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

Meltdown, written by Thomas Woods Jr., examines the popular topic of what caused the latest recession and describes how government's intervention and political agenda were to blame. This book, however, uses simplistic applications of Austrian School of Economic thought to explain complex processes that involve the irrational economic decision maker, the human being.

The first part of the book does a good job of describing the housing policies that were a weakness in developing a strong economy. The usual culprits of government sponsored enterprises (GSE's) are listed as causes of the recession. It misses, however, international forces and private sector mismanagement in the pursuit of profits that also caused the recession. Fannie Mae and Freddie Mac, and the Community Reinvestment Act no doubt contributed to the housing bubble. What is ignored is the 2 trillion dollars of Chinese foreign investment that hand strung any effort to raise interest rates during the making of the housing bubble. Also ignored are the rating agency's poor risk evaluations in the pursuit of profit by turning BBB- ratings into AAA ratings.

Meltdown then describes the problem of moral hazard and the financial assistance the government provided to save the corrupted system. One of the topics that is particularly amusing in light of the recent Goldman Sachs charges is Wood's description of short-selling as being unpatriotic. I thought that short selling is a legitimate investment strategy and still do. In the Goldman Sachs case, I find this to be another example of the private sector justifying better government regulation of financial services. A registry like the DOW would require greater transparency and would have disclosed Goldman Sachs' efforts to design a fund that was destined to fail.

According to this book, current economic growth and recessions are caused by the central bank's action in the economy. In the chapter on "How Government Causes the Boom-Bust Business Cycle", Wood's describes the low interest rate period in this century's first decade as the work of the federal reserve, ignoring any international influences. The federal reserve's objective is to maximize growth while managing inflation. This chapter ignores the fact that there was little inflationary pressure during this period so the fed should not have raised interest rates. Raising interest rates would undermine confidence and could have caused a recession.

The next chapter of the book examines how government made the Great Depression worse instead of mitigating it. I have no argument about the policies of FDR that prolonged the Depression. Fortunately the world has a central banker in the US who is familiar with this subject and has acted on the lessons learnt from this period in history. Bernanke has supported credit markets so consumer confidence can continue at levels that will mitigate the economic damage that unregulated financial markets have created.

Wood's takes the reader into the history of money in his next chapter and discusses government manipulation of money and the negative consequences. He doesn't discuss the positive consequences learnt from history. Part of this discussion examines inflation and the theory of cost-push inflation. The criticism is that if gasoline increases in price then people will have less to spend on other goods and therefore there is offsetting deflation in other goods due to higher prices for necessity goods. There are two problems with this. 1) Petroleum is used in so many other goods that their price would also increase and 2) Workers will demand higher wages to meet higher costs of goods and this will cause prices to increase while fixed income citizens will have their incomes eroded.

In conclusion I think this book is a vehicle for a "point of view" rather than an unbiased explanation of the causes of the recession. If you hold a libertarian view on how society should be organized then you will like this book. If you are looking for a balanced view on what caused the recession, educate yourself on some basic economics or read the Big Short.

Mark.
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