Meltdown: Moral Hazard and the Financial Crisis

Meltdown by Thomas E. Woods, Jr.We are all aware of the current economic crisis. Whether we’ve experienced job loss, a devalued mortgage, or simply a higher price tag on our groceries, we all know that uncertainty is in the air.

In such extreme circumstances, it’s hard to maintain a clear perception. We all feel wronged, and we all want someone to blame.

It may be fitting, then, to begin by playing a little blame game.

First of all, it’s the bankers’ fault because they’re greedy. They lent too much money to people who made too little, and they should’ve been stopped. Then again, maybe it’s their customers’ fault. After all, isn’t it a bit greedy to buy a house you can’t afford? But wait a minute, aren’t the financial speculators to blame? Just think about it. There they were, crouching like vultures, waiting to feed on the failures of poor innocents.

Conclusion? (Duh!)

“The problem is greed.” says Politician A (or Media Pundit B). “And we all know who we can thank for that. Capitalism!

It this confused, muddled mess that Thomas E. Woods hopes to permeate with his recent book, Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse (quite a laborious subtitle, if you ask me).

As far as my fun little game goes, Woods thinks there is plenty of truth behind it. Indeed, the narrative is filled with people who were overly hasty, downright foolish, and yes, excessively greedy.

But not all bankers loaned unwisely and not all homeowners went beyond their means, so why did such greed manifest so suddenly, and why didn’t we have this problem before? If bankers are really that money-hungry, why didn’t they exercise their magical powers over consumers earlier in American history?

Woods’ primary and most fundamental answer has to do with moral hazard.

Many are already familiar with the concept, but Woods provides a good definition:

Moral hazard is the increased likelihood of risky behavior when the acting party believes that any costs of his behavior will be borne not by himself alone but by a large pool of people — as when a firm behaves recklessly because it expects to be bailed out with other people’s resources.

Woods’ primary critique, then, has to do with government (if you didn’t gather that from the subtitle). Yes, the banks were foolish (among many other parties), but there would have been no reason for such reckless behavior had the costs been understood to be “borne” by the banks themselves.

Although Woods uses the term “moral hazard” sparingly, it is a constant theme throughout the book. For Woods, the Federal Reserve provides the primary insulation, which is then reinforced by add-ons like Fannie Mae and Freddie Mac. Once these institutions adequately perverse the incentives, society takes it from there, assuming more and more unnecessary risk with the (now true) assumption that there is nothing to lose.

(Hint: This is not capitalism.)

Woods makes it clear that all involved parties are to blame (to an extent), but his primary argument has to do with the government’s role. Such distinctions provide a great service to the Remnant Culture disciple, for while Woods is particularly concerned with the role of various earthly systems, the reader will not easily forget that responsibility is ultimately found at the foot of the individual.

As far as the specific content goes, the book is divided into two primary pieces. In the first half, Woods provides a detailed retelling of how the crisis happened and where it currently stands. He starts with a critique of the Federal Reserve, moves on to discussing how the government created the housing bubble, and ends with the implications of what he calls “the great Wall Street bailout.”

In the second half, Woods gets a bit more theoretical, offering an entire chapter on Austrian economic theory (a la Mises), a helpful (and relevant) commentary on the Great Depression, and an extensive discussion on money and inflation (primarily founded on Austrian-school, pro-gold standard arguments).

For a book on monetary matters, Meltdown is exceptionally accessible and relatively brief (only 160 pages). Woods has an occasional tendency to be overly polemical (particularly when discussing politicians), but for the most part his approach is thoughtful and restrained.

For those who have been confused by the crisis and want to add a bit of clarity to the emotionalized chatter in the media (e.g. “GREED!”), Woods might just be able to bail you out.

To purchase Meltdown, click here.

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