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BOOK REVIEW: Thomas E. Woods Jr., Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse (Washington, D.C.: Regnery Publishing, Inc., 2009), 194 pp. $27.95
Websites and blogs are rapidly replacing newspapers, newsmagazines, and opinion magazines. What’s next? Instant books, I suspect. Thomas E. Woods Jr.’s Meltdown shows why.
In its heyday, the instant book was an invaluable resource. Appearing shortly after a major news event, the tome would give a complete news account of the affair and add in a certain amount of background and analysis. Pocket Books claims to have published an early instant book following the dropping of atomic bomb, but some histories say the Chicago fire of 1871 brought forth the first example of the genre.
Inherently, though, instant books have two vulnerabilities. First, their publication deadline establishes a cutoff point after which all further developments, reactions, and debates are excluded. Secondly, their authors necessarily lack perspective on the events described. Of course, those things are also true of newspapers and newsmagazines, but a periodical can update readers in its next edition. Still, for news junkies like me, it was instant books—and not the daily newspaper—that provided the “first rough draft of history.” My disappointment with Meltdown suggests the magic is gone.
Woods makes no attempt to deny that this is an instant book. Although he prefers to call it a “time-sensitive book,” he admits that it is the product of “fast and intense work.” It is also a very brief book, with only 158 pages between Congressman Ron Paul’s “Foreword” and the “Acknowledgements” section. A further drawback—one that is not at all typical of instant books—is a paucity of news and an over-emphasis on theory. Speaking generously, two of the book’s seven chapters may be called newsy, while the remaining five are theoretical and historical. In terms of pages, only forty percent of the book is devoted to discussing the “meltdown” of the title.
The first of the newsy chapters is “How Government Created the Housing Bubble,” and it lists six explanatory factors, of which the first two will probably be familiar to all conservatives and libertarians: (1) Fannie Mae and Freddie Mac; and (2) the Community Reinvestment Act and affirmative action in lending generally. In addition, Woods indicts (3) government advocacy of adjustable-rate mortgages and the government-created cartel of agencies that rate securities; (4) the “pro-ownership” tax code; (5) the Federal Reserve and artificially cheap credit; and (6) “the Greenspan put,” the widespread belief that the Federal Reserve would not allow major institutions to collapse.
The second newsy chapter—Chapter 3, “The Great Wall Street Bailout”—is not as clear or well-organized. Woods refers to some of the important bailouts (Bear Stearns; Fannie and Freddie; AIG; and Merrill Lynch), as well as relating the history of the Troubled Assets Relief Program. But all of this is interrupted by digressions, such as a defense of short-selling and an attack on Sarbanes-Oxley. More annoying still, the account is endlessly padded with sarcastic asides that imply all public officials are fools or knaves or possibly both.
The rest of Meltdown, pages 63 through 158, is background material: economics, politics, and American history. To be fair, the book’s subtitle represents truth-in-advertising, emphasizing as it does both the “why” of the financial collapse and the author’s economic predictions. Yet even so, Woods’s idea of explaining the “why” is to present large amounts of abstract theory, with only a slight effort made at applying the theory to current events.
Chapter 4, for example, is entitled “How Government Causes the Boom-Bust Business Cycle,” and anyone who has read the standard Austrian works on that subject will find Woods’s explanation wholly familiar. “When the Fed lowers rates artificially, they no longer reflect the true state of consumer demand and economic conditions in general. People have not actually increased their savings or indicated a desire to lower their present consumption. These artificially low interest rates mislead investors” (67-68).
Chapter 5 also presents material familiar to anyone who has perused some works of Austrian economists, particularly the works of Murray Rothbard. And this material is even less informative about the meltdown of 2008. Entitled “Great Myths about the Great Depression,” the chapter actually takes very brief looks at the depressions of the nineteenth century and the depression of 1920–21, as well as devoting 11 pages to the causes of the Great Depression. And how does an examination of the Great Depression help explain the collapse of 2008? “In both cases, an inflationary credit boom brought about by the Fed’s lowering of interest rates led to massive resource misallocation and a distorted capital structure.” (106) That’s not very helpful.
Chapter 6, “Money,” takes the reader to a still more rarified level of theory. It purports to relate the origin of money, the troubles caused by government intervention in the field of money, and the effects of fiat money. Along the way, Woods also explains briefly how the Federal Reserve System works, attacks the fractional-reserve system of banking, and advocates a gold standard. The brief final chapter—called “What Now?”— rehashes the Austrian theory of business cycles and then, in a “What to Do?’ section, recommends abandoning bailouts, abolishing the Federal Reserve System, and instituting a gold standard. An appendix on “Further Reading” recommends five books by Rothbard; a collection of essays by Rothbard, Mises, and Hayek; the Rothbardian Ludwig von Mises Institute; Mises’s Human Action, and Henry Hazlitt’s Economics in One Lesson.
Meltdown’s limited presentation of the events that constituted America’s financial collapse is difficult to understand. The deficiency could have been supplied easily by hiring an intern to assemble a good journalistic account from a few online databases. Moreover, a detailed account of the collapse might have induced Woods to present a more detailed explanation of those events, rather than waving his hand at them and saying that they are all explained by his general theory of economics. Just as a satisfactory explanation for the fall of Rome must explain why Constantinople did not fall, so a satisfactory explanation for the collapse of some U.S. banks must explain why others did not collapse.
Now, some critics might blame this tendency to abstractionism on Woods’s “ideological” economics, but I do not. If he believes in the pure Austrian theory of boom-and-bust, fine. Let him present his analysis using that theory and let his explanation be judged by its adequacy, not by its origins. But in order to judge the adequacy of Woods’s case, we need to hear him make it against those economists who understand his theoretical approach but disagree with it or at least disagree with his application of it. It is no help to hear Woods rebut mainstream economists who do not take Austrian economics seriously.
And this, it seems to me, is where the instant book has met its Waterloo. The whole genre depended upon a certain kind of establishmentarianism; that is, it depended upon a body of assumption that was shared by the author and his readers. For mass market volumes, these assumptions were mainstream liberalism. For books aimed at the Right, they were mainstream conservatism. For works (such as Meltdown) that aimed at libertarians, they were mainstream libertarianism. There simply was not time, when producing an instant book, to elicit, consider, and answer debates internal to the target audience. And that was fine, when the authors of instant books were writing the first rough draft of history. Whichever perspective it took, the instant book roughed out an account that its target readers could accept, knowing that reviewers, journalists, and academics of their persuasion would later refine it.
Today, because of the Internet, the instant book is outdated by the time it arrives at the reader’s desk. Its “first rough draft of history” is already being challenged and refined online. Take the case of Meltdown. Years ago, a libertarian reader would have nodded approvingly through the book’s uncompromising indictment of the Federal Reserve System and its post-9/11 increase of the money supply. That is the standard Austrian story, and, as Woods tells the tale, the Fed’s behavior seems to fit the model. But anyone who follows even a few libertarian economics blogs will know that there is a very lively debate underway about the role the Fed played in the financial collapse of 2008. This is not a debate between libertarians and Keynesians. It is a debate taking place entirely among economists who agree that the Fed should be abolished. (David R. Henderson and Jeffrey Rogers Hummel have taken the lead in presenting an alternative view. See their article “Greenspan’s Monetary Policy in Retrospect,” Cato Briefing Paper No. 109.) In light of this debate, Woods’s indictment of the Federal Reserve seems to be simplistic at best and smug at worst. Woods may be on the right side of the debate. I do not pretend to say. The point is that, for a libertarian reader, the attempt to understand the financial collapse of 2008 had moved beyond the standard explanation in Meltdown even before it was published. Thus has the instant book has fallen victim to the instapundits, and first-draft history to an army of Davids.
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