(From BARRON'S)
By Gene Epstein
Two quite different books on the economic crisis share the same one-word title: Meltdown. The first is a collection of articles from The Nation -- "America's leading progressive weekly." The second was written by Ludwig von Mises Institute senior fellow Thomas E. Woods Jr., and includes a foreword by libertarian Rep. Ron Paul of Texas.
I found Meltdown II a must-read. Writing with remarkable clarity and occasional mordant humor, Thomas Woods makes a compelling argument for a radical turn to the free market as the only way to prevent meltdowns from recurring. Not that The Nation reporters don't contribute a few nuggets. For example, their general feeling that something radical should be done about the way the Federal Reserve operates -- that we should no longer be "subservient to the Fed mystique" -- is surely progressive in spirit. But when they go on to urge that the Fed make itself subservient to "democratic discourse," we have to remind ourselves that the term "progressive" is a code word for greater government control of the economy, which generally leads to retrogression.
As Woods says, in creating the housing bubble, the Fed was already far too subservient to pressure from Democratic congressmen like Barney Frank, mentioned favorably in Meltdown I. At the same time Frank was disavowing "any kind of financial crisis," Ron Paul was warning of "the long-term damage" from "the government's interference in the housing market."
What Paul understood, and The Nation reporters clearly don't, is that the Fed isn't a product, as they declare, of "market ideology," but of a very different way of thinking. "Instead of planning the production of steel and concrete," writes Woods, the central bank "plans money and interest rates, with consequences that necessarily reverberate throughout the economy."
According to Austrian business-cycle theory, boom-and-bust is caused by the feckless expansion of money and credit that can come only from government intervention. By beginning his story with the Panic of 1819, nearly a century before the Fed was created, Woods makes it clear that government-initiated credit expansion can also occur without the Fed.
But the central bank does help systematize the process. The Fed operates in the dark, in precisely the way any planning agency would that sets prices in the absence of a market. When the interest rate is set too low, "malinvestment" results, eventually leading to bust. One key difference in the case of malinvestment in housing was that the credit mania was actively supported by government-sponsored enterprises, most notably Fannie Mae and Freddie Mac, underwritten by the central bank.
Some now see more regulation as the ultimate solution. And in the abstract, certain forms of regulation might have helped. But, Woods asks rhetorically, with George W. Bush in league with Democrats to push the "ownership society," what regulator "would have...dared tell the regime something other than what it obviously wanted to hear?"
Besides, more regulation won't prevent boom-and-bust; only true free- market banking can accomplish that. Woods again: "If you believe in the free market, you cannot support the Fed, one of the most intrusive interventions into the market." Now, there is a truly progressive idea.
---
For Barron's subscription information call 1-888-BARRONS ext. 685 or inquire online at http://www.barronsmag.com/subscription/subscription.html.
Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/access/al?rnd=ipGmQ6ymSsv9nubKKSrSTQ%3D%3D. You can use this link on the day this article is published and the following day.
(END) Dow Jones Newswires
March 21, 2009 00:07 ET (04:07 GMT) | 
