Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and the Government Bailout Will Make Things Worse

by Thomas E. Woods, Thomas E. Woods

If you are fed up with Washington boondoggles, and you like the small-government, politically-incorrect thinking of Ron Paul, then you'll love Tom Woods's Meltdown. In clear, no-nonsense terms, Woods explains what led up to this economic crisis, who's really to blame, and why government bailouts won't work. Woods will reveal:
* Which brave few economists predicted the economic fallout--and why nobody listened
* What really caused the collapse
* Why the Fed--not taxpayers--should have to answer for the current economic crisis
* Why bailouts are band-aids that will only provide temporary relief and ultimately make things worse
* What we should do instead, to put our economy on a healthy path to recovery

With a foreword from Ron Paul, Meltdown is the free-market answer to the Fed-created economic crisis. As the new Obama administration inevitably calls for more regulations, Woods argues that the only way to rebuild our economy is by returning to the fundamentals of capitalism and letting the free market work

Genres: Economics, Politics, History, Nonfiction, Finance, Business, Government

194 pages, Hardcover

First published January 1, 2009

Reviews

[Stephen · Rating 4 out of 5]

A FEW INTRODUCTORY REMARKS…
Books on politics and economic theory can be very divisive and create strong feelings in those on both sides of an issue. I have strong feelings myself and in the course of this review, a few of them may come out. Discussing my personal views on these kinds of topics is something I don’t generally do in my reviews because it is too easy “over the net” for threads and discussions to go nuclear and I generally find that stuff petty and stupid.

Unlike some reviews I see on goodreads about emotionally charged issues, I have zero interest in bashing or belittling one viewpoint over another whether I agree with the viewpoint or not. I actually do like discussing these issues, but not to the point of the name-calling, “fuck youing” and “anyone who doesn’t think like me is moron” garbage. Nothing, NOTHING bothers me more than “discussions” that include statements that begin, “How can you possibly think __________________” or “I could never respect someone who believed ______________”…. You can pretty fill in the blanks and finish those sentences with anything and it is safe to say you are not having a discussion. What you are doing is picking a fight, claiming your own superiority and acknowledging your full time membership is the A.A.L.C. (Asshat & Assclown Leadership Council).

So, now that my politeness and decorum rant is over, how about we finally get to the book review. If I were trying to summarize the main argument of the book, it would be this: the “free market” which has been so demonized of late as a primary cause of the banking crisis, the housing debacle and just about every other economic woe the U.S. is experiencing is NOT to blame for the current state of the economy. Instead, the true culprit for the mess is intervention in the market, primarily by the Federal Reserve in implementing its policy of artificially raising or lowering interest rates and monetizing the debt.**

** I am not going to go into detail on the monetization issue (i.e., printing money to pay our debts rather than growing the economy), but it is a very interesting aspect of the book and one I think most people, at least in part, would tend to agree with in general.


Thomas Woods is a fervent disciple of the “Austrian” school of economics whose other adherents include: F.A. Hayek, Henry Hazlitt, Murray Rothbard and Ludwig Von Mises. The “Austrian” school believes strongly in the a “free market” approach to capital investment and blames intervention by the Federal Reserve for creating artificial conditions that “invariably” lead to the kinds of booms and busts that we have seen over the last decade. While Woods provides numerous examples of this, I will do my best to explain this argument using the author’s take on the housing crisis.

AN ARITIFICIAL BOOM LEADS TO AN INEVITABLE BUST

After 9/11, the Federal Reserve, in an effort to jump start the economy, restore consumer confidence and spur spending significantly reduced interest rates below where they otherwise would be. Now economics 101 tells us that as interest rates go down, more money tends to flows into “capital intensive” markets which benefit the most from lower interest rates because of the amount of capital expenditure required to operate these businesses. One of the most capital intensive markets is real estate, specifically homebuilding.

Thus, as a result of the interest rate cuts by the Federal Reserve, more and more capital flowed into homebuilders which led to more land acquisition and more homes built. This in turn, led to higher land prices (i.e., more builders chasing less land = higher prices) and construction costs (i.e., more demand for supplies and labor = higher construction costs) which led to higher home prices (i.e., higher land prices + higher building costs = higher home prices).

At the same time, the reduction in interest rates also led to lower mortgage rates which allowed a greater number of people to afford (or at least believe they could afford) a home....[Quick Pause for a Side Note: One of the most fascinating, but also most involved, aspects of the book was an analysis by Woods of the “sub prime mortgage market” and the massive “political” pressure that both President Bush and the Democrats/Republicans in Congress brought to bear on Fannie Mae, Freddie Mac and the banking system to “make loans to people.” This pressure was a huge contributing factor to the “lax lending requirements” that EVERY politician is now saying was so bad. Other then this “teaser” I am not going to address that part of the book here as it would take WAY TO LONG to lay out properly…but it is fascinating.....[End Pause]...Anyway, you take a large increase in homes and an equally large increase in people who can “afford” them and add to that the massive number of people who sucked the “newly created” equity out of their suddenly more valuable houses to buy shit they either didn’t need of couldn’t really afford and you get an economy that is just chugging along…..UNTIL reality sets in and the economic piper must be paid.


Thus, the “author” argues that the housing crisis was created because the actions of the Federal Reserve produced an “artificial” change in the flow of capital away from some areas and into the homebuilding industry. This led to conditions that could only exist for as long as the “artificially” created stimulus was present, which led to people buying homes that under normal market conditions they could not afford which eventually led to disaster. Alternatively, says Woods, if the market were allowed to set prices and interests rates according to the free flow of capital, the housing market would not have gone up as high or crashed nearly as hard and the capital that was “vaporized” by both homebuilders, homebuyers and the lenders who lent them money would have been used in other areas of the market where it could have provided a productive benefit to the economy as opposed to just being lost.

In sum, the author, based on the “Austrian” approach, states that anytime you “artificially” adjust the market, you create the very genesis of the correction that must inevitably follow when that “artificial” stimulus is removed.

STEVE’S THOUGHTS

So, what was my take on this analysis? Well, I thought it was a fascinating book and intend to read more on the subject. I certainly lean in favor of “free markets,” but at the same time, I don’t think I am ready to scrap the Federal Reserve and say that there is never a time when interference in the market by the Federal Reserve is justified. I did find a lot in what the author was saying that struck a cord with me including:

1. Politicians using “artificial” stimulus and monetization of the debt to gain political support from large constituencies and not caring about the long term effect such actions have on the economy.

2. The inherent wrongness of the “too big to fail” mentality and the virtue of allowing the businesses to fail and go bankrupt rather then “bailing them out” for their poor judgment.

3. The history of previous booms and busts in the American economy, including the Great Depression, and how the “free market” approach provides insight into those periods.

The author talks in some detail about these issues and I found much of it that made sense. Not all, but much.

The most “controversial” topic that the author discusses is the problems with a “fiat” currency and argues passionately in favor of a commodity-backed currency. While it is certainly tough to argue some of the merits of the author’s position, I think the genie might be so far out of the bottle on this point that it may not be reasonable to seriously debate returning to a commodity-based currency. However, I am interested in reading more about this and found the author’s arguments interesting.

Overall, I found the book to be entertaining and very thought-provoking (whether or not I agree with all of it). I will say that the book is fairly short (fewer than 300 pages) and makes it very clear that many of the arguments advanced are given in very general terms. At the end of the book, the author provides a list of additional reading on these topics for those interested. I for one will be pursuing further reading on these topics. HIGHLY RECOMMENDED!!

[Patrick Peterson · Rating 3 out of 5]

2014 Nice audio book. Good reader.
The beginning style is perhaps too polemical to be convincing to many of those who are skeptical of the ideas in the book, which is unfortunate, since they need to understand (and appreciate) the ideas and facts the most. Folks who have no problem with government intervention, since their inclination is to blame the financial meltdown of 2008 (or any meltdown) on business or "capitalism," really need the facts and analysis in this book the most.

The repetition of sarcastic comments toward individuals and groups that blamed the crisis on the market was off-putting, even to me, so I would assume many more people who are not inclined to be open to free market ideas may totally dismiss the book, or at least get so irritated with the author, that they might react far less positively to his otherwise excellent presentation of the facts and analysis of the crisis.

As the book progressed, it got better, less pejoratives, less sarcasm, though still certain phrases which would be downright offensive to neutral or partisan statist leaning folks kept coming back. The snide comments detracted from the power of the positive explanation of the history presented.

The book was mostly a very good presentation of "Austrian" economic business cycle theory analyzing the situation, focusing on the 2008 crisis. But several previous economic boom/bust cycles were also covered, including the crucial and iconic Great Depression. Monetary theory, banking functions, inflation, deflation, booms, busts, etc. were all clearly explained. There was even a wonderful explanation of "short selling", with reasons given why it is a beneficial practice for consumers and the market overall and his ideas on why government regulators are so vicious in suppressing it.

He did a pretty neat job of nailing the bad guys, from both major political parties, as well as some of the private actors who hopped on the statist bandwagon:
Fannie Mae
Freddie Mac
Community Reinvestment Act (CRA)
Sarbanes-Oxley regulations
Barney Frank (but not the terrible Dodd-Frank law, which came later)
Dem party in general
Repub. party in general too
George Bush
Hank Paulsen
Alan Greenspan
etc.
He is a non-partisan critic! REALLY, even though statist leaning Dems may find this hard to believe.

I have heard from several reliable sources that this is one of Tom Woods' "worst" books. That he is generally a very top scholar, but this book was a partial blot on his record. Since this is the first book I have read of his, I can't comment on that statement. I'm looking for holes in the logic of the book and did not noticed many, except for what I noted above - the counterproductive polemical style, as opposed to errors of fact or logic in argument.

However, there is a significant debate in Austrian economic circles about desirability of 100% reserve requirements for banks for demand deposits. Woods takes the Rothbardian line in his presentation, without giving any hint of alternative Austrian views, which is indeed a major flaw. That tone and one-sided presentation do indicate that there may be other areas where he is not altogether upfront about some legitimate ways of looking at the situation.

So, if the polemics don't bother you too much and you can keep an open mind toward some alternative ways of looking at the economic theory presented, I recommend the book. It does provide a very significant amount of valuable facts and analysis, in a very clear and easy to understand manner and has telling critiques of common misconceptions. I just wish it was written in a more positive and reasonable tone.

Review edited for style 11 April 2017, & 2021-04-02.

[Amora · Rating 3 out of 5]

We’ve all been told the same narrative by the media: greedy loan lenders, in conjunction with the government, twisted credit requirements to trick people into thinking they could afford houses. As Woods shows in this concise book, this narrative is false. This book is an excellent starter for anyone that wants to learn what really caused the 2008 financial crisis and if you’re looking for something more comprehensive I recommend reading Peter Schweizer’s book “Architects of Ruin.”

[Bernie · Rating 5 out of 5]

Solving the problems of our current economic problems by accelerating the same failed prescribtions that fed the bubble in the first place has never made sense to me. Heaping on top of that the moral hazards of the "too big to fail mentality" will ensure that problems will re-occur in even more chronic form, if that is possible.

Using the eminantly sensible Austrian Economic model, Thomas E Woods outlines the origins of our current economic crisis , how it echos historic economic crisis, especially the Great Depression, and how government, while diverting blame to other actors, has been the central economic manipulator, and cause of most of the problems. And though government manipulaton is the problem, how the government and misuderstanding pundints often turn the blame on the free market, when in fact it is their perversion of the free market that is to blame.

In conclusion he gives seven radical but sensibly argued prescriptions for changing the situation. He makes the case, that the Austrians, having seen the crisis coming, deserve some attention. And he makes a call to all of us who believe in the free market, saying,

"If you believe in the free market, you cannot support the Fed, one of the most intrusive interventions into the market. If you believe in the free market, you cannot support government price-fixing, including the fixing of interest rates. No free market supporter worth his salt would accept the argument that thus-and-so is so important that it needs to be administered and supplied by government. In any other context, free-market advocates know the correct answer: the more important a sector is, the worse a job government would do with it, and the more urgently it needs to be handled by free indifiduals subject to competition."

[Laura · Rating 3 out of 5]

It is a testament to how good the content of this book is that I finished listening to the entire audiobook version despite my strong urge to reach into my car's CD player and smack the author. (Although I guess I was imagining smacking the guy who read the book, and not the actual author, which is pretty unfair.)

Seriously, the world does not need your inflammatory, obnoxious, self-righteous rhetoric. The world, as you so correctly state, needs facts. So state them, and then STFU.

It drives me nuts that apparently even nonfiction books now need to be written with such vitriol. According to the author, basically every economist ever, except him, is an idiot. They are "quacks," "idiots," "living in a fantasy world," and a whole lot of other things that I wish I could remember more exactly. Also, government is simultaneously oblivious, clueless, and idiotic...and engaging in an active conspiracy to destroy the lives of Americans. Sorry, you sort of have to pick one.

I like learning things, and I like snark, but this was ridiculous. This is why people hate economists.

That said, it is a very good overview of Austrian business cycle theory and some other macroeconomic concepts. From an academic/content point of view, there were certainly a few oversimplifications and misstatements that I felt even I could argue against with my limited economic knowledge, but overall, there was really good, interesting content.

So I enjoyed the part of it where I learned things. I really DIDN'T enjoy the part of it where the author thinks he is God's gift to the idiots of the world who are so far beneath him. The vitriol pretty much ruined it for me. This author made a lot of good points, and I agree with him on a lot of them, and he may even be right on most of them.

But he's still an asshole, and there's really no need for that.

If divisive, nasty rhetoric doesn't bug you, read it- you'll learn something. Otherwise, your blood pressure might thank you for staying away.

[Richard · Rating 4 out of 5]

The Austrian School of Economics is a strange sort of fundamentalist sect of the free-market religion. Thomas Woods (who is listed as a "fellow" of the Mises Institute and wrote the Politically Incorrect Guide to History) does a nice job excoriating bad public policy for many of our recent economic ills and even makes a somewhat compelling case for the idea that government economic management contributes to the boom/bust cycle.

The problem is that Woods does not argue that governments contribute to the cycle; he maintains that they are the sole cause of it. Austrians are as close as one gets to Anarcho-Capitalists while still being able to wear jacket and tie. The problem that Woods and the bulk of Mises' disciples face is the useful things government does: compensating for externalities, subsidizing public goods, protecting the utility of our medium of exchange (i.e. money). Saying that the government's meddling in the economy means we ought to privatize money is the sort of baby-with-the-bathwater argument that permeates the book.

Despite the above rant, Woods (with Mises' and his students' help) makes many very salient points that perhaps the government does too much in our economy. A well-reasoned and intelligent book, if flawed in its broad generalizations.

[David · Rating 3 out of 5]

It starts out good and demonstrates how the American government also had a big hand in the Wall Street meltdown but tends to focus just on government as the villain (and how they are making it worse).

Really, I believe there is a lot of blame to go around...government, the financial industry, and avaricious consumers...and Woods just doesn't pursue this un-holy trinity as effectively as he might.

But a very good book for demonstrating the government role in the crisis.

The visceral rhetoric (almost invective) is difficult to swallow at times.

This book is a must read for anyone who is only getting their information about this crisis from television and the average newspaper/website...generally they both want simple stories to report on...like the AIG bonus scandal that allowed them to manufacture simple villains where the truth was far, far from simple or clear.

In the end, though, I was a little ambivalent about the book...and am hoping for better books to come where cooler heads will prevail.

[Frank · Rating 1 out of 5]

Yet another in the "libertarianism is religion" genre. As a Popperian might sardonically note, it is impossible to imagine a state of the world which would cause such people to give up their "markets uber alles" weltanschaung. Check out Russ Roberts' EconTalk podcast for a gaggle more of these types.

[Jacob Aitken · Rating 5 out of 5]

I normally don't read "crisis books," especially when it involves the federal govt screwing up. However, knowing Woods to be a masterful scholar, and having a friend loan this book to me, I decided to read it.

All in all, a good read. I read it in about 3 hours. If one is reasonably familiar with the Austrian school of economics, this book won't tell you anything new. Indeed, if you are an Austrian, you've probably figured it out. That being said, Woods summarizes the events leading to the 2008 debacle. He spends 2 chapters saying what went wrong and how government intervention is the culprit.

Chapter 4 is a summary of the Austrian theory on boom-bust. Ideally, the market determines interest rates. When people save, interest rat When the FED artifically lowers interest rates and/or artificially increases the money supply, it encourages a boom in the production of longer-term projects. However, this production is not like that of genuine consumer interest. It is not in line with real consumer preferences and the current state of the economic pool. It draws real resources away from consumers. The Fed lacks the saved resources to finish projects and the consumer base to purchase the finished products (Woods, 26).

Chapter 5 debunks myths about the Great Depression. FDR, as most economists know today, didn't get us out of the Great Depression and Herbert Hoover was no laissez faire man.

The next chapter explores the FED. Basic Rothbard.

His conclusion, while I agree with every word, will probably be ignored (and laughed at) by those who aren't Austrians. That being said, and I am not a full Austrian man myself, it is hard to laugh at the Austrians--and the heroic Dr Ron Paul--when they have predicted the crisis almost to the dot.

[Todd Mitchell · Rating 5 out of 5]

Having not fully understood the present state of economic affairs, I picked up Meltdown to get some insight that I could count on to stray from the popular media story.

This book was a great read for very basic ideas and many complicated concepts as they pertain to money, the government, and what has resulted from the interactions between the two, both in the United States and around the world.

Readers can expect controversial and bold ideas on what's wrong with the economy and what must be done quickly to prevent (or rectify) the New Depression.

To use classic comedy for my final point:
I was curious to see if the author blames Democrats or Republicans for the majority of the current financial crisis, and, yes he does.

[Mary · Rating 2 out of 5]

I am afraid the Austrian School of Economics is no more convincing than any other school of thought. These guys have some kind of notion that 'THE MARKET' is something akin to God. It isn't. Like any other collection of human actors it is basically an committee writ large and you know what they say about committees--the only organism with six or more legs and no brain. While I agree that some of the very agencies that were supposed to be regulating the economy and some that were supposed to help achieve certain laudable ends malfunctioned badly I don't think a totally unregulated free market would do any better. Not so long as we have a society that rewards bad behavior and greed. And that is exactly what we have. Easy read but not convincing.

[John · Rating 5 out of 5]

This might be the most important books for American's to read right now. Woods demonstrates that it was the government via the Federal Reserve's easy money policy combined with other government interventions into the economy that led to the economic collapse--and NOT the failure of capitalism. The government is far too involved in our economy and we haven't operated in a purely capitalistic system since the Federal Reserve Act of 1913.

No only that, but the "stimulus" and interventions on the part of the gov. are only going to protract the depression, just as in the 1930s. Until we our government gets out of economics, we're going to continue our boom and bust cycle.

[Stephen · Rating 4 out of 5]

Truly interesting book. Not very long, easy to read quickly.

Though short and quick, there are some economics principles that may not be completely well-explained, and could have used more depth of introduction and explanation.

It would be a good read for just about everybody, but those with a definite economic bent may not be open-minded enough to accept any new ideas. For those, maybe it would be best avoided.

This book has made me interested in learning more about the Austrian business cycle theory. Never really expected to say something like that about economics.

[Darius · Rating 3 out of 5]

I gave up on this book about a third of the way in. For me personally, there was not enough new material. From where I stand, convinced about the nature of the Fed etc., the book was too one-sided. ["Foreword by Ron Paul" -- almost kept me off the book] That means: little new to learn, and little that was thought-provoking. But, to be fair, the book does have a decent summary of the issues around the recent "great recession", and would be useful if it is not preaching to the choir.

[David Robins · Rating 5 out of 5]

Examines and explains the root causes of the 2008 crash, which had far more to do with government control (with cheap credit from the Federal Reserve being a major culprit) than corporate greed, and shows how bailouts just made things worse.

[Toe · Rating 4 out of 5]

Why did the real estate bubble form in the late 1990’s and early 2000’s? Why did it burst around the end of 2006? How did this weaken the economy in general? Why do booms and busts occur at all? How do we prevent or control these difficult processes? What changes can be made to produce a more stable and robust economy? These are the questions Thomas Woods Jr. addresses in this thought-provoking and hugely important work. At 163 pages, it is a quick read that would benefit all. Woods’s style is so elegant, and his sentences are so richly worded that I will offer more extensive quotes than normal.

When Woods inveighs against the machinations of the Federal Reserve in “Meltdown,” he exposes the unfamiliar but true. The Austrian school of economics, to which Woods subscribes, is hardly ever taught in public high schools or any colleges throughout the country. Most of the mainstream economists, politicians, and members of the media subscribe instead to the Keynesian school. Keynesians claim that demand drives production, and consumption leads to prosperity. Spending is the hero of this theory and must be maintained at all times and at any cost. If private expenditures slack, then government must step in to fill the void—so they say. The conclusions of such a philosophy lead people like Paul Krugman to ludicrously argue that the solution to depressions and recessions, even those caused by over-leveraging, is more spending. They ignore deficits and will blithely destroy the dollar or whichever currency is used to maintain this spending. This path is counterproductive, unsustainable, based on theft, and extremely harmful to the economy in the long run.

Ludwig von Mises, Friedrich von Hayek, Murray Rothbard, Ron Paul, Peter Schiff, Thomas Woods Jr., and many others offer the Austrian school as an alternative. The key behind this libertarian philosophy is that free markets, as usual, are the answer to most economic questions. Specifically, a freely operating capital market without governmental interference in the form of a central bank (the Federal Reserve in the United States) will set the interest rates according to the genuine time preferences of the market participants. Keynesians, on the other hand, completely ignore the time preference aspect of interest rates.

To illustrate the main issue discussed in this book, let’s assume that there is no Federal Reserve or central bank manipulating interest rates or the money supply. People are free to spend their money or save it and loan it out as they choose. If more people choose to spend their money in the present, there will be less money available to loan out to others. This decrease in capital makes it more scarce and drives up the price as reflected by higher interest rates. Businessmen notice the increased cost of borrowing and only engage in those investment activities that remain profitable above the higher interest rate. At the same time, they notice the increased present demand and ramp up present production (as opposed to capital investments to enhance production at a later date). Conversely, if more people decide to cut back present consumption in anticipation of higher future consumption, there will be a larger supply of capital that will lower the interest rate. With a slack in present consumption and lower interest rates, more businessmen and investors will borrow to finance longer term projects such as factory building or large machinery replacement. Thus, a free market in capital efficiently allocates this scarce resource just like it does anything else.

Currently, however, the Federal Reserve arbitrarily alters the interest rates based on its open market operations, which involve buying and selling bonds and writing checks against itself. In order to lower interest rates, it will buy treasury bonds and flood the market with cash or, more accurately, credits monitored electronically. If it sounds fishy, that’s because it is. The Fed is a legalized counterfeiting operation, and nearly all politicians who have the power to stop it are themselves on the take. I theorize that the mechanics of the Fed's activities are intentionally complicated and confusing because the people, if they properly understood the activity, would not stand for it. Whatever the details behind the process, the Fed ultimately creates money out of thin air. It manipulates the currency but does NOT add anything of value, i.e. any goods or services that people demand. This leads to inflation, which is simply a hidden form of taxation or theft from those forced to use the dollar as currency. Additionally, the “easy credit” leads businessmen and investors to misinterpret the pool of real savings available and misjudge future demand for products. They begin investing heavily in areas where they would not invest with a higher interest rate extant. They invested in technology stocks throughout the 1990's and real estate in the first half of the 2000's. These were both bubbles, which burst when the interest rate rose, as it eventually had to.

In the first scenario with the free capital market, where there was a lower interest rate because of real savings, businessmen can draw on this pool of savings to see them through until the completion of their projects at which point they will be in a position to more than make up for the lower production sustained while they were completing the project. In the second scenario with the governmental currency manipulation, creating dollars does not create anything useful and muddles the pool of real savings. More projects are begun than could possibly be completed or demanded in a free market because of the tampering with the signal that the interest rates send. The projects that can't be completed and must ultimately be abandoned at the loss of real resources are called "malinvestments" in the Austrian school.

Woods Jr. and the Austrians hold both political parties responsible for the creation and sustaining of the Fed. They argue that the root of all booms and busts is ultimately government interference taking the specific form of monetary tampering; F.A. Hayek won a Nobel Prize for exposing this truth. The Community Reinvestment Act, the activities of HUD and ACORN, and the moral hazards created by the bailouts all play a part. But Woods Jr. writes that the size of the bubble and most of the fallout stems from the Fed.

Though both parties are responsible and neither work to abolish the Fed, the greater blame still falls on the Democrats because their specific actions and policies worsened this crisis. Congressional Republicans called for greater regulation of Fannie and Freddie, but Congressional Democrats balked and claimed that these calls were simply concealed attacks on “affordable housing” itself, or disguised racism. Not surprisingly, Democrats received huge campaign contributions from Fannie and Freddie. Chris Dodd, Barack Obama, and Barney Frank were three of the largest recipients from these GSE’s. All three claimed that Fannie Mae and Freddie Mac were fundamentally sound, that there was no systemic risk of failure, and that they should be expanded because they were so effective at accomplishing the arbitrary goal of affordable housing. How foolish they look now.

See here for damning evidence:
http://www.youtube.com/watch?v=_MGT_c...

http://www.youtube.com/watch?v=cMnSp4...

Visit www.mises.org for many of the ideas covered in this book.

The Austrians, as the only people who foresaw the collapse and have a proven theory to explain it, ought to be listened to for solutions. As a libertarian and subscriber to the Austrian school, Woods Jr. recommends abolishing the Fed, returning our currency to the gold standard (thereby restraining future attempts at counterfeiting and adding stability to the currency), allowing failing firms to go bankrupt, abolishing Fannie Mae and Freddie Mac, cutting government spending, and ending the government monopoly of money. These suggestions are, of course, widely criticized or ignored in the government, schools (which get much of their funding directly or indirectly from government), and media. I submit it's because these institutions benefit from the counterfeiting that goes on at the Fed. The Fed creates money out of thin air, distributes it to its friends in government and at private banks, and the private citizens donate some of their ill-gotten gains back to government officials who will maintain the heist. The average American would be much better off without this immoral thievery.

Memorable Quotes:

“The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” – Ludwig von Mises

“The remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last.” – John Maynard Keynes, who was pitifully wrong

"The tremendous merit of gold is, if we want to put it that way, a negative one: it is NOT a managed paper money that can ruin everyone who is legally forced to accept it or who puts confidence in it. The technical criticisms of the gold standard become utterly trivial when compared with this single merit." - Henry Hazlitt

“Fannie Mae was originally created as a government agency during the New Deal in the 1930s, and was privatized in 1968. Freddie was created as a putatively private competitor in 1970. As GSE’s, their exact status as public or private entities has always been ambiguous—they enjoy special tax and regulatory privileges that potential competitors do not, but their stock is traded on the NYSE...Everybody knew that if the GSE’s ran into trouble, they would be bailed out at the taxpayer expense. (Everybody was proven correct when the Treasury placed these companies into “conservatorship” in 2008—-the federal government essentially took them over, as we’ll see in chapter 5.)...On the eve of the federal government takeover in 2008 they had a hand in about half the country’s mortgages, and nearly three-quarters of new mortgages.”

“In the wake of September 11, which came just over a year after the dot-com bust, then Fed chairman Alan Greenspan sought to reignite the economy through a series of rate cuts, culminating in the extraordinary decision to lower the target federal funds rate (the rate at which banks lend to one another overnight, and which usually drives other interest rates) to 1 percent for a full year, from June 2003 until June 2004. In order to bring about this result, the supply of money was increased dramatically during those years, with more dollars being created between 2000 and 2007 than in the rest of the republic’s history.”

“Prices that seek to come down are going to come down.”

“The bailout of the Big Three automakers sends the message that although mismanagement at an average-size firm will be punished with losses, gross mismanagement on a gigantic scale will be rewarded with credit and funds purloined from innocent third parties. People who are good stewards of wealth are thereby forced to subsidize people who are disastrously poor stewards of wealth. It should be obvious that all the “regulation” in the world cannot prevent risky investments in an environment like this, in which moral hazard has been practically institutionalized.”

“The government does not have a magical supply of funds it can tap into. It will either borrow or print the money it needs for its bailouts, or seize it from the population.”

“Between September and December [2008:] alone, the Fed’s balance sheet shot up from $900 billion to over $2.2 trillion. The New York Times said in mid-December that the Fed’s balance sheet would soon be up to $3 trillion.”

“In other words, there is no shortcut to creating wealth. We cannot become prosperous by pushing interest rates lower than the market would have set them. There is no monetary magic wand that can make everyone rich. The interest rate was at the level the market established for a reason, and when governments and their central banks artificially interfere with it, they mislead investors into destructive courses of action they would not otherwise have taken. They encourage investment in lines that make no long-run sense. They encourage consumption at a time when investors are starved for capital.
Meanwhile, the free market takes the blame when these artificially encouraged lines of investment and production go belly up. But the free market has nothing to do with it. It is the interference with the free market, the refusal to allow the market to coordinate production and consumption, that causes the problem.
F.A. Hayek won the Nobel Prize in economics for showing how central banks—which are creatures of government, not the free market—set the boom-bust cycle in motion when they try to take shortcuts to prosperity.”

“Interest rates are like a price. Borrowed money, or loaned capital, is a good, and you pay a price to borrow it. When you put money in a savings account or buy a bond, you are the lender, and so the interest rate you earn is the price you are being paid for your money.
As with all goods, the supply of loanable funds sometimes goes up and down, and on the other hand, the demand for loanable funds goes up and down. The supply and demand determine the price. If more families are saving more or more banks are lending, borrowers don’t have to pay as much to borrow—interest rates go down. If there’s a rush to borrow or a dearth of loanable funds, interest rates go up.
That’s what happens in a free market, where supply and demand set the price. There are some results of this dynamic, not obvious at first, that contribute to a healthy economy.”

“Investment adviser Peter Schiff draws an analogy between an artificial boom and a circus that comes to town for a few weeks. When the circus arrives, its performers and the crowds it attracts patronize local restaurants and businesses. Now suppose a restaurant owner mistakenly concludes that this boom in his business will endure permanently. He may respond by building an addition, or perhaps even opening a second location. But as soon as the circus leaves town, our businessman finds he has tragically miscalculated.
Does it make sense to try to inflate this poor businessman’s way out of his predicament? In other words, should the banking system create new money out of thin air to lend to him to keep his business profitable? Creating new money doesn’t create any new stuff, so lending this business owner newly created money merely allows him to draw more of the economy’s existing resource pool to himself, at the expense of genuine businesses that actually cater to real consumer wishes. Getting him hooked on cheap credit only prolongs the misallocation of resources. This restaurant is a bubble activity that can survive only under the phony conditions of what we might call the circus-induced boom. It needs to come to an end, so that the resources it employs can be reallocated to more sensible lines of production.”

"In other words, fiat money is always parasitic on a previously existing commodity money, and could not come about without it. The usual pattern runs as follows: (1) society adopts a commodity money; (2) paper notes issued by banks (or by governments) that can be redeemed in a given weight of the commodity money begin to circulate as a convenient substitute for carrying precious metal coins; and (3) government confiscates the commodity to which the paper notes entitle their holders, and thereby leaves the people with an inconvertible fiat paper money." [Note that step 3 occurred in the U.S. in 1933 under FDR and in 1971 under Nixon.:]

"The substitution of fiat paper money for an existing commodity money always and everywhere comes about by some government violation of private property rights. It always involves the threat of violence and never occurs voluntarily."

"Although people often define inflation as a general rise in prices, and economists themselves employ that definition as a kind of shorthand, inflation is actually the increase of the money supply itself (which in turn leads to higher prices than would otherwise have prevailed). Specifically, it is an increase in the amount of money in circulation not backed by the monetary commodity--in other words, an increase in paper-note claims to gold not backed by increases in gold itself. Under a fiat standard, which the countries of the world have now, in which the monetary system is not backed by a commodity, we can define inflation simply as an increase in the amount of paper money in circulation."

"Thus the higher prices that people describe as "inflation" are not themselves the inflation; they are a CONSEQUENCE of the increase in (or inflation of) the money supply. Inflation always applies an upward pressure on prices."

"In fact, though, high oil prices cannot cause overall price inflation. If the price of a gallon of gas increases, people may indeed spend more of their incomes on gas than they used to. But that means they will have LESS income to spend on all goods OTHER THAN GAS. This is the essential fallacy in all "cost-push" accounts of inflation, which try to blame increases in the OVERALL price level on increases in INDIVIDUAL prices like oil. The decreased amount of money people have to spend on goods other than gas puts offsetting DOWNWARD PRESSURE on the prices of all those other goods. So although GAS PRICES may rise (and may in turn trigger price increases in certain goods that are sensitive to gas prices but for which demand is inelastic), people will have less money left over to buy all other goods, and the demand for--and thus the price of--those other goods will fall. There is no OVERALL increase in the price level."

"The only way all prices can rise simultaneously, apart from a decrease in the supply of all goods (an extremely rare occurrence), is if the amount of money in the economy increases...Under our fiat system, the money supply can be increased only by the Federal Reserve. The Fed is, for that reason, exclusively responsible for price inflation."

"The contention that there can never be a general overproduction of all goods, and that increased supplies of goods themselves constitute the demand for other goods, is known as Say's Law, after economist J.B. Say. (John Maynard Keynes famously claimed to have refuted Say's Law but, as usual with Keynes, he did so only by misstating the law and then refuting his own misstatement.)"

"Money that people save is not a drain on the economy. Just the opposite. Savings provide the pool from which business can draw to build new, more productive equipment that can produce capital and consumer goods in ever-greater quantities at lower costs in the future. Without saving, without abstention from consumption, this process, and the increase in living standards that accompanies it, could not occur."

"During the Great Depression, FDR's Treasury secretary, Henry Morgenthau, noted in his diary: 'We have tried spending money. We are spending more than we have ever spent before and it does not work...We have never made good on our promises...I say after eight years of this Administration we have just as much unemployment as when we started...and an enormous debt to boot!"

[Joshua · Rating 4 out of 5]

In this bestselling book, Tom Woods examines the 2008 financial crises through the lense of Austrian economics (specifically in light of the "boom/bust" cycle). He expertly breaks down how the Federal Reserve and national misallocation of capital are largely responsible for the financial disaster. He also explains what must be done to prevent this sort of meltdown in the future. As someone completely ignorant about the Fed until very recently, I appreciate Woods's accessible writing style and gift for explaining complex issues in simple terms.

As one of my Goodreads friends pointed out, Woods adopts an unnecessarily sarcastic attitude that some readers may find abrasive. Though I personally enjoy Woods's biting wit, his attitude may degrade the persuasiveness of his arguments.

[Sumeet Mahendra · Rating 3 out of 5]

This one of quite contradicting view of 2008 Lehman Crisis. Here the author blaming the Government particularly the President Bush & his economic advisories. While the mainstream media maintains that rampant capitalism caused the 2008 financial crisis, the federal government is actually to blame. That’s because by depressing interest rates and fostering economic bubbles, the government caused the near disintegration of the US economy.  

[Amy T. · Rating 5 out of 5]

Learned a lot. End the Fed.

[Mark Geise · Rating 5 out of 5]

I gave this book five stars for what it is: a short primer into the Austrian view of the 2008 financial crisis. Meltdown focuses primarily on the Federal Reserve's policies of artificially low interest rates and cheap credit in exacerbating the booms and busts that we have seen in recent American history. Interest rates serve as an extremely important indicator for entrepreneurs and businesses. When interest rates are low, this signifies a savings glut and higher consumption in the future. When interest rates are high, this means that savings levels are low and people are consuming more in the present. When central banks manipulate interest rates, they can no longer serve this important purpose. If interest rates are kept low without a corresponding savings glut, businesses tend to invest in longer term projects that they believe will pay off when these savings are used for consumption in the future. Unfortunately, there is not enough savings to support all of this investment with future consumption.

Woods blasts the Fed for manipulating interest rates, which misallocated resources into projects that would not have been undertaken with rates at their natural market levels. Leading up to 2008, housing was the primary area where these resources were misallocated. Artificially low rates along with government intervention to erode lending standards pushed housing prices higher than they would have been in a free market. When this bubble burst, businesses that had undertaken the construction of new homes and individuals who had bought homes that they otherwise wouldn't have been able to afford were left significantly worse off. Because of housing's central role in the economy, this precipitated major problems in the financial sector as well. Woods makes the important point that the Fed's artificially low rates were the most important cause of this deep recession. The Community Reinvestment Act, while certainly playing a role, did not distort the entire economy in the way that artificially low rates did.

This perspective is even more important now than it was in the years immediately following the collapse. The federal funds rate has been kept at effectively zero since the 2008 crisis, inflating another huge bubble that will burst at some point. This time, the cheap money appears to be flowing primarily into stocks, where I expect we'll see another burst much like the 2000 dot-com stock crash.

If you're looking for an extremely detailed or nuanced account of the 2008 financial collapse, there are likely better sources out there. However, for someone that is looking for an introduction in Austrian economics and how it applies to what has happened over the last fifteen years, this is a good read. It's only 163 pages, but it packs a good amount of information considering how short it is. This also would be a great tool for proponents of Keynesian economics to get a better sense of the Austrian perspective without investing a lot of time in reading a longer account.

[Patrick S. · Rating 5 out of 5]

This was one of the first books to be written about the 2008 finical crisis. I know Woods wrote the book in something like a month. With all the information in this book that had to be an arduous undertaking. Woods' approach is to look at the cause of the '08 crisis under the Austrian economic business theory. Essentially, this theory says that value of something is subjective and people act to their ends, according to ideas. From this, order, money, value emerges. This is comparable to other methods that attempt to try and quantify every aspect to make predictors. Unfortunately, this takes out the factor of human action.

Without doing the job of the book, this approach explains what we saw in '08 from an approach that not many have ever thought about it. Having listened to enough Tom Woods' podcasts, I had a decent grasp of the concept but this book presents an amazingly complete case from the Austrian side of things.

This book forms concentric circles around the '08 crisis. It covers the reasons and people who were responsible for the crisis. Then it covers other countries who experienced their own financial crisis and what the Austrian model says. Then it covers what is money, value, currency backing, and other basis economic issues that someone might not have thought of. A decent presentation on gold and silver backed currency is also made. Then, a great look on the 1930's Great Depression and the reasons behind it and the outlook from the Austrian POV is also made. The term, "they didn't teach that in school" can be uttered throughout this portion - and most areas of this book.

This really is a great book on the topic and the topic of economics. Woods writes not with an air of elitism but he really tries to communicate and educate the reader of the book. The areas he writes about in the detail he does, and in the limited amount he had to write is impressive.

The one area that I could say that needed a little help is in explaining a few of the topics with a little bit more beginner outlook. Unless I missed it, there wasn't a definition of Austrian economics and it would have been good to really drive home the definition and basic factors throughout the book for someone who is just picking up a book on the subject for the first time.

If you have an interest in economics or the politics of the '08 crisis or libertarian ideas this is a great book to pick up. Final Grade - A

[Seth · Rating 4 out of 5]

In a sentence, Meltdown presents the argument that Austrian economics and its business cycle theory is the model with the best explanatory power for the boom and bust roller coaster our economy has ridden in the last 100 years (and beyond). Woods explains why the Federal Reserve's easy money policies fueled the unnaturally rapid growth of the mortgage market in the 2000s, the dot-com boom of the 90s, and every other crash going back at least a century, including the Great Depression. Using Hazlitt, Mises and Hayek, among others, he debunks Keynes and shows how every attempt to spend our way out of a financial bust has failed miserably and only prolonged the economic pain. This is meant to be a broad overview of Austrian economics applied to real life, and so while Woods touches on the Fed, fractional reserve banking, inflation, and sound money, he doesn't go into great detail on any of them. It's a good primer on the concepts and their explanatory power juxtaposed against mainstream Keynesianism.

Here's a representative quote near the end of the book:

If you believe in the free market, you cannot support the Fed, one of the most intrusive interventions into the market. If you believe in the free market, you cannot support central planning of money, the very lifeblood of the economy. If you believe in the free market, you cannot support government price-fixing, including the fixing of interest rates. No free market supporter worth his salt would accept the argument that thus-and-so is so important that it needs to be administered and supplied by government. In any other context, free-market advocates know the correct answer: the more important a sector is, the worse a job government would do with it, and the more urgently it needs to be handled by free individuals subject to competition. Money may in fact be far better cared for within the nexus of voluntary cooperation that constitutes the free market than under the compulsion and coercion of government. (157)

[Mark Dantonio · Rating 5 out of 5]

Meltdown by Thomas Woods…. ISBN – 978 1 59698 587 2

This book appealed to me because it is relatively short and does a good job at explaining the issues in the US economy from 2007-2008. I liked that it was specific enough to explain what the author stated were the causes while at the same time did not get too deep in the “weeds” to confuse the reader. I also liked that the author “wove” a story which included well known economists from all over the political spectrum and explained how their ideology fit into the crisis from this time. I further enjoyed the examples and simple style of the book.

The content of the book started with a discussion of government intervention and greed. I liked the quote early in the first chapter: “blaming the crisis on greed is like blaming an airplane crash on gravity.” The author puts a good deal of blame on both US political parties and was very critical of the Federal Reserve and Hank Paulson from Treasury. One of the main points made in the book was that the artificial availability of cheap credit (by the Fed) helped to create excessive risk taking and leverage. This led to increased moral hazard. This manipulation did not let the market adjust to what would be a normal risk level. In essence the author put a great deal of blame on the government and Fed for the Boom/Bust cycle. Woods speaks of how politicians tried to legislate success for all with an “ownership society.” The author also goes into detail about how standards were reduced for loans and income and the rules led to the crises. The author stated that the rules were relaxed to help low income and minority buyers. Banks were encouraged to give these loans (Community investment act) and could be charged with discrimination if they did not comply. The author said that banks were “encouraged” to make loans to people that they had previously deemed as “unworthy.” Woods makes the point that the Fed’s ability to create credit should be regulated.
The author speaks of Mises and Hayek who are both proponents of “Austrian” economics. This type of economists are more “free market” and basically take a hands off approach to the economy. Generally, they believe that the market can correct more quickly than interference from politicians can. Basically, they are against regulation. The cheap credit and lax rules led to an environment where banks became “too big to fail” because the government was not willing to let them go under. Woods theorized that once a bank reached this point there is really no risk it would not take because it knew the government would be there (moral hazard). When the crisis erupted some homeowners walked away. Others that still had jobs could not qualify for help. Some couples decided one of them would quit a job just to qualify for the help. The point was that the regulations had unintended consequences. Woods certainly shares the general Austrian ideas of very limited government regulation. The government can borrow or print money or seize it from taxpayers through higher taxes. The author comes to the conclusion that the Fed creates the Boom / bust cycle (Hayek) and that not interfering with the situation and allowing the market to correct (clear) would fix the market quicker (Mises). The crisis will come sooner or later but will be worse if we wait. Woods states that the Keynesian fantasy of a “permanent boom” just makes the future bust worse. The author states that the market decides which capital is used well and which is not and eventually poorly used capital is reallocated to more successful entities by bankruptcy. Woods gives an interesting example of how decisions should be made by using the Circus. He states that demand for food and other products and services increases in a town when the circus arrives. But this demand drops off when it leaves. A businessman would make capital budgeting decisions based on what he or she felt was permanent demand. The government does not.

Woods tackles the idea that WWII helped get us out of the Depression. He says if this were true we should just make ships and take and go to war. Mises said, “War prosperity is like prosperity that comes from an earthquake or a plague.” The author goes on to discuss money and where it comes from. In this section of the book the author does a great job explaining the history in a very clear manner. He states that money did not have to be a government thing. It is logical since barter has so many issues. Woods stated that money started with people that warehoused metals such as gold for others issuing them notes. These were exchanged for products and services and a bearer could go and get the gold at any time. Institutions knew that everyone would not want to pick up their gold at once and so they could make loans just keeping what they needed for daily use (fractional reserve system). In the end the government lost interest in this type of currency since they needed to maintain reserves at the same level of issued currency or fractionally. Without this constraint the government had the “flexibility” to create more money when needed. Any bank with a problem goes to the “lender of last resort” known as the FED.

The author defines inflation simply as too many dollars chasing too few goods. Deflation is the opposite. Blaming inflation on Oil or housing or whatever is a fallacy. He states that the Fed is responsible for price inflation. Woods goes on to state that so many of use favor the Fed injecting credit to “prime the pump” so there can be more borrowing and lending. Woods says this is a fallacy as well. He says “nothing can be lent that is not first saved.” He uses a little story to illustrate about Robinson Crusoe living on an island and fishing with his hands. Crusoe can catch what he needs to survive by hand but nothing extra. If Crusoe decides to build a net to catch more fish it will take 3 days. But he needs 3 days of food to eat while building the net and such a reserve of fish does not exist. The same works with trade but is more complicated. In the end a baker cannot give bread as payment to sustain a shoemaker while the shoemaker makes shoes unless there are saving involved of extra bread production from the baker.

The point: In the end I feel Woods made a solid case for less regulation and a reduced role for the Fed. In addition he made a good case for the Gold standard and the Austrian school. He really does a good job at showing how the government has the capacity to create rules to advantage itself. These rules lead to cycles which can have severe consequences.

Easy to read and fun, very clear, good examples and nicely closed around theory and current events.

Mark D.

[Ailith Twinning · Rating 1 out of 5]

You can't hear it, but I'm laughing so hard. Oh, this one was fun.

I should, probably, give this like a 4 - in that I 'really liked it' - but I'm quite worried that I've gotten to the point I can like a book like this, and I absolutely do not want anyone who doesn't have a basic understanding of at least two schools of economic theory to read it. Apart from that, the fact I've gotten to the point I find this kind of thing hilarious is worrying itself - it means I'm becoming more cynical. I thought I already was cynical. But, as Pratchett said, and I never get tired of quoting, regarding his sort of late 19th century beat cop archetype --

"If there was anything that depressed him more than his own cynicism, it was that quite often it still wasn't as cynical as real life"

[Anastacia Hines · Rating 3 out of 5]

This book may be the best way to introduce Austrian economics to friends and family. Woods writes to a lay audience about a timely topic. Who doesn't make comments or think about the economy these days? Because of that fact, many people who would not have been open to the ideas in this book gladly read it. Woods also confirms the sneaking suspicion of many American that all is not as it seems according to the media and the government. Overall, this work is timely and concise. It will not answer all your questions nor does it always seem to carefully make its arguments. But, maybe that is the point because it will definitely cause you to want to read and research more on your own.

[Sheryl Tribble · Rating 5 out of 5]

Thought this book was dead on, right down the line, the prose readable, and he stays tightly on target -- possibly too tightly, as more than once he dismissed something with, "I'll cover that in chapter whatever." I've got a fair background in Austrian economics so that never bothered me, but it might bug someone who isn't familiar with the basics I suppose.

I think a lot of Austrian economists get bogged down on the details or write pretty dense prose; Woods doesn't. He may skim over some things too lightly, but he doesn't go the other way for me. I don't always agree with him this completely, but I do always find him an easy read.

[Brandon · Rating 4 out of 5]

Thomas Woods offers in this book a very helpful summary of the Austrian business cycle, and a clear application of it to the recent economic recession. I was chiefly looking for a response to the idea that “debt deflation” causes recessions, which, it's claimed, the Great Depression all but proved. Thankfully, this book did not disappoint. Woods devoted a whole chapter to the Great Depression, and he talked about debt deflation both in that chapter and in a later sidebar. This book is short, so each issue is addressed in a cursory manner. Yet Woods makes up for this defect with book recommendations in an appendix at the end for all those who would like to pursue the subject further.

[Doug · Rating 5 out of 5]

Do you still believe the propaganda you are spoon-fed by politicians and the media that the current economic crisis was brought about by unfettered capitalistic greed and wall street speculation? If you want to know the truth behind what has happened to our economy, read this book. Tom Woods explains in terms anyone can understand, how the federal reserve's manipulation of interest rates and artificial credit expansion are responsible for the mess we find ourselves in. This book was a breath of fresh air, and I recommend it to everyone.

[Dan Walker · Rating 3 out of 5]

This book explores the Austrian theory of the business cycle. Surprise! The boom-and-bust cycle we have grown so accustomed to (Boom in the 90's, bust in 2000. Boom in the 2000s, bust in 2008) wasn't caused by those greedy bankers or home builders, etc. etc. It was caused by government (the Fed) manipulation of interest rates. Unfortunately, it will predictably happen again and again until we either learn and abolish the Fed, or become a centrally planned economy as the old Soviet Union was. And those of us born before 1989 all know how that worked out for them.

[Ron · Rating 2 out of 5]

This was an oversimplified look at the financial crisies of modern times. This was also written from a very right wing view and agenda. Reading a book about how everything has been screwed up really didn't tell me anything new. Nothing in here provided any more analysis or facts that I get from reading the paper daily. Take a pass on this, unless you use Fox news as your sole provider of news and information, they you'll probably like this book