Interview with Thomas Woods

Congratulations on “Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse” hitting the bestseller lists. The fact that you were the first to publish a book about the financial crisis so soon after the September crash indicates that you may have anticipated it. You’re an Austrian economist, so did you find that your knowledge of Austrian theory helped you put the crises in context?

The book is in itself an Austrian analysis from start to finish. For anyone who doesn’t know, the Austrian School of Economics is a free-market school of economics that includes luminaries such as Ludwig von Mises and Friedrich von Hayek, the latter of whom won the Nobel Prize in 1974. I would say the bulk of the economists who saw the crisis coming were Austrians. There is no economic school of thought from which a higher proportion of economists warned that the housing market was indeed experiencing a bubble, that it was going to burst and that the rate of home price increases was unsustainable. That was an Austrian warning. I wrote the book because I could not stand listening to the conventional wisdom, day in and day out, saying that this was all the fault of the free market so now we need the geniuses in Washington to fix everything for us. That is just an obscenity.

When you say the government created the housing bubble, are you also including the Federal Reserve as part of the equation?

In my chapter on the subject, I show there were a half-dozen contributing factors, and some of them were clearly government factors. For example, Fannie Mae and Freddy Mac, which are quasi-public, quasi-private agencies whose exact status was not altogether clear to people. It was more or less taken for granted that they would be bailed out by taxpayers if it should come to that, and they got special privileges such as tax and regulatory breaks that were not available to anyone else in the housing market. All of this added up to an incentive to take greater risks than a truly free market actor would take. There’s been a lot of talk among conservatives about the Community Reinvestment Act, which was a Carter-era law that required banks to make loans against their best interests so as not to be sued for so-called discrimination. On the left, there’s been a lot of frustration that this act has been targeted [for helping cause the housing bubble]. They point out that since it dates back to Carter and the late ’70s, how can it be blamed for a bubble 30 years later? The answer is that the act didn’t really have enforcement teeth until the mid-1990s under Clinton. It’s not like we’re just desperately looking around to blame the most irrelevant thing.

There are other factors, too. But as for the Fed, although it’s technically true that it is not a government agency, I think it would be wrong to argue that it’s a purely private thing. Again, we’re dealing with a weird amalgam of public and private. The Fed was created by an act of Congress; its board is appointed by the U.S. government, and it enjoys monopoly privileges that are granted to it by the U.S. government. So, it’s not a purely government agency, but it’s dramatically different than any free market actor and would not have spontaneously come into existence under a free-market system. If it could have done so, Congress would not have needed to create it.

How long do you expect the current contraction to run, and how big do you expect the decline to be in terms of GDP?

I know this will sound like a cop-out, but I don’t put much stock in economic forecasting, and I am critical of GDP as a metric to measure the economy. It would be one thing if we had a genuinely free market with no government involvement at all. Then you might be able to make some kind of ballpark estimates. But I have no idea what the federal government is going to try! It’s at least within the realm of possibility that the general public could become so angry that the federal government changes course, tries something different or stops continuing to attack the economy with a 2×4. But I think it’s more likely that they’ll keep trying unprecedented things, and that makes it very, very hard to predict how long this will go on. I think the more it does that, the longer it will go on. I think it is at least possible that we could have a stagnation as long as Japan’s, which was well over a decade.

What are some of the other myths about the Great Depression?

We’re hearing almost every single one of them repeated. We’re hearing myths that no reputable historian, regardless of his political allegiances, would repeat. I cannot believe there are still people who believe that Herbert Hoover was a supporter of the free market who just sat back and allowed the depression to unfold before his eyes. That’s just flatly false. Another big myth is the idea that FDR lifted the country out of the Great Depression. A third myth would be that the Depression was caused by the free market, and the lesson that should be learned from that is that we can’t allow that again. In fact, we now have the same Federal Reserve activity and expansion of the money supply that leads to the Austrian boom-bust cycle.

The equity boom ended in 2000. The housing boom ended in 2005. Which sector do you expect to recover first?

I really don’t know. Unfortunately, the collapse in housing affects practically everything, and not just because of the securitized mortgage debts that are held by so many investors and institutions, but also because of everything that goes into a house. The appliances, the raw materials, the building supplies and the trucking and shipping services required to move those things across the country, all of those things are affected. So, I honestly don’t know, but here’s my suspicion: Retail outlets that cater to basic consumer needs will do relatively well.

It’s conventional wisdom that the Smoot-Hawley tariff contributed greatly to the Great Depression, but how does that make sense given that imports were only 5.1 percent of the U.S. economy and the balance of trade’s contribution to GDP was a negative 1.1 percent in 1929?

I don’t think it did play a big role. I think those who think of themselves as free-market economists have exaggerated the importance of Smoot-Hawley. It didn’t help; anything that shrinks the extent of the division of labor is going to have an impoverishing effect, so it didn’t help. Part of the reason so much emphasis has been placed on Smoot-Hawley is that there are some free market economists who are operating without the benefit of Austrian trade-cycle theory. At the same time, they know they don’t want to blame the free market, but they don’t have a coherent explanation for what happened. So, they flounder around, looking for some form of government intervention to explain why this downturn occurred.

This column is an abridged version of Vox Day’s interview with Thomas Woods. The complete transcript of the interview can be read at Vox Popoli.

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