economics predicted exactly what was going to happen, my deep resentment towards these revisionists came up above water. I have read virtually every single piece of literature these people have put out for years and years and years. They predicted the death of the stock market in 1981 (when the Dow was at 800). They predicted hyperinflation and the need to buy gold at the same time, from which gold began a 20-year bear market that has left it today, $1,300 per ounce BELOW its inflation-adjusted price of the early 1980’s. And in 2003-2005, if anyone believes that the Austrian-anarcho-Libertarians were predicted massive asset deflation, I challenge you to “check the tape”. Of course, one can cut and paste certain predictive forecasts that proved accurate, but taken in totality, it is utterly disingenuous to say that the Austrians saw all of this coming.
And then on page four, the book’s author decided to join the fun by using Peter Schiff and Jim Rogers as examples of “investment mavens” who predicted everything that would happen. Again, Schiff and Rogers certainly predicted much of what was to pass, along with an innumerable amount of other people (primarily, the “correct” pessimistic common ground was merely in the claim that housing prices were in a bubble; a belief that a monkey could have articulated in 2006). But here is the thing – investment “mavens” are not allowed to only predict what is going to fall apart. “You can’t beat something with nothing”, a well-known Austrian newsletter-writer used to say. What did Schiff propose investing in while he was predicting pessimistic outcomes for the U.S. in 2006, and what did his clients find out the hard way that he was invested in during the collapse of 2008? He was short the dollar, which rallied about 20% against the Euro, and he touted foreign stocks, the decline of which made the S&P’s 40% drop look benign. Rogers, on the other hand, called for a 100% migration to commodities, just as gold retreated from $1,000 to $700 per ounce, and oil went from $145 per barrel to below $50 per barrel. What irritates me to no end is how much these people dilute their own very important message with such deceit and revisionism. For I agree with far more of what these people say than I disagree with, but anyone reading this book who needs to learn about the errors of Fed policy, or the tragedy of government interventionism, may not make it through page 4 if they decided to look into the investment track record of these “always right Austrians”. The reality is that there are two kinds of people who forecast economic circumstances and investment prices: (1) Humble ones, and (2) Liars. I would have no problem if these guys just admitted to being the former; but it is their continued existence as #2 that continues to irk me.
None of this changes the fact that Woods is spot on about most of what he writes in this simple and elementary work. The government and the central bank alike continue to set records in their blind refusal to look at this economic meltdown honestly. Alan Greenspan in particular is shameless in his dishonesty about the role his inane and reckless monetary policy played in fueling the fire of the biggest asset bubble the world has ever seen. I disagree with Woods on much of his concern with the mere existence of a central bank, but I share his disdain for the bulk of Fed policy since its creation, and certainly Fed policy coming into this crisis. One thing Woods does very well is explain how distracting it is to ask, “was the Fed/Treasury right in how they handled [some aspect of this crisis],” when the far more important issue is, “what part of Fed/Treasury policy helped to cause this problem to begin with.” Personally, I would have preferred to see a more sophisticated understanding of the actual credit meltdown be achieved, with a deeper look at credit default swaps, excess leverage, etc., but Woods chose to focus on essentially one part of the problem (that is, the ridiculous amount of liquidity the central bank had pumped into the system in advance of this disaster). It is patently absurd to end all analysis at that singular observation, but Woods does a good job making the basic point he is trying to make.
The other “sleight of hand” Woods rebuts is the notion that “the free market, untethered” caused this problem. Woods is sharp enough to explain how this crisis can hardly be blamed on an unregulated free market, when it was really anything but. Like those who blamed the energy crisis and Enron of 2001 on “deregulation”, it is impossible to blame a problem on something that never, ever, ever existed. Woods documents this well.
His section on Fannie and Freddie was fine as far as it goes, though it seems that even with an audience of laymen, he could have scratched deeper than this. He gets into the “bailout at taxpayer expense”, but ignores the fact that the Preferred stock of Fannie and Freddie were allowed to disintegrate. His criticisms of the “implicit guarantee” are good, but not profound. In Woods’ defense, there is not a lot of “profound criticism” required of the Fannie/Freddie debacle. It was an insidious and overtly unconstitutional creation.
I do think that the continued reference to “Von Mises AND Hayek” is very effective for Woods (and the Austrian camp in general), as it gives an ongoing impression that there is monolithic agreement on these matters amongst the Austrians. Essentially, because F.A. Hayek is a far more respected and well-regarded economist, it enables a sort of association to lend credibility to the broader work. The reality is that the Murray Rothbard wing of Austrians (who run the current Von Misesian camp, especially in the Lew Rockwell world), have ample areas of substantive difference with F.A. Hayek. To paint a picture that Hayek and Rothbard/Mises are a sort of monolith is as intellectually dishonest as it is manipulative and convenient. Hayek was the leading voice of anti-Keynesianism of the 20th century. Rothbard and his heirs were, well, not.
I could toggle back and forth between positive and negative comments about the book all day. I do not share many of the author’s presuppositions about economics, and he does not seem to attempt to validate many of them. I am a full-blown subscriber to Von Mises’s work on business cycles, and I absolutely agree that government intervention in all cases seems to make matters worse, not better. I do wish that the study of this topic would focus more on the policy errors that created it, and not merely on what was or was not good after the fact. I intend in my synopsis of these many reviews, and of this overall situation, to offer my readers an underlying account of both what caused the problem, and what had to be done in light of the problem (with good and bad on both counts). I believe Woods belittles the problems of September 2008 naively, but I do agree ideologically with the idea that malinvestment must be allowed to work out of the system. The additional nuance that this process requires will be dealt with in future writings.
I would recommend this book for someone who has absolutely no familiarity with these issues whatsoever. I can only hope that the author’s motivation was to help the public debate, and not to rush out a very generic and short work into the marketplace while the “gettin’ was good”. He is a fine scholar (I have read other works of his as well), and I commend the book to the extent that it, too, wants to fight Keynesianism and all its ugly cousins. I do not, however, commend any apsect of the book that leads people to believing that Austrian-influenced scholars predicted this crisis, or have been calling things correctly ever since. We were smothered by an onslaught of deflationary woe in 2008, and these people were downright cocky in their assertions in 2006 and 2007 that inflation was going to deal us a death blow. They called some things right, but for the wrong reasons, and with no follow-up to serve as any practical benefit. Woods strikes me as a reasonable author, but I will demonstrate by the end of this series that absolutely no camp or person predicted this crisis in the form that it ended up taking. And I will demonstrate that it was a tragic cocktail of errors that led to the catastrophe, not the singular woe of overly accomodative Fed policy.