November 20, 2009
 
|
 
|
 
|
 
|
 
|
 
|
 
|
 
|
 |
 |
 |
 |
 |
| The Money Meltdown: A Conversation with Thomas Woods Jr. |
| by Brian Saint-Paul |
| 3/11/09 |
|
The economy is in free fall and we may be facing another Great Depression. In response, the government is scrambling to spend its way back to health. Is this really the best solution? Brian Saint-Paul spoke to Thomas Woods Jr., author of the New York Times bestseller, Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse.
♦ ♦ ♦
Brian Saint-Paul: The popular media is blaming the economic collapse on the free market and "laissez-faire capitalism." And yet these same commentators seem largely ignorant of what a laissez-faire economy actually involves. So first things first: What is free market capitalism?
Thomas Woods Jr.: Well, it's not nearly as scary as people think it is. Free market capitalism simply involves the free exchange of property between individuals. The idea is that you're free to enter into contracts with other people. These contracts are reached on a voluntary basis; both parties must consent to the terms. The system proceeds along the lines of mutual respect. In other words, the free market is civilized behavior, institutionalized: You can't initiate physical force against somebody else to make him do something -- you have to get his consent.
It's a system based on private property and free exchange. And that's really it.
So government intrusion into the economy -- say, pressuring banks to make loans they would not normally make -- is not a feature of a free market economy?
No, because that involves the threat of physical force. If the bank doesn't comply with the demands, then they can be fined, they can go to jail, etc. With a free market approach, people make deals on the basis of mutual respect. If they're deemed to be credit worthy by certain traditional criteria, they get the loan. But in a free market, they don't get a loan by asking the town bully to physically force the banker. That involves violence and the free market eschews all violence.
On a related point, a free market economy is not centrally planned?
Right, it doesn't have ideological commitments like, say, creating an "ownership society." It's nothing more than the summation of individual exchanges. So in the same way, it would be wrong to say that the free market 'poorly distributes wealth.' The free market doesn't distribute wealth at all -- there's no distribution mechanism whatsoever.
Again, we're talking about nothing more than the voluntary exchange of property titles.
In your book, you identify a number of culprits in the financial meltdown -- contributing factors to the disaster, but not the main cause. For example, you argue that Democratic-led efforts to increase lending to low-income earners was not a primary cause. Why is that?
Because I don't think the numbers support it. The scope of the sub-prime mortgage problem has been exaggerated. Of course, those things didn't help. In the effort to make homes more affordable to low income families, they did discard things like the traditional down payment requirement. We also saw the rise of 'liar loans,' where you could approach a lender and make up an income, and no-one would verify it. The Adjustable Rate Mortgage is another factor, though there can be some merit to that in some circumstances.
But when you combine these all together and make these loans available to people who would be called sub-prime, there's almost no way to limit it to that. More and more people began using these types of mortgages, so the ready availability of very easy mortgage terms spilled over into the non-minority, non-low income market. It gave an artificial stimulus to speculation in homes, and made it seem as if the quickest way to become wealthy is to buy several investment properties, because everyone believed they'd appreciate forever. And of course, you could buy them on easy terms.
So this seems to be a bigger contributing cause than the sub-prime issue because the default problem is much more severe among prime Adjustable Rate Mortgages than it is among sub-prime mortgages. These are the mortgages that are most likely to have been purely speculative, and this unsustainable wave of speculation crumbled at the first sign of a housing collapse. People just walked away from these mortgages. They had no stake in them.
So this was more of an issue with speculators than 'predatory lenders'?
Right. I hasten to add that I don't think speculation is a bad thing, but when you're in the middle of an asset bubble, people who don't belong in speculation get drawn in. They get caught up in a kind of mania where they think they can do no wrong -- not at the stock market, not at flipping houses. I think that's what happened here.
Most mainstream commentators are blaming the collapse on a simple lack of regulation over the markets.
If we're going to argue that the mortgage market itself needed to be regulated, then what about Ben Bernanke? He told us himself that his own regulators looked into the mortgage market and found it to be perfectly healthy -- in fact, healthier than ever. So what do you do when the regulators miss it? You need to have something else.
Second, the Federal government wanted banks to be making these loans. Banks were only doing what every layer of government and the Federal Reserve itself wanted. So what regulator would dare stand up to the entire political establishment? Such an individual would be driven out of town, denounced, etc. "Aren't you just a heartless monster who doesn't want poor people to have affordable homes?" -- that would be the claim. It would require a regulator of superhuman courage and integrity to say something other than what the regime wants to hear.
Finally, the apparent risks financial institutions were taking with these mortgages didn't actually seem substantial at the time. That was due to the myths of the housing bubble: home prices always increase, a house is the best investment you can make, and you can hardly ever go wrong flipping a house. These myths made it seem as though investments in housing weren't all that risky. Houses continued to appreciate, so the banks weren't left with some unsellable thing that had dropped 50 percent in value. The Federal Reserve's own economists said that this was not a housing bubble and that these high prices are sustainable and based on real factors.
So the investment was made to seem safe because of what the Fed was doing in pumping up the housing market.
Ok, but that's housing. What about the financial markets?
The short answer is that the entire system, from the Federal Reserve on down, encourages risky behavior. The Fed can create money out of thin air. When it floods the economy with it, people naturally use it in a riskier way than they would in other circumstances.
I like the example that Peter Schiff uses. He says imagine a Kindergarten class where the teacher gives pixie sticks and soda pop to all the kids, and then leaves the room for a few minutes. When she comes back and finds the classroom trashed, who do you blame? So the Fed ought not be doing these things, and we shouldn't have the implicit presumption that Alan Greenspan will come riding to your rescue if things go bad. Many investors seemed to believe this. There is built into the system an institutionalized degree of moral hazard.
Then there's the Too Big To Fail doctrine, which encourages risky behavior. And finally, we have deposit insurance which means that nobody cares about the soundness of banks anymore. They care more about which plasma TV they're going to buy than they do about the place where they're putting their money. Instead of having a hundred million people keeping their eyes on the banks, the responsibility falls to a small number of regulators in Washington, D.C.
So you're saying that the "breakneck deregulation" we've heard so much about is largely a myth?
Most of the alleged deregulation people complain about is completely phony. Suppose you have a government monopoly like the post office and say, "Ok, we're going to deregulate the Post Office. From now on, the Post Office can charge $100 for a stamp." That's not really deregulation. Full deregulation would say, "We're going to deregulate the mail business so that no-one is prevented from entering it by regulatory barriers." Now that would be real deregulation. Try selling $100 stamps in that arrangement and see how that goes for you.
What we've had in recent years is phony deregulation. Banks are allowed to engage in riskier behavior than they were before, but the government will continue to guarantee their deposits with deposit insurance. How is that deregulation? In effect, you can do riskier things but the public is still on the hook for your errors. Real deregulation would say that you can do risky things, but you're on your own. We haven't had that. We've had the worst of all possible worlds.
Much of your book involves the leading role the Fed has played in the crisis. First, what is the Federal Reserve? Most people don't realize the planning role it plays in our economy.
The Federal Reserve is the central bank of the United States. It has some regional banks, but it's by-and-large a centralized system. It serves a couple purposes -- it can act as the lender of last resort to institutions in financial trouble. But more significantly, it can increase and decrease the supply of money in the economy. Of course, as people have been saying for years, maybe we don't need a Soviet-style Commissar in charge of money and interest rates. If we believe in the free market, why should we have an institution whose manipulation of the supply of money can artificially push interest rates one way or the other? Why don't we trust the free market to set the interest rates as we do any other price?
The Fed is a non-market institution whose interventions in the free market, far from stabilizing it (as it supposedly does), actually destabilizes it.
And that explains the boom/bust cycle?
Friedrich Hayek is the Nobel Prize-winning economist people should be listening to, not Paul Krugman. Hayek argued that the source of the business cycle in the economy is the central bank's manipulation of interest rates. (Before someone objects that there were business cycles before there was a Federal Reserve system, I'll simply note that I address that in the book.)
Hayek's argument was that interest rates can come down in two possible ways: First, people save more, and rates come down because banks have more money to lend. Second, the central bank could force them down artificially. Hayek's point is that there are dramatically different economic consequences that flow from these two choices. When they fall voluntarily, the market coordinates production successfully, because when I save more, I'm implicitly telling the economy that I'm putting off some of my consumption for right now. And it so happens that when interest rates are low, businesses take the time to engage in future-oriented projects. This is how the market coordinates production across time: When people defer consumption for the future, that's the time when it's most profitable for businesses to engage in future-oriented projects.
Secondly, the fact that I'm saving and not consuming releases resources that then provide the material so that businesses can complete their investment projects. So this is all sound and good.
But if interest rates are brought down through artificial means, the public has not indicated that it intends to defer its consumption. So you have businesses involved in long term projects or engaged in product development at a time when people are demanding more products at the present.
Furthermore, forcing down the interest rates by flooding the economy with money does not create any additional resources. You have the same resource pool that you had before, but you now have more investors drawing from it, trying to complete their investment projects. They soon discover that the necessary resources don't exist in sufficient quantities to do that.
If this is all true, then why do Hayek and the Austrians represent a minority position, while Paul Krugman and the Keynesians enjoy establishment favor?
There's a mutually reinforcing aspect to this. First, Austrian economics has not been taught, so therefore the next generation won't teach it. I think it's getting a lot more exposure now, because it has so much explanatory power with regard to what's just happened.
Second, Austrian economics does not tell the government what it wants to hear. I know this will shock people, but in my view, the government is not necessarily committed to the pursuit of truth alone. Rather, it will promote economists who say what it wants to hear. Politicians want to be told that you can spend your way to prosperity; you can print your way to prosperity. They don't want to hear about the limitations that exist.
There are some criticisms of Austrian theory, of course, but I find them to be poorly thought out. They're often thrown out casually by people who are annoyed with the Austrian view, but who may not have really studied it. Paul Krugman, for example, is contemptuous of the theory, but when you read his material on it, it's clear that he doesn't understand it.
We've had bailouts and stimulus packages, and possibly more of both in the near future. If you were to look into a crystal ball, where are we going to be in 20 years? Where is all of this heading? Will we reach a point of total economic collapse? Or will we wind up as the newest Euro-style state?
It seems to me that the best-case scenario is a kind of European third-way stagnation: high unemployment, anemic growth (if any), and a whole bunch of people scratching their heads and wondering why this is happening. That could be our fate.
Of course, it could be worse. It may turn into something like what Japan endured in the 1990s and beyond -- though at least Japan had some domestic savings as a cushion. Or there could well be a complete collapse of the system, with the dollar destroyed. This is all conditional, because it depends in large part on what the government does. Its cure is almost sure to be worse than the disease.
I'd love to think that if a collapse came, people would say, "Obviously, intervention doesn't work, so let's try what the Austrians have been suggesting." But I think instead a demagogue would rise up to say -- as usual -- that the problem is not enough government involvement, and that he's going to rescue us.
That's the most likely outcome.
Thomas E. Woods Jr. is senior fellow in American history at the Ludwig von Mises Institute. He is the author of nine books, including two New York Times bestsellers: The Politically Incorrect Guide to American History and the just-released Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse, as well as the award-winning The Church and the Market: A Catholic Defense of the Free Economy. Visit his new Web site. Readers have left 15 comments. Who "...would dare stand up to the entire political establishment? Such an individual would be driven out of town, denounced, etc." His name was George W. Bush. And look who ran him out of town. Search youtube: Timeline shows Bush, McCain warning Dems Written by nobody citing one of his more important books for us Catholics: The Church and the Market: A Catholic Defense of the Free Economy (Studies in Ethics and Economics). This is an essential read, especially since so much of the Social Teachings of the Church seem to be (mis)interpreted by those in various "justice" and caritas activities as liberal, Statist interventionist dogma. This book should be required reading by EVERYONE who works at the USCCB, especially the office of CCHD, every bishop, every head (as well as the staff) of diocesan caritas organizations, Catholic Relief Services, etc. Here is some more info on Professor Woods that might be of interest to other: He holds a Bachelor's Degree from Harvard University and a Ph.D. in history from Columbia University. He served as a history department faculty member at Suffolk County Community College in New York until 2006, and is now resident scholar and senior faculty member of the Ludwig von Mises Institute (LvMI), as well as a member of the editorial board for the institute's Journal of Libertarian Studies.[2] He is also an associate scholar of the Abbeville Institute. He was an ISI Richard M. Weaver Fellow in 1995–96. Woods is a convert to the Roman Catholic Church and author of The Church and the Market: A Catholic Defense of the Free Economy. He is associate editor of The Latin Mass Magazine, which advocates traditional Catholicism. His 2005 book, How the Catholic Church Built Western Civilization, is the basis for The Catholic Church: Builder of Civilization, a thirteen-episode television series airing on EWTN in 2008. The series examines the Church's influence on law, morality, science, and scholarship. Woods's writing has appeared in numerous popular and scholarly periodicals, including the American Historical Review, the Christian Science Monitor, Investor's Business Daily, Modern Age, American Studies, Journal of Markets & Morality, New Oxford Review, The Freeman, Independent Review, Journal des Economistes et des Etudes Humaines, AD2000, Crisis, Human Rights Review, Catholic Historical Review, and the Catholic Social Science Review. He is a contributing editor of The American Conservative. His most popular book to date was the 2004 New York Times bestseller The Politically Incorrect Guide to American History (Regnery Publishing, 2004). Written by Deacon Ed It may not do any good, to have this lonely voice speaking the truth. But it is such a relief to hear it, all the same. I feel like a Frenchman who's been saying, "Y'know, I have serious doubts about the effectiveness of the Maginot Line," and getting scoffed at for saying it until I scarcely have the courage to raise my voice any more, and THEN, finally hearing a public figure say the same thing, and articulate it far better than I could. Sure, it doesn't mean decision-makers will listen. The wrong policies will likely still be pursued and the Germans will likely still roll through the lowlands wreaking havoc. But at least someone has said the truth. Thank God. Written by R.C. Outstanding interview. Woods is terrific on this. As rotten as Obama is, the Republicans are as guilty.....if not more. They are also worshipers of Keynes. Let's not forget that Bush nationalized the banking and mortgage industry with October's $700 billion bailout. Bush bailed out the auto industry. Defense spending exploded with Bush. Bush left office with a $1 TRILLION dollar deficit. The national debt doubled under Bush. Written by RK citing one of his more important books for us Catholics: The Church and the Market: A Catholic Defense of the Free Economy (Studies in Ethics and Economics). — Deacon EdHi Deacon Ed, You're exactly right: That is a must-read for anyone interested in the intersection of economics and Catholic Social Teaching. A fabulous book. Thanks for catching that. I've added it to Tom's byline.  Written by Brian Saint-Paul I think this offers a fair option in theory as to contructing economies that are grounded in reality along the lines of basic supply and demand business and trade practices, which seem normative and good on the whole- as the encyclicals endorse a "free economy" or "business economy". But there are some other ideas derived from Catholic social doctrine that I cannot set aside- my reading would indicate that while every one of us has some responsibility for the universal common good- and I think Pope Benedict is going to be stressing the role of each and every one of us to make good moral economic decisions. It is also pretty clear that the Church has taught that labor is prior over capital, and the economy is made for humanity, not humanity for the economy, and that the political community has a very special responsibility to ensure the universal common good in all the important facets of the social condition. It is also clear that a contract that is unjust is not morally valid- so even if someone is desperate enough to take work that pays next to nothing- that does not let the other party in the contract- by my reading of the social doctrine's general principles of establishing justice not merely legal agreement as the truly binding principle in such situations. The Church in commenting on global and national economies has repeatedly stressed the neeed for a just juridical framework to underpin the business economies as well. What is confusing to me is how everyone thought that Greenspan et al were operating according to their stated economic philosophies of being free market, deregulation proponents- but as Dr. Wood indicates this was not so- there was the combination of Big Government interference and printing of currency- bailing out huge failing banks and corporate interests, but the oversight and regulation supposedly being conducted by government officials was not effectively pursued. So apparently we have had the worst of all possible economic models in place. So either we go the Austrian School direction, or we keep the social insurance and Government guarantees in place, but reform the regulatory and oversight of political authorities to watchdog ethics and bookkeeping practices. And also be empowered to look at such things as unhealthy speculative bubbles that are encouraging the irrational and the greedy to push things well beyond supply and demand sanity. I can see that some of the debate has be reframed- we must be able to separate the wheat from the chaff- those who are hiding behind free market theories, but are actually of the Greenspan/Bush/Clinton mindset- and will just print money and bail out big corporate interests over and over again- using government powers as a mere tool for the large and well-connected in society. Or those of the Austrian School who propose some ways to curb multinational corporate power without drawing out more governmental power. I'm not sure how this could play out given the current situation of extreme power in the mulitinational banking and corporate spheres and their ability to put ordinary politicians into their pockets. And what to do with the freedom of trade and the freedom of persons to move across borders to seek opportunities shut off from them in their native places? It would seem that is commerce and trade is free, then labor must be also- or else you will just get more of the same- practical slave labor in parts of the world where people are not free to leave- and not welcome in the lands of the free- a double whammy that smells rotten- why should there be a First World free society that trades and helps Third World dictatorship societies like China to keep their people down and use them as they wish? With the challenges of free markets and borders, I wonder if keeping the basic governmental structures in place would still be useful, as long as the regulatory powers of governance were used properly- more as the Church has prescribed- having common sense and human rights at the heart of any such regulatory process. Written by Tim Shipe Who "...would dare stand up to the entire political establishment? Such an individual would be driven out of town, denounced, etc." — nobodyHis name was George W. Bush. And look who ran him out of town. Search youtube: Timeline shows Bush, McCain warning Dems If you truly believe this to be true then you need to do a lot more historical economic research. Start with the year 1971 when we left the gold standard and the birth of the Finance, Insurance and Real Estate (FIRE) economy through the tech stock crash in 2001 and into present time. It should become abundantly clear to you that poor keynesian policies have been followed by the Democrats and Republicans alike. If you want a real history lesson go back further and find the congressional hearings records for the Bush Family banking scheme. Find out why the U.S. Government confiscated Herbert Walker and Prescott Bush's banking money. Written by Tom In Greenspans book, The Age of Turbulence, there's a passage on page 297 where Greenspan describes his debate with Li Peng and Greenspan told Li Peng that the US tried price controls (under Nixon) but learned that they don't work and learned not to do them. This conversation was during the period when Greenspan was head of the Fed and controlling US interest rates.... I find it hard to believe that Greenspan didn't realize the disconnect in this. Written by George @ Tim Shipe Tim, Tom does not get a chance to go into it much in this interview on why Austrian School economists don't support holding onto regulatory systems in government. Austrians, classical liberals, and Libertarian-minded folks see the repeating pattern of all governments in history...they all eventually corrupt themselves. Your wish to have a benevolent government, one which does the right thing and serves the people, can never happen. While those serving may not necessarily be evil, the collective actions of government officials lead to a corrupted system. It's built in and history repeats it over and over again. As such, regulatory systems are to be rejected because at some point it will break down, corrupt, and do harm to the free market and to the citizens of that country. This is also why they suggest very limited government with definite, described powers that cannot be expanded. Power corrupts, as the saying goes, but history reveals it to be true. Written by Douglas G Douglas G. I'm not sure that the view you state on government being inherently incapable is one I can locate in Scripture of official Church social doctrine- but in any case- when one compares the system of law and order applied to economic systems with a system of "free markets" where I suppose corporations are able to compete with other corporations and small business owners, with no regulatory policing or built in protections for laborers or the environment- I begin to worry. Corporations have legal persons status, which seems quite suspect from a Catholic humanist viewpoint. And corporations have a very one-dimensional purpose- to maximize profits for shareholders according to some legal precendents like when the Dodge Brothers took Henry Ford to court for his tapping into dividends in order to lower the cost of his cars- the shareholders rights trumped good intentions. Corporations also have a very non-democratic composition- while government has the possibility of being something composed of the people for the people kind of thing- so I find more potential for common good coming from governing forces rather than large corporate forces- the only non-democratic institution I would place money on is Christ's Church. Do the Austrians have a way of treating corporate powers differently than the current model? With transnational corporation being enabled to move freely around the globe, and with their capital also being made more free to circulate without burdens of taxation, all the while labor is caught behind nation and state lines tightly controlled by such boundaries- how can the free market system work if only corporations and money can flow but not people? Would the free market be free only if trade and enterprise were limited to the peoples who live in nations where it is agreed that anyone can go and live anywhere in the free market spheres? Written by Tim Shipe “large corporate forces- the only non-democratic institution” A false representation. Corporations are a representative democracy with separation of powers much like our U.S. government as designed by our Founding Fathers. And I notice here on InsideCatholic com. boxes very rarely do people mention our U.S. Constitution in there arguments. Clearly Karl Marx is a favorite reference source. Ultimately the consumer has the final say in products and affirmation of said corporate entity---what’s more democratic then that? Now there isn’t one cookie cutter process nor is it as simple as I will describe but it goes something like this:
The role and responsibilities of a board of directors vary depending on the nature and type of business entity and the amount of power exercised by the board varies with the type of company. Written by nobody Separation of Powers: Amendment X: The powers not delegated to the United States by the Constitution nor prohibited by it to the states, are reserved to the States respectively, or to the people. From Federalist 63: 'There are particular moments in public affairs when the people, stimulated by some irregular passion, or some illicit advantage, or misled by the artful misrepresentations of interested men, may call for measures which they themselves will afterwards be the most ready to lament and condemn. In these critical moments, how salutary will be the interference of some temperate and respectable body of citizens, in order to check the misguided career, and to suspend the blow meditated by the people against themselves, until reason, justice, and truth can regain their authority over the public mind?' Free Market System: Federalist Papers No. 11: THE importance of the Union, in a commercial light, is one of those points about which there is least room to entertain a difference of opinion, and which has, in fact, commanded the most general assent of men who have any acquaintance with the subject. This applies as well to our intercourse with foreign countries as with each other… That unequaled spirit of enterprise, which signalizes the genius of the American merchants and navigators, and which is in itself an inexhaustible mine of national wealth… An unrestrained intercourse between the States themselves will advance the trade of each by an interchange of their respective productions, not only for the supply of reciprocal wants at home, but for exportation to foreign markets. The veins of commerce in every part will be replenished, and will acquire additional motion and vigor from a free circulation of the commodities of every part. Commercial enterprise will have much greater scope, from the diversity in the productions of different States… Let the thirteen States, bound together in a strict and indissoluble Union, concur in erecting one great American system, superior to the control of all transatlantic force or influence, and able to dictate the terms of the connection between the old and the new world! (And certainly a Catholic subsidiary form of government also) Written by nobody Our economy has more features of a free market economy, where individuals have the most control, than a command economy, where government has the most control. When the Constitution was written, the framers set up a system of checks and balances of power between the judicial, the executive, and the legislative branches of government. They also knew that competition would protect the public in a free marketplace. The Limited and enumerated powers of federal government:
The problem has been an every growing and intrusive Big Daddy Government coupled with a loosening immoral society that values self more than neighbor---Catholics being no different. Written by nobody U.S. antitrust laws prohibit anti-competitive behavior. Antitrust laws are designed to encourage competition in the marketplace. They make illegal certain practices deemed to hurt businesses or consumers or both, or generally to violate standards of ethical behavior. What is a government take-over of corporations or of there daily activity but a violation of Antitrust laws? A pure democracy is communism. Benjamin Franklin remarked that "democracy is two wolves and a lamb voting on what to have for lunch. Liberty is a well-armed lamb contesting the vote." Written by nobody As a real estate analyst for a large brokerage I have found the mainstream rhetoric regarding causal factors in the home market tragedy untidy. They simply didn't fit the data. Woods explanations fit like a glove. I too believe this is a must read for all... Catholic, Protestants, Buddhists, Muslims and such. Written by Gene Urban |
|
 |
