BOOKS: Meltdown

REVIEWED BY W. JAMES ANTLE III

As the financial crisis deepens, wiping out jobs and propelling families' savings down the memory hole, so does the sense in Washington that the political class must Do Something. At the behest of former President George W. Bush, that "something" took the form of a $700 billion federal bailout of Wall Street. President Obama is following up with a fiscal stimulus plan that could end up costing more than $1 trillion.

That's definitely something. But in his new book, "Meltdown," Ludwig von Mises Institute senior fellow Thomas E. Woods Jr. contends that this flurry of action — and massive unfunded federal spending — is no solution to the country's economic woes.

Instead, it is analogous to an alcoholic curing his hangover by quaffing a case of beer in the morning or a doctor bleeding the patient to death in order to save him. In Mr. Woods' telling, a roaring ocean of debt fed by tributaries of reckless spending and loose monetary policy is what flooded out the American economy in the first place.

This flies in the face of the conventional wisdom that the real culprit is corporate greed unshackled by deregulation, a laissez-faire economy gone wild. For a mess that was supposed to be made by the invisible hand, it sure has the federal government's fingerprints all over it. Mr. Woods discusses how government-sponsored enterprises such as Fannie Mae and Freddie Mac and the Clinton administration's aggressive enforcement of the Community Reinvestment Act (CRA) loosened lending requirements, especially for socioeconomically disadvantaged but politically favored groups.

Despite all the talk of parasitic lenders who dishonestly forced subprime mortgages on uninformed or unfortunate borrowers, under Presidents Clinton and Bush the government pushed for increased lending to the uncreditworthy in order to expand low-income homeownership. So did outside activist pressure groups such as ACORN. Mr. Woods writes, "[T]he same cavalier approach to risk assessment that informed the CRA pervaded the whole mortgage-lending arena."

Plenty of conservatives have criticized Fannie, Freddie and the CRA in the attempt to push back against the Newer Deals and Greater Societies liberals advocate in the name of economic stimulus. Mr. Woods goes much further, blaming not just affirmative-action-loving bureaucrats, lax lenders and boneheaded borrowers: The real villain in "Meltdown" is the Federal Reserve.

And why not? Despite the reputation for hypercompetence Alan Greenspan's minions acquired during the Internet boom of the 1990s, the Federal Reserve has been at the helm of some of the greatest economic disasters in American history: the Great Depression; the stagflation of the 1970s and, Mr. Woods contends, the current crisis. Through artificially low interest rates and the excessive creation of credit, the Federal Reserve encourages risky investments and bad decision-making on a massive scale.

For a while, the investments encouraged by the Fed's out-of-control printing press create a boom, like the housing bubble or the rise of the dot-coms. Companies expand, jobs are created, and the good times roll. Eventually, however, "The necessary resources to complete all these projects profitably do not exist," Mr. Woods writes. More "McMansions" are built than homebuyers can afford; the stocks of companies with price-to-earning ratios of zero come tumbling down. The bubble bursts, the questionable businesses fail, and the boom becomes a bust.

Nobody wants to hear this, of course. So policymakers immediately return, once more with feeling, to their spending, borrowing and credit creation in a desperate attempt to re-create the boom or at least forestall the bust. Mr. Woods is persuasive that doing so only guarantees a worse day of reckoning down the road, like having a 15th glass of whiskey rather than calling it a night.

But Mr. Woods' prescriptions -- stop the bailouts, cut spending, resolve that no business is too big to fail, let the market make its own painful adjustments -- are ones that no politician would embrace. Well, no politician except for Rep. Ron Paul, the Texas Republican who wrote the book's foreword.

At times, Mr. Woods is too self-conscious about converting readers to Austrian economics, citing the works of Mises and Murray Rothbard as if they are sacred texts. It's the book's biggest flaw. "Meltdown" already challenges readers to embrace fairly radical notions about the New Deal, the Federal Reserve and the government's role in the economy. It should read less like it is asking them to try a new religion too.

• W. James Antle III is associate editor of the American Spectator.