Contrary to mainstream story, the global economy has not recovered from the 2008 crisis. Instead, it was expanded even more. Once central banks stop these QEs, the real situation of the economy will be exposed. And so the best alternative at this point is to address the problem following the free market way to recovery. In any case, economic pain is unavoidable.
The free market solution will lead to the reduction in asset prices and debts. The primary obstacles to this solution are the interventionist policies of the government in the form of bailouts and increased taxation of the wealthy. Such policies discouraged saving and are rooted in the myth that increased consumption is good for a struggling economy. However, for Austrian economists, to stimulate consumption in the midst of recession is not only foolish, but will aggravate the situation even more. Better listen to these economists if we really want to find the way to economic recovery.
In the last chapter of Thomas E. Woods Jr.s' book, "Meltdown: A Free Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse," the author offers concrete steps to recovery from a free-market perspective. We can reduce these steps into four:
1. Allow firms to declare bankruptcy. This solution should first be applied to Fannie and Freddie, which Woods calls as "zombie companies." These state-sponsored enterprises have already brought so much distortion to mortgage market that should be stopped.
However, this bankruptcy solution is avoided due to two baseless fears. One is related to the perceived negative impact on the economy once firms disappeared. Woods corrects this misconception. He argues that in case of bankruptcy, firms will not disappear. Instead, there will be a change in ownership of assets from incapable to capable hands. Woods cited Enron to prove that "its bankruptcy in 2001 had no effect on the economy at all, and even energy markets barely noticed it" (p. 147).
The second fear is about the lost of credit. This is the justification in bailing out banks. Woods thinks that it is unnecessary for in our time, it is now easier to raise capital outside the banking system. He identified selling bonds, issuing stock, and borrowing overseas as examples.
2. "Stop the bailouts and cut government spending." Excessive consumption and too much debt caused the 2008 crisis. It cannot be cured by continuing the same practice. Bailouts and increase in government spending are just the other faces of persisting in excessive spending and borrowing. This too must stop.
3. Demand transparency from the Fed. Though Woods did not directly recommend to end the Fed, I think he is happy to see its abolition. He does not like this institution for its impact on US economy is the exact opposite of its official purpose. He sees it as a source of economic instability, "unnecessary," "disruptive," and intrusive to the market economy. And the Americans can only realize the destructive impact of the Fed on US economy if its records will undergo public scrutiny. The Fed must identify the recipients of its bailout program and the collateral backing up such loans.
4. Keep the government away from the monopoly and manipulation of money. Again, I think this serves as the primary reason for the abolition of the Fed for it is through this institution that the US government is actually monopolozing and manipulating the monetary system. Various proposals have been made as a replacement. The goal in mind is to keep the government away from money for Woods sees no role for government to "play in the monetary system that can confer any kind of social benefit" (p. 154). Citing Ludwig von Mises, Woods narrates:
". . . the history of money is the history of government efforts to destroy money. If ever there was a monopoly with which government could not be trusted, this is it. The temptation to debase the money and impoverish the people in order to benefit favored constituencies, hoping most people won't know the source of their declining standard of living, is too great" (ibid.).
This ends our study of Meltdown.
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.