Agatha Christie’s play The Mousetrap, an all-time classic, is running strong even after 23,000 performances. The play, first staged in the West End of London way back in 1952, has a twisted end, with the detective investigating the case turning out to be the real murderer.
The current financial crisis has an uncanny similarity with the play — the central banks trying to rescue and steer economies out of the crisis are themselves the problem.
Or so, Thomas E Woods Jr, a senior fellow at the Ludwig von Mises Institute in Albama, US would have us believe.
Woods, the author of the recent bestseller Meltdown: A Free-Market
Look at Why the Stock Market Collapsed, the Economy Tanked, and
Government Bailouts Will Make Things Worse, spoke to DNA on a host of issues. Excerpts from an email interview:
The only solution the US and other big governments seem to have for the financial troubles is printing more and more currency…
In the US, we have an expression: when all you have is a hammer, every problem looks like a nail. Printing and spending are just about all the government and its central bank can do, so those are considered the solutions to just about any economic problem. And with the widespread view that the government needs to “do something,” it’s no wonder they’re swinging that hammer at anything and everything.
Depending on who you believe, the US debt stands at $50-70 trillion. Do you see them repaying it…
I think the question answers itself. It will never be repaid. The only question is whether the default will be clear and in the open or concealed, and if concealed, by how much.
The US government right now wants its citizens to start borrowing and spending money all over again in order to revive the economy. This, after the current crisis happened because of people borrowing more than they could repay. As one columnist recently put it, “The Government’s Cure for Alcoholism – Whiskey, More and More Whiskey.”
What the average congressman knows about economics could fit comfortably inside a thimble. On top of that, I think it is a mistake to assume that American officials are all motivated by a concern for their fellow countrymen. Some of them simply want to shovel money to their friends. Even if what they’re doing might not help the economy as a whole, it might (at least temporarily) help their friends, or those to whom they owe political favours. They contrive various ways of arguing that their activities are really motivated by a deep concern for the common good.
What are your views on the US government trying to rescue financial institutions?
For many years, the US lived in the shadow of what became known as the “Greenspan put,” the general understanding that there was a floor beneath which the Fed would not permit asset prices to fall. Naturally, important financial institutions began to see risky investments as being not quite so risky after all, since they could keep the big profits and likely socialise the losses. By bailing out these companies now (and bailing out Long Term Capital Management, for example, in 1998), the government proves these reckless investors right, and punishes more conservative players who thought the bust would be their opportunity to expand their market share. So much for the free market!
Meanwhile, we’re being told a lot of fantasy stories about “systemic risk” —- in effect, that the earth would break free of its axis and go tumbling toward the sun if a major financial institution were permitted to fail. This is a big subject, but to make a long story short, I am convinced that this is largely just a pretext politicians can hide behind when they’re handing out money to their friends. “We’re just looking out for the little guy when we bail out the fat cats,” they can say, doubtless with a suppressed laugh.
What do you think was the single biggest factor that led to this financial crisis?
This is what my book is all about. The world’s central banks, led by the Federal Reserve System here in the US, went on a money creation spree that distorted the investment decisions of businessmen and the consumption decisions of consumers. That’s what F A Hayek showed in the work that won him the Nobel Prize in economics. Interest rates are not arbitrary figures. They play a coordinating role in the economy. They ensure that long-term investment takes place (1) at a time when the population indicates a willingness to defer present consumption and (2) when the resources necessary to complete additional long-term projects have been saved by the public.When interest rates are pushed down artificially, their coordinating functions are disrupted. Tampering with interest rates as the market sets them leads to massive error. Investment projects are begun that would not otherwise have been begun (and for good reason). The pool of saved resources has not increased, so the increased number and different kinds of projects initiated during the boom must draw from an unchanged resource pool and thus cannot all be sustained. Moreover, at a time when consumers are demanding more of existing goods, businesses are misled into engaging in long-term product development —- another mismatch.
What about the consumer side?
On the consumer side, the Fed’s activity, coupled with various federal government initiatives, gave rise to a real estate bubble that sent housing prices soaring. Thinking themselves richer than they really were (since they had an asset that consistently appreciated, and that the so-called experts assured them would only continue to do so), consumers made consumption decisions they wouldn’t have made had they known their true net worth. They took out home equity loans to finance conspicuous consumption. Now the home they borrowed against is tumbling in value. As a result, countless Americans, who all this time had been busy taking on far more debt than they could pay back, are now broke. Note that these distortions have nothing to do with the free market. They come about because of the central bank’s interventions into the free market. Few people realise this, so government is able to get away with blaming the resulting problems on the market.
When asked on CNBC what he would take if he were appointed the US Fed chairman, Jim Rogers is reported to have said that he would abolish the Fed and then resign…
Absolutely. It is long past time for us to abandon the superstitions of central banking. For decades we’ve been told that central banks are essential to provide “liquidity” to financial institutions, to carry out the scientific management of the money supply, and to provide macroeconomic stability in general. For anyone paying attention, each of these claims stands exposed today as a joke, a fraud, or both.
As Hayek showed, central banks create the phony booms, the false prosperity, and the misallocation of resources, all of which culminates in an inevitable bust. And when they do go bad, the free market takes the blame. It’s about time for supporters of the free market to abandon institutions like the Fed, which, I repeat, are interventions into the free market such people claim to believe in.
Do you feel Barack Obama and his team of officials will be able to get US out of this rubble?
I have confidence in Obama’s team —- confidence, that is, that he and Congress will continue to do the exact opposite of what anyone with any sense would do.
If Obama can’t take the trouble to learn sound economics, he can at least learn from American history. In 1920-21, the US faced a depression that was worse in its first 12 months than was the Great Depression in its first 12 months. Instead of the absurdity of fiscal “stimulus,” the US government actually cut its budget. The Federal Reserve essentially stayed out; the Fed didn’t engage in open market operations until 1922, in fact.
The result? The beginnings of recovery by the summer of 1921. And as I show in Meltdown, this happy result occurred not in spite of the absence of fiscal and monetary stimulus. It occurred because those destructive courses of action were not taken.
That is what we need now. Monetary and fiscal stimulus disrupt and confuse the market’s normal recovery mechanisms... Bailouts, needless to say, disrupt the process further. Instead of letting resources shift from incompetent hands to capable hands, they stay frozen in the possession of those who have proven themselves poor stewards of those resources. How can this do anything but ‘zombify’ the economy?
You recently called the US a banana republic…
Banana republics are associated with several characteristic phenomena: a defiance of the rule of law; the use of inflation, usually on a substantial scale, as a conscious tool of policy; and very high spending and corruption. Every country on earth qualifies to one degree or another, but the US is moving so rapidly according to each of these indicators that I thought the term was apt.
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