Capitalism has failed! This is the constant message that people have been hearing since the 2008 economic crisis. Politicians, economists, and mainstream media agree that free market capitalism is the culprit that caused such economic mess. Greed and excessive risk taking claimed to be inherent in the market are to blame.
"The crisis was the fault of libertarianism," an editor of a popular website actually believed this claiming that "'unregulated markets'" (p. 4) caused the problem. And since this is the case, that editor thinks that the 2008 crisis marked "the end of libertarianism" (ibid.).
Since capitalism and libertarianism were considered responsible for the 2008 economic trouble, any free market solution to the crisis was automatically dismissed and persisting to do so would be considered insane. The proposed remedy was greater government intervention in the forms of increasing the money supply, more debt, and bigger spending.
The problem with the above conclusion is that the real culprit escaped public attention and shifted the limelight into the market. And since the diagnosis of the crisis was mistaken, the proposed solution, instead of addressing the problem, would aggravate it even more.
For Thomas Woods, the reason people were misled was because almost nobody asked the right question. "Where did all the excess risk, leverage, and debt, not to mention the housing bubble itself come from?" (p. 2). Once this question was asked, the direction would be pointing not towards the market, but to government intervention in the market. And "the greatest single government intervention in the economy" (ibid.) is through the Federal Reserve System, which is the real culprit. This is the institution responsible for the "inflationary monetary policy," (p. 3) which causes the business cycle and for setting "artificially low interest rates of 1 percent" that placed "world's economies on unsustainable paths. . . ." (ibid.).
Thomas Woods anticipated in 2009 that "There is nothing the government or the Federal Reserve can do to improve the situation, and a great deal they can do to prolong it" (p. 7). For Woods, the crisis will never be solved unless people would understand how the world entered into this mess in the first place.
In Meltdown, Woods explains in layman's term "where the economy is and what should be done next" (ibid.). There is nothing new in his message. His ideas are old, but they are ignored.
Woods' ideas are common among the economists of the Austrian School. Hundreds of economists from this school have seen the crisis coming several years before it happened. Unlike the mainstream economists who subscribe to diverse versions of Keynesianism, very few of them have seen the crisis in advance. Woods mentioned that only about 10 or 12 among 15,000 professional economists in the US have seen the crisis coming.
1. Who were to blame for the 2008 crisis according to politicians, economists, and mainstream media?
2. What was their proposed solution? Explain further.
3. What was the problem with the dominant story about the 2008 crisis? What would be its future consequences if it is not corrected?
4. For the Austrian School and Thomas Woods, which institution is responsible for the 2008 global economic crisis?
5. Explain the role of the Federal Reserve System in causing the crisis.
6. Why do you think most mainstream economists failed to see the coming of the 2008 crisis?
Source: Wood, T. E. Jr. (2009). Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse. Washington, DC: Regnery Publishing, Inc.