My guest today is Dr. Thomas E. Woods, Jr.
Thomas is the New York Times bestselling author of Meltdown,
A Free Market Look at Why the Stock Market Collapsed,
The Economy Tanked, and Government Bailouts Will Make Things Worse.
Tom is also the author of The Politically Incorrect Guide to American History.
Both of those books are published by Regnery.
Tom holds a bachelor's degree in history from Harvard and a master's degree in philosophy
and a Ph.D. from Columbia. Dr. Woods is a senior fellow in history at Mises Institute.
Tom, welcome to the show.
Thanks very much, Mike. Glad to be here.
Delightful to have you here.
Tom, I was looking through your book again last night and there's just, there's hours
I thought what we would do is, if I just go to the first page of your book, Meltdown, I'm quoting here Tom. It says, anyone and everyone has been blamed for the current crisis except for the government itself. So Tom, what are the problems that you see government being responsible for?
Well, I talk in there, and this is frankly the reason I wrote the book actually, is that there's this conventional wisdom that the government is utterly blameless, it's just greedy capitalists and the free market system which is just given to boom and bust cycles for no apparent reason and the government is the innocent bystander who then after the fact comes in and puts everything right and this is such a grotesque distortion of the truth and the consequences of believing it are so grave and
and Potentially Revolutionary for our Society, that this cannot go, this can't be allowed
to pass without comment. We have to fight with everything we have. So it's true that
the government plays important roles in ginning up the housing market, for example, by means
of interventions like Fannie Mae and Freddie Mac, which are not private organizations by
any rational definition given all the special tax and regulatory breaks they got, and given,
You know, what a lot of people sort of assumed was an implicit bailout guarantee, but in
addition to things like that, I think the main factor that contributed to this, that
the government has some role in, involves the policy of the Federal Reserve System.
Now, even though, strictly speaking, the Fed is not a department of the government, nevertheless,
it survives and is able to operate at all because of monopoly privileges the government
gives it.
and create legal tender money out of thin air and in doing so by expanding the money supply through the banking system it can influence interest rates so it has a tremendously important role in the economy and I'm making the argument that is happily no longer particularly controversial that it was Alan Greenspan's decision to hold interest rates so low that led to the housing bubble that you wouldn't have had a housing bubble in the absence of the Fed and you know bubbles are going to burst
So it's therefore more than anyone else on earth, his individual responsibility for what's
going on here.
And of course recently, I guess a few months ago, we had to endure the spectacle of Greenspan
saying in a sort of melancholy way that, my gosh, I guess there's a flaw in the free market
I hadn't noticed before.
Well Alan, we have met the flaw and it is you.
That's by and large the thesis of the book that, as in so many other cases in American
history, the Fed or the central bank gives rise to economic dislocation, it discombobulates
the market, and then the free market is blamed for this. Well, it's not the free market's
fault, it's the Fed's fault.
Yeah, I want to come back, Tom, and talk a little bit more about the Fed. I think we're
definitely on the same page about the Federal Reserve. I just want to ask you a little bit
more about the housing bubble, and I should tell my listeners, Tom, I think most of my
listeners already know this, but I came out of banking and I think you do a wonderful
job talking about how the government created the bubble, you talk about, maybe how to start
with Freddie Mac and Fannie Mae, what were your concerns with those two organizations?
Well initially Fannie Mae was a government agency back in the 30s and then in the 60s
It was putatively anyway privatized and Freddie Mac was established in 1970 right off the
bat as a supposedly private organization to compete with Fannie Mae and Fannie's role
evolved over time and eventually it just became the role of making housing affordable and
they eventually began to make housing affordable supposedly by purchasing mortgages on the
The Secondary Market, so your local bank extends a mortgage loan to you, Fannie Mae could go buy that loan that has purchased the rights to receive the monthly mortgage payments from the bank and therefore the bank now doesn't have that mortgage, the bank now has money to extend more mortgages and what followed from this is that given that Fannie and Freddie, more or less everyone knew that if they ever got in big trouble, I mean not only did they have a line of credit with the treasury but that line of credit would
They naturally were inclined to be riskier in the types of loans they would take on than they otherwise would.
And the banks themselves began to feel like they didn't really have to worry about doing their traditional due diligence, because Fannie and Freddy were going to take the loans off their books anyway.
Fannie and Freddy also politicized the process of granting home mortgages,
Home Mortgages, because it wasn't just the Community Reinvestment Act, it was every single
government agency, quasi-government agency connected to housing that was insisting that
loans be made sometimes on racial grounds to make sure that everybody has access to
credit, which of course in and of itself is not a bad thing to want people to have access
to credit, but we can't bring that about through arbitrary fiat.
have to use traditional standards of creditworthiness and these things began to be dismissed as
just sort of old relics, the stupid old days that are really just obstacles in the path
of people getting housing.
But Fannie and Freddie were extremely reckless in the types of loans they were willing to
take on and then packaging them.
The whole model has turned out to be a gigantic bust.
These are not things we need in a free society and they are premised on the idea that everybody
Everybody needs to be a homeowner. That's a false premise and it's an impossible premise.
Some people would do much better renting. Heck, you don't have a lot of headaches renting.
You give your landlord all the headaches. It's not a bad thing to rent, but we've got this
superstition that everybody's got to own a home. Well, unfortunately, that superstition
is just like everybody needs to go to college and everybody needs to get a master's degree
and everybody needs to get a Ph.D. Well, the standards for these things are going to fall
And the more you start to claim that everybody should have them, instead we should let the
market decide who should get what and that's the fairest and most economically sustainable
criterion.
That's really well put and I think what you're saying is so true Tom because I remember when
I was in banking we were making home loans fast and furious because we knew we could
sell them off to Fannie Mae and Freddie Mac and to be quite honest we wouldn't have made
those loans without that artificial secondary market to buy those things.
And you know, that's such an important point, Mike, because I think people now are being
led to believe that this is the fault of the banks and the mortgage lenders and then they're
to blame.
They're just predatory people.
Like, they want to make loans that they'll never get paid back.
You know, like, why would a bank want to do that?
So banks were basically doing what the government obviously wanted them to do, which was to
create an ownership society and extend mortgages to more and more people. George Bush himself
who is supposedly a supporter of the free market, which is a laugh, but George W. Bush
himself made a speech in which he was very disparaging about the down payment, the idea
Probably the best summary I've seen of it. It's a great job.
My guest today is Dr. Tom Woods. He is the author of Meltdown. And during the break,
Tom will tell me some interesting behind-the-scenes things going on with the book.
And Tom, you want to share some of that with my listeners?
Oh, sure. Now, I'm very happy to say Meltdown, which has a foreword by Ron Paul,
All is the only politician with any credibility in my view, was a New York Times bestseller
this year for ten weeks and I was very happy about that, but interestingly the New York
Times refuses to review it. According to my publisher they have refused to review it so
they will not allow their readers' eyes to be soiled by these words and arguments. No,
no, no, we're just going to get the New York Times version. What's interesting is what
the New York Times will let them read and what they will let them read are the columns
In terms of Paul Krugman, and there's a collective groan going up from all your listeners right now, Paul Krugman, of course, as we all know, most unfortunately was the Nobel Prize winner last year, believe it or not, but for his work on international trade, not for his crummy articles in the New York Times, but interestingly, Krugman in October 2001 said, and Krugman, by the way, has been taking credit, he's been claiming that he saw the housing bubble coming, and he's a great
In October 2001, we have him saying, you know what we need right now is low interest rates to spur housing.
So I mean, yeah, you know what, Paul, I could predict the housing bubble too if I had called for it the way you did.
I mean, the guy calls for a housing bubble.
I mean, he basically calls for the very factors, institutional factors that would bring about an asset bubble,
and then later claims that he was able to predict it.
The New York Times has no problem publishing a complete and utter propagandist, but somebody who comes along and actually questions the whole foundation, well, gee, we can't have people reading that.
and they wonder why their newspaper is going down the tubes and on its way to bankruptcy.
I wonder why that could be.
That's amazing.
Well, I wanted to go back and touch on the housing bubble again, Tom,
and then kind of lead into a discussion on the Fed.
I know you talk about in your book that this issue you brought up about the Fed
and artificially keeping interest rates down led to the housing bubble.
Wasn't that also true with the dot-com bubble as well?
Yes, I think so. There was a good article in the quarterly journal of Austrian Economics some years ago called something along the lines of
can Austrian business cycle theory explain the dot-com boom and bust?
Needless to say, the authors, one of them a professor at Auburn University,
Roger Garrison is one of the great experts on business cycle theory and one of the things
he said to me once was that each business cycle has unique characteristics.
In other words, we know that artificially low interest rates encourage an unsustainable
and the Federal Investment path, but the exact direction that path will take can vary from
case to case.
We had a housing bubble this time, I think for particular reasons and because government
was encouraging artificially easier lending standards in the mortgage market, so I think
a lot of the new money tended to go into the mortgage market, but in the 1990s it was the
dot coms and what Garrison says is that what tends to happen by and large is whatever the
The big thing is, will then become, under the influence of the Fed's easy money, grotesquely
big and a way out of control beyond where it should be.
It will reach completely irrational heights and I think that's what happened.
And then, what's particularly useful to realize is that in the wake of the dot com boom and
bust, around 2001, Greenspan was getting kind of tired of being in a bust, he wanted the
boom again.
So we got 11 rate cuts in 2001 alone and people were saying, wow, he's the maestro, he really
navigated us out of this downturn.
But the problem is when the Fed intervenes to create still more credit, to navigate you
out of a bust created by its earlier interventions in the economy, all it does is postpone the
bust and make it worse when it comes.
Mises gave the example of the analogy of a home builder, imagine a home builder building
But if he continues building and he's got the house almost done, then he realizes no more resources exist, then it's going to be much harder to adjust. A lot of those resources will be squandered forever.
And so the analogy is that what's going on when the Fed decides it's going to get us out of a recession by doing more of the same is it's like saying to the home builder,
Hey, why don't you drink a lot of vodka?
Because if he drinks a lot of vodka, maybe he won't notice that he's got a dwindling supply of bricks.
Well, okay, yeah, that'll keep his boom going. That'll keep him building for a while.
But it doesn't make the bust any less inevitable.
And so Alan Greenspan encourages this artificial recovery, in effect.
But the artificial recovery encourages people to keep doing what they've been doing, to carry on with the housing bubble.
Instead of letting it bottom out there before all these errors have been made,
people perpetuate this spending stream so that when the bust comes all these
intervening years they've continued to do the wrong thing so the bust is all
the more severe when it finally hits. Yeah, that's well put. I'm grabbing your
book here, Meltdown, and if I recall, Tom, you have a whole chapter on the Boehm
I think it's chapter four in your book. I like this chapter because I think you've done a really good job there, Tom, talking about the Austrian School and how it views the business cycle. I think you give that example in the book, too, of Mises and Briggs.
I like that example.
I do too, because it makes it so obvious to see what's happening with that.
Yeah, that's an excellent chapter.
If I could, Tom, let me go back to the Federal Reserve.
You mentioned Congressman Ron Paul, who we both admire, and he's trying to get us to
where we can at least audit the Fed.
What are your thoughts, Tom, after that?
Once we've audited the Fed, are you in agreement with me and our mutual friend, Bob Murphy,
we need to abolish the Fed altogether?
Yes, I am of that opinion and I was on a radio program in Ohio about a month ago and the
host was very sympathetic to what I was saying.
He was persuaded by my arguments and then when we got to this and I said, I think the
Fed needs to be done away with, I think it's unconstitutional, it's superfluous to a free
Free Society, and it's positively an obstacle to the free and healthy development of a market economy.
He said, well, aren't you throwing the baby out with the bath water?
And I said, you bet I am, because this is a demon baby.
You know, this is, I want to do this.
And I think in this case, it's a very healthy thing for us to think in ways that a lot of people haven't been encouraged to think in the past.
Every time we go through a crisis, the government exploits the situation to, as we've all heard the Rahm Emanuel quotation about not letting a crisis go to waste,
it's that they want to exploit the situation to get things they wouldn't otherwise be able to get under normal circumstances.
And so we hear crazy things like $1.8 trillion deficits and green jobs and things they would have a harder time passing,
Why should the pro-government side be the only side of the argument that during a crisis gets to put forth radical, unusual views?
They get to put their more and more government regimentation view forth.
Why don't we get to put forth our less and less government view?
I say we should talk about the Fed and we absolutely should consider abolishing it. What we hear argued on behalf of the Fed is propaganda. If the Fed is supposed to be the great stabilizer of the economy and they trot out all these statistics to show how much smoother the business cycle has been, I think that's a lot of hocus-pocus. I don't see how with a straight face you can look at the Fed right now and say it's the great stabilizer. If you're Jim Cramer, you could say that, but Jim Cramer is pretty much wrong about everything, so I would count that as a point in my view.
I agree with you. I probably ought to let this go because we're coming up on the break.
I'm thinking about the way you referred to this in the book, Tom, where you say the Fed is the elephant in the room.
I've had similar reactions, as you talked about, from other radio shows.
We can talk about these issues and most people agree, but when you come to the Fed, somehow you just can't talk about that elephant.
Why do you think that is? Why do I have to avoid that?
Well, I know if we're coming up to the break, I'll be super brief, but for one reason or another, it has been off the table politically.
No politician other than Ron Paul has really made an issue out of it in a presidential campaign.
They've just gone by the rules. Nobody talks about the Fed. It's just the experts are there.
We've just been led to have a superstitious reference for the technical competence of these people,
where in fact the whole mission they're engaged in no matter what their technical
competence is foolish but we've just allowed ourselves to think that this is a
wonderful thing run by experts and you're some kind of crank who
probably needs psychological evaluation if you question it. Well, if we want to
live in a free society we have to be free to ask questions and this is not coming a
moment too soon. I think that's a good way to think about it. How do you say that?
at a Superstitious Reference.
You have a free chapter for your book, and that's on your website, right?
Right, at tomwoods.com.
There's a big thing about Meltdown on the front page, just click on it and you can get
a free chapter.
Okay, yeah.
Now, of course, I'm going to recommend everybody go ahead and buy the book.
I'd like that too, but it just goes to show how I'm being really sporting about this.
Also Tom, I know you have quite a bit of, I think you have both audios and videos available
on Mises.org and then don't you have quite a bit of your, quite a few of your articles
are on LewRockwell.com as well, right?
Right, right.
I've got big archives there and I've got a lot of audio.
I've got people saying, hey, I listen to your audio when I'm jogging.
To me, I need to hear loud music if I'm jogging, but to each his own.
But the easiest way to find those things is so you don't have to navigate and type my
name in and look around, is I link to all that stuff on the articles page at tomwoods.com.
Okay, yeah, that's great.
They're great resources.
Tom, let me do this.
Let me jump into chapter five of your book, where you talk about great myths of the Great
Depression, and I think you talk about a few things here that Bob Murphy also talked about
a few weeks ago.
I know you talk about Hoover and FDR and so forth, but what are some of those great myths
as you see them?
Well, I think Bob has done a fantastic job with his book that I have recommended very
I do explain the argument that the free market caused the Great Depression and I show that no, in fact, as Murray Rothbard classically showed, it was of course the Federal Reserve once again. The myth about Herbert Hoover not being an interventionist president, I cover that. This is all covered in very brief compass just because it's very hard any time you're talking about economic
In 1920-21 there was a pretty substantial, severe economic downturn that most people have forgotten about and it's very worth looking at and here's an episode where the government did the exact opposite of what all Keynesians would recommend.
In between 1920 and 1922, the federal budget was cut in half.
That is the opposite of what our overlords tell us needs to be done, that we need more
spending by government.
We need our government offices renovated citizens, this is for economic stimulus, don't you know?
We get all this nonsense talk.
Here we have the exact opposite done.
The Fed was by and large passive during this crisis, and yet the thing was over very quickly.
By the summer of 1921, recovery is already evident.
So who are you going to believe?
The Keynesian textbooks are your own eyes.
I mean, this isn't supposed to be possible, and yet it happened.
And this episode, which you'd think this would be front and center in a lot of major studies
of American economic history, it is just down the Orwellian memory hole like it never occurred.
So I dug it up and put it in meltdown because I thought it needed to be known and then somebody
pointed out to me that up until a few months ago there wasn't even a Wikipedia entry about
the depression of 1920.
Now I know people have varying opinions on Wikipedia but Wikipedia has everything.
It'll mention the Jethro Tull drummer from the 1980s who was on two albums and will have
a page for his third ex-wife or something but nothing on the depression of 1920.
Well, you know, now finally people are starting to talk about it, but it's no wonder that
our politicians don't talk about it, because it's not flattering.
They want to be flattered.
They want to be told that in a downturn they have these almost magical powers to direct
us out of it and bring us back to prosperity, and the Austrian theory, with this great historical
example in the background, is in effect saying anything you do will make things worse.
You are responsible for the downturn in the first place.
You need to get out of the way because all you can do is prolong the misery and it's
no surprise as I say that this episode doesn't get mentioned but in my opinion it cannot
be mentioned often enough because there is no quick, slick, Paul Krugman answer to that
episode.
This great myth of the Great Depression chapter, Tom, is great.
That chapter is worth the price of the book for sure.
Let me do this, Tom. Let's go on and talk a little bit about Chapter 7 here, where you're talking about basically what's next, and I know that's a big topic, but where do you see things going and what would you like to see?
Well, yeah, let me start with the second question first. What I'd like to see is people to follow what was done in 1920 and understand that the solution to the analogy of the master builder, which he's supposed to be an analogy for the whole economy, is not to liquor him up and keep him doing what he's been doing.
It's to tell him he's been doing the wrong thing. In other words, allow failures to occur, because that's the economy's way of saying, okay, these were the wrong things. Now we need to reallocate resources toward the right things.
I read the other day, Yahoo is reporting that in May we saw a 17% climb in construction of new homes and apartments, and they said this is an encouraging sign. I don't see how it could be. How could it be an encouraging sign?
Now on there are no bailouts and then at that point the market wouldn't have all this uncertainty
hovering over it.
What huge overhaul is the government planning?
What's it going to do this time?
What sector of the economy is it going to take over?
At this point private actors would have to say, all right, look, for better or worse,
what we've got is what we're stuck with and we're going to have to sort it out.
And that's the beginning.
Certainty and stability are what market actors want and we need to give it to them.
And this of course is the opposite of what they're going to do unfortunately.
And so it is essential.
It's essential, absolutely essential that the correct understanding, the Austrian school understanding of what has happened to us get out there and that this conventional wisdom be smashed at every possible opportunity.
The only reason I put myself through writing a book like Meltdown and writing it in great haste and sacrificing everything and staying up late and working, working, working to get it out there is one of the first books on this,
was so that the Krugmans of the world would not have the first and the last word, that there would be a free market point of view that's easy to understand, that you can give to your friends who think you're crazy, and by the end they'll say, hey, this makes sense. In fact, the guy who read the audio book is an Obama supporter, and then he wrote to me, he's a professional voice guy, and said, you know, I have to admit, I thought your book was going to be just stupid Yahoo nonsense, and by the end of it I said, hey, this guy makes a good case. Well then, I'm satisfied.
That's what I'd like to see happen, whereas I think they're by and large going to try
and do the opposite. The only way they'll be stopped is if public opinion shifts dramatically
and quickly. The only reason they're supporting the Audit the Fed initiative, it's not because
they all started reading Mises' book, The Theory of Money and Credit, it's that people
called their offices. That's why there is a shift in public opinion. That's why these
Let me try to do this, Tom. We've only got about two-and-a-half minutes left here. Last night, it occurred to me, I was looking at the book again, and I was looking at your foreword. As we said, it was written by Congressman Ron Paul. Dr. Paul's first sentence there says, many Americans are looking to the new administration to solve our economic problems. What struck me, Tom, was we used to think of Americans as
Why do you think we're putting so much faith in the government when they seem to be creating the problems? Is it just the easy answer?
I think most people probably don't realize the government is creating the problems. I think most of the time when they're being educated and when they're listening to the media,
I think they're being told that either that greedy capitalists cause problems and wise public servants solve them.
The Free Market just has these natural cycles and it stinks.
This is Karl Marx's view, but it's also the view of Keith Olbermann.
The free market just goes up and down.
So, hey, somebody's got to navigate us through this.
Who has the power to do it, if not the government?
They're hearing these superficially plausible answers.
And that's why it's so important to challenge that conventional wisdom, so that they hear that there is another way of thinking about this.
And it's very important for free market economists at the Austrian School to explain, look, we're the ones who are most likely to predict this, and we believe in the free market.
So obviously we couldn't have had a free market if we free marketeers warned something was wrong.
So I'm glad that Peter Schiff is getting a lot of attention.
I'm happy my book did well. Ron Paul's books continue to do well. We're doing everything we can. If we win, that's wonderful. If we don't win, we gave it everything we have.
Do you see some glimmers of hope, the tea parties and so forth? Are we having an impact?
The Tea Parties are a good start. I think a lot of them are, you know, their hearts are in the right places, but they don't, they're not focusing enough, in my opinion, on the Fed. But that's fine. It's a matter of education. The fact is they know something's wrong. And that makes them better than most of our alleged experts. That's great. That's a great starting point. So sure, as long as that continues. And if we get a Republican in 2012, I hope they're still as outraged when he spends just as much as this guy. I mean, that's, if you want to have any
Credibility, you're going to have to be consistent in your criticism.
Yeah.
Well, Tom, we're just about out of time, and I just want to thank you for being an absolutely
wonderful guest today.
This has been fascinating.
Thanks, Tom, very much.
You're very generous, Mike.
It's been my pleasure.
Thank you very generous, Mike. It's been my pleasure.