You’ll not be surprised to learn that free-market thinker Thomas Woods rejects the arguments emanating from the Left that suggest unfettered markets created our current economic woes.
But you might be surprised to learn that Woods assigns the blame to more than just bad government initiatives such as Fannie Mae, Freddie Mac, and the Community Reinvestment Act.
Woods’ new book, Meltdown, assigns the most blame to the monetary system itself, especially the actions of the Federal Reserve. He says the Fed’s cheap-credit policies were bound to pave the way for problems:
The economy ? can support only so many investment projects at once. The interest rate acts as the market’s restraint on how many such projects are begun, in order to prevent the initiation of more projects than the pool of savings can support in the long run. When the interest rate is artificially lowered, more loans can be extended and more projects started, but artificially low interest rates do not magically supply the additional real resources necessary to complete all the projects.
Moreover, the kind of projects that are started differ from those that would have been started on the free market. Mises draws an analogy between an economy under the influence of artificially low interest rates and a home builder who falsely believes he has more resources ? more bricks, say ? than he really does. He will build a house whose size and proportions are different from the ones he would have chosen if he had known his true supply of bricks. He will not be able to complete this larger house with the number of bricks he has. The sooner he discovers his true brick supply the better, for then he can adjust his production plans before too much of the finished house is produced and too many of his labor and material resources are squandered. If he finds out only toward the very final stages of the project, he will have to destroy almost the entire house, and both he and society at large will be so much the poorer for his malinvestment of all those resources.
