Book Summary: Meltdown by Thomas E. Woods, Jr.

Are you looking for a book summary of Meltdown by Thomas E. Woods, Jr.? You have come to the right place.

I jotted down a few key insights from Thomas E. Woods, Jr.’s book after reading it.

You do not have to read the entire book if you don’t have time. This book summary provides an overview of everything you can learn from it.

Let’s get started without further ado.

In this Meltdown book summary, I’m going to cover the following topics:

What is Meltdown By Thomas E. Woods, Jr. About?

In Meltdown, you are provided with a guide to understanding the government regulations that caused the 2008 global financial crisis

The book will explain how government spending worsens economic recessions and what must be done to save the world economy.

Who is the Author of Meltdown?

Thomas E. Woods Jr. is a senior scholar at the Mises Institute. 

An award-winning author, he wrote the New York Times bestseller, The Politically Incorrect Guide to American History.

Who is Meltdown By Thomas E. Woods, Jr. For?

Meltdown By Thomas E. Woods, Jr. is not for everyone. If you are the following types of people, you may like the book:

  • Students studying economics and finance
  • Anyone interested in the financial crisis of 2008
  • People tired of big government’s meddling

Meltdown By Thomas E. Woods, Jr. Book Summary

Introduction

In the seventeenth century, one Dutch tulip was worth ten times as much as a skilled craftsman’s salary. The tulip mania gripped the world, inspiring rampant economic speculation that triggered a financial crisis that robbed ordinary people of their life savings.

Does this sound familiar? There have been many booms and busts in the global markets, whether they are tulips or mortgages. People all over the world were affected by the recent global crisis in 2008, with millions of people losing their jobs, their homes and their sense of security.

Despite recovered economies, economists warn that the real question isn’t if another crisis will occur, but when. We have to do something different! This book offers insights into how we got into this mess and how we can get out of the destructive boom-and-bust cycle.

Lesson 1: It wasn’t deregulation and free markets that led to the last financial crisis – it was government regulation

There are plenty of stories in the media about how capitalism unrestrained caused the recent economic crisis. To fix the economy, they say the government should be more involved.

Could the government, which was supposed to repair the economy, have triggered its collapse in the first place?

Let’s examine this more closely. A government program gave mortgages to people who otherwise would not have been able to afford them. A government-sponsored enterprise, better known as Fannie Mae and Freddie Mac, began implementing a plan to help low-income and minority families buy homes in 1999.

In order to implement the plan, the government made changes to mortgage regulations so that brokers could offer loans with zero down payment, making it easier for those without savings to buy a home. Furthermore, government-backed rating agencies classified these risky mortgages as creditworthy.

To avoid being branded as “risky,” these agencies maintained that the mortgages were secure.

The crisis isn’t solely the fault of Fannie Mae, Freddie Mac, and the rating agencies. In fact, the Fed played a major role as well. This is how:

As early as 2000, the Federal Reserve printed tons of money to slash interest rates. Cheap money coupled with relaxed mortgage rules sparked a major housing boom, resulting in insane price increases for homes. Careless investors piled into the market in hopes of getting rich overnight.

In 2006, speculators accounted for around 25 percent of home purchases.

However, the good times did not last. A 43 percent rise in foreclosures occurred by the end of 2006, as housing prices declined. In the absence of down payments, speculators just walked away from their underwater investments. The mortgage market collapsed, and soon thereafter the financial system, which had stuffed billions of dollars into mortgage-backed securities, collapsed as well.

Government policies were to blame for this disastrous outcome because people spent money they didn’t have.

Lesson 2: Hayek’s business cycle theory can help us understand the roots of the current crisis

Friedrich Hayek developed an economic theory that is likely the most influential in modern times. This theory describes the boom-and-bust phases of the market and is relevant to both the recent financial crisis and past economic catastrophes.

This is how it works. Based on the effects of government-suppressed interest rates, the business cycle theory seeks to explain economic cycles. 

The reason for this is that printing money artificially lowers interest rates and creates the illusion that current production can increase more than is sustainable. 

Entrepreneurs are thereby misled into investing in long-term ventures that are not based on the realistic savings necessary to feed current production levels.

If a builder believes he has 30% more cement than he actually has, he will build a bigger house than he is able to. If he realizes he runs out of cement, he will not be able to complete his project and will have wasted time and resources on something that will not be useful.

The government manipulates interest rates so that people think they have a lot more money than they actually have by artificially lowering them. The result is that spending spikes before economic downturns.

During the dot-com boom of the late 1990s, for instance, we witnessed the business cycle theory in action. Internet start-ups’ stock prices soared between 1995 and 2000. What caused this?

The classical signs of the business cycle were all present: low interest rates, caused by the Federal Reserve’s expansion of the money supply, resulting in record high debt, along with rapidly rising capital prices for things like programmers and real estate.

As a result, the resources necessary to complete long-term market investments were no longer available by 2000. In other words, the Nasdaq stock exchange fell by 40 percent when the Internet bubble burst.

Lesson 3: Government intervention prolongs economic crises just as it causes them

The reason for the economic crisis we’re still engulfed in is clear, but how can we best deal with it?

From previous crises, like the Great Depression, we can learn. This was due to the inflationary government policies of the 1920s that led to the Great Depression. Therefore, the business cycle theory could have predicted the 2008 recession just as it could have predicted the depression of the 1930s.

According to basic economics, prices of goods will decrease when production increases. Unfortunately, that’s not what happened in the 1920s. The government instead increased the money supply by 55 percent in order to make it appear that prices were stable. In the government’s view, if prices were stable, so would the economy.

Until 1929, people swallowed the government’s story and continued spending, while the stock market grew at an increasingly unsustainable rate. 

At the time, most economists thought the American economy was invincible, but Austrian economists saw its eventual collapse. The crash of the stock market in October 1929 validated their predictions.

President Franklin D. Roosevelt introduced the New Deal, a series of social programs designed to boost the economy and address unemployment. However, this program did not help the United States to exit the Great Depression; rather, it prolonged the crisis.

Roosevelt threw money into the economy instead of listening to reasonable ideas. Despite the 1929 crash and its root causes, Roosevelt refused to accept them. 

Neither the huge public works programs nor the increased spending related to World War II were able to save the economy.

By raising taxes and funneling money to businesses with no real demand, Roosevelt obstructed the economy’s natural attempts to restart itself, based on real consumer desires. 

The economy didn’t begin to recover until the 1940s, when New Deal policies finally ended.

Lesson 4: End bailouts and reevaluate the purpose of the Federal Reserve

In the same way that prolonged government spending didn’t solve the Great Depression, government bailouts that inject billions of dollars into the broken US financial sector are a losing strategy.

Bailouts only exacerbate the problem. Rather than bailing out failed financial institutions, we should let them fail.

As an example, the government rewarded failure by handing out billions of dollars to Fannie Mae and Freddie Mac. They should’ve allowed the companies to go bankrupt instead.

That’s because, in the short term, a few well-known institutions going bankrupt conveys a signal that the government is using common sense and letting the free market work.

Beyond this, it’s also necessary to end the unjust, Soviet-style central monetary planning of the Federal Reserve. Considering that big names like Jim Rogers are questioning the role of the Fed, it could indicate that government’s role in regulating the economy is changing.

What are the implications of this shift?

The Fed’s relationship with the banking sector needs to be reevaluated to end its obstruction of the free market. 

Considering that the Fed is the primary reason big banks are taking ever-greater risks, it needs to be reevaluated as the “lender of last resort.”

The boom-bust cycle will never end if banks continue to assume the Fed will bail them out if their risky practices backfire.

Second, the Fed needs to stop manipulating interest rates, which only prolongs recessions. 

Interest rates should be allowed to float freely so that they can fulfill their natural purpose of recalibrating the market to actual conditions rather than artificial ones.

Lesson 5: Gold standards and deflation may be the best ways to avoid future crises

Clearly, governments that can print as much money as they want can cause economic crises and poor investment decisions. An alternative is needed. However, how should it be implemented?

Government interference in the economy can be minimized by using money that’s tied to a commodity standard. Contrary to paper money, which can be printed endlessly, a commodity standard is tied to a limited supply of material, like gold, which increases as more is discovered.

Do not worry, this does not mean you’ll have to carry around a bag filled with gold to buy your groceries! It would be possible to link paper money to gold and exchange it for gold at any time.

Obviously, the government is against such an initiative since borrowing or tax changes would be necessary without the ability to print more paper money. 

Since the government uses secretive inflationary policies, the public would have no choice but to protest such actions.

This isn’t the only reason for such a system to be beneficial. A second reason for deflation is that, while inflation is bad for the economy, it can be beneficial. That’s because inflation means increasing money supply, while deflation means lowering consumer prices.

Critics claim that a gold-based commodity standard would induce deflation, since the supply of goods would consistently outpace the supply of gold. Deflation would lead to a financial crisis, according to these critics.

One study from 2004 revealed, however, that 90% of deflationary periods in the last 100 years (barring those during the Great Depression) did not cause economic depressions. It is natural for a growing economy to experience deflation.

Take a look at the technology market. The quality-adjusted price of computers fell by 90 percent from 1980 to 1999, but manufacturers shipped out nearly 100 times more units during that period. In this instance, consumers and producers both benefit from deflation.

Final Summary

Despite what the mainstream media claims, the federal government is actually to blame for the financial crisis that occurred in 2008. 

The reason is that the government depressed interest rates and fostered economic bubbles, causing the economy to collapse.

Further Reading

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