The Venus Flytrap - Meltdown Quotes

Quotes from
Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse

"The Fed rests on principles diametrically opposed to those of the free market. It is dedicated to central economic planning, the great discredited idea of the twentieth century.... The Fed's intervention into the economy can give rise to the boom-bust cycle, making us feel prosperous until we suffer the inevitable crash. The free market is inevitably blamed for that crash. No one even thinks to point the finger at Washington and the Fed. And that is part of what makes it so insidious. These Artificial booms, wrote economist Henry Hazlitt decades ago, must end "in a crisis and a slump, and... worse than the slump itself may be the public delusion that the slump has been caused, not by the previous inflation, but by the inherent defects of 'capitalism.'"" (pp. 8-9)

"At the center of the collapse were the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, better known as Fannie Mae and Freddie Mac. These leviathan corporations are creatures of Congress and are officially known as "government sponsored enterprises" or GSEs.... As GSEs, their exact status as public or private entities has always been ambiguous-they enjoy special tax and regulatory privileges that potential competitors do not, but their stock is traded on the New York Stock Exchange.... Most important, investors and. lenders took for granted that if Fannie needed it, this line of credit would be essentially unlimited." (pp. 13-14)

"Government agencies of various kinds were pressuring lenders into making riskier loans in the name of "racial equality."... Naturally, banks did what government regulators wanted them to do. "Banks began to loosen lending standards," says Liebowitz. "And loosen and loosen, to the cheers of the politicians, regulators, and GSES."" (p. 17)

"Government, at the federal, state, and local level, developed hundreds of little programs intended to encourage more people to buy homes, thereby channeling more artificial demand into the housing sector. Developers constantly get handouts, free land, new roads, and tax privileges to build homes.... Renters and people who buy a home outright without taking out a mortgage don't get to write off their housing costs come tax day. Government introduces strong incentives to buy instead of rent-and to borrow heavily in order to buy." (pp. 24-25)

"When the Federal Reserve pushes down interest rates by increasing the money supply, it encourages a boom in the production of relatively longer-term projects: raw materials, construction, and capital goods in general.... Unlike the production that genuine consumer demand stimulates, though, the Fed's artificial stimulus is not in line with real consumer preferences or the current state of the economy's pool of savings. It draws resources away from projects that cater to real consumer demand, and it encourages more and different kinds of projects to be undertaken than the economy can sustain.... The already existing campaign to lower lending standards, along with the monopoly privileges enjoyed by the quasi-governmental agencies Fannie Mae and Freddie Mac, played a role in channeling into the housing market the new money the Fed was creating. But it was the Fed, ultimately, that made the artificial boom in housing possible in the first place, and it was all the new money it created that gave the biggest stimulus to the unnatural rise in housing prices." (pp. 25-27)

"Financial "deregulation" has often been blamed for the economic meltdown, with then Senator Barack Obama late in the 2008 campaign season ceaselessly condemning the Bush administration's alleged drive to "strip away regulation." We'll have more to say about financial deregulation in the next chapter, but with regard to the housing market, the point is that lenders were doing exactly what the federal government and its central bank wanted them to do. Saying that more government oversight was needed misses the point. More and riskier loans are what the government wanted." (p. 29)

"As long as the Fed can create as much money as it wants and push interest rates down to destructively low levels, bubble activity - that is, wealth-destroying activity that seems profitable only because the Fed has kept interest rates artificially low - will occur somewhere. If it wasn't the mortgage markets and the financial industry that became distorted, it would have been something else." (p. 31)

"AIG, Fannie and Freddie, the Big Three automakers (which jumped on the gravy train when they saw the money flowing), and others sure to come are said to be "too big to fail" - that is, too big for the public to let fail... But there is an alternative way to think about large-scale failures. If a single company has four profitable activities and two unprofitable ones, discontinuing the unprofitable activities is good for that company. Instead of squandering resources in areas that poorly satisfy consumer demand, the company can reallocate those previously invested resources toward its four profitable activities. The company is healthier for having sloughed off its parasitic sectors, and can now expand with renewed vigor. What is true for this single company is no less true for the aggregate of wealth producers that constitute the whole economy.... In that sense, these firms we're told are too big to fail are in fact too big to be kept alive. The longer they are kept on life support, the more they drain capital and resources away from fundamentally sound firms that could put those resources to much more productive use from consumers' point of view. Keeping such firms alive via government bailouts discourages rather than encourages capital formation and economic recovery." (pp. 40-41)

"The fate of Lehman Brothers is a good example of what happens to a firm that is allowed to fail, and what happens to the rest of the economy when a gigantic firm goes under. With assets totaling $639 billion and some 26,000 employees, Lehman could have made a good argument that it was too big to fail. In fact, though, it wasn't. What was good and worth preserving in Lehman found other homes at the hands of other owners when it went under in September 2008; what was not worth preserving disappeared. That is what happens when bankruptcy is declared. The earth did not break free of its orbit and go tumbling toward the sun. Washington Mutual, or WaMu, was the largest American savings and loan bank, and it had to liquidate in September 2008. JP Morgan Chase bought some of its good assets. Life went on." (p. 41)

"Financial bubbles need to burst, so that the inflated prices of the assets involved, like housing, can fall to their market prices-that is, the price on which the natural, unimpeded forces of supply and demand would converge." (p. 57)

"Notice that the precipitating factor in the business cycle has nothing to do with the market economy itself. It is the government's policy of pushing interest rates below the level at which the free market would have set them. The central bank is a government institution, established by government legislation, whose personnel are appointed by government and which enjoys government-granted monopoly privileges. It bears repeating: the central bank's interventions into the economy give rise to the business cycle, and the central bank is not a free-market institution." (p. 74)

"Resources and laborers need to be directed into those lines of production in which the healthy, non-bubble economy needs them. When prices and wages are made artificially rigid, this process is disrupted and the return to prosperity delayed. Contrary to popular belief, wages were rather high during the Great Depression. But that was the problem-they were artificially high, thanks to government intervention, and therefore far fewer people were hired in the first place." (p. 77)

"The often overlooked depression of 1920-1921 is especially instructive for us today. During and after World War I, the Federal Reserve had been inflating the money supply quite substantially, and when it finally began raising the discount rate (the rate at which it lends to banks) the economy slowed as it began its readjustment in line with Austrian business cycle theory. By the middle of 1920 the downturn in production had become severe, falling by 21 percent over the following twelve months. Conditions were worse than they would be in 1930.... Yet scarcely any American even knows that such a slowdown occurred. That's probably because, compared to the Great Depression of the 1930s, it was so short lived. Unlike those terrible times, in which the federal government confidently announced its intentions to navigate our way out of it, the market was allowed to make the necessary corrections, and in no time the economy was back to setting production records once again." (pp. 94-95)

"In 1920, the Japanese government introduced the fundamentals of a planned economy, with the aim of keeping prices artificially high. According to economist Benjamin Anderson, "The great banks, the concentrated industries, and the government got together, destroyed the freedom of the markets, arrested the decline in commodity prices, and held the Japanese price level high above the receding world level for seven years. During these years Japan endured chronic industrial stagnation and at the end, in 1927, she had a banking crisis of such severity that many great branch bank systems went down, as well as many industries. It was a stupid policy. In the effort to avert losses on inventory representing one year's production, Japan lost seven years." The U.S., by contrast, allowed its economy to readjust." (p. 95)

"Hoover was no laissez-faire man - which was exactly the problem.... Among other things, he launched public works projects, raised taxes, extended emergency loans to failing firms, hobbled international trade, and lent money to the states for relief programs.... This is why Franklin Roosevelt accused Hoover, during the 1932 presidential campaign, of having presided over "the greatest spending administration in peacetime in all of history," and derided him for believing "that we ought to center control of everything in Washington as rapidly as possible."" (p. 99)

"Where does money come from in the first place?... People who are dissatisfied with the clumsy system of barter perceive that if they can acquire a more widely desired (and therefore more marketable) good than the one they currently possess, they are more likely to find someone willing to exchange with them. That more widely desired good can be anything from berries to shells to gold, all of which have served this purpose in various historical cases. And the more that good begins to be used as a common medium of exchange, the more people who have no particular desire for it in and of itself will be eager to acquire it anyway, because they know other people will accept it in exchange for goods. Even if you have no direct use for a precious metal, you will still want to acquire it because you know you can make exchanges with it. In that way, gold and silver (or whatever else the money happens to be) evolve into full-fledged media of exchange, or money. Money, therefore, comes about spontaneously as a useful commodity on the market. It is not arbitrarily introduced by government decree." (pp. 110-111)

"The tremendous merit of gold is, if we want to put it that way, a negative one: it is not a managed paper money that can ruin everyone who is legally forced to accept it or who puts his confidence in it. The technical criticisms often gold standard become utterly trivial when compared with this single merit." (p. 134)

"Falling prices do not cause economic hard times. They are the natural outcome of a progressing market economy. Under a commodity money, there is a natural tendency for consumer prices to fall over time. The money supply stays relatively constant or increases at a modest rate, but the increasing capital investment and resulting productivity gains of a market economy typically generate yearly increases in the production of goods and services." (p. 135)

"Enron was the largest energy company in the United States. Its bankruptcy in 2001 had no effect on the economy at all, and even energy markets barely noticed it. Economist Steven Landsburg asks "what's special about banks" that makes them deserve a bailout that would never be granted to firms in most other industries. The usual answer is that lending would come to a halt, business would not be able to raise needed funds, and so on. But banks are merely intermediaries between depositors and borrowers. Presumably this intermediation could occur in another form. In our day and age it is far easier for would-be lenders and borrowers to find each other outside the banking system. If a firm wants to raise capital, couldn't it sell bonds over the Internet, issue stock, or borrow overseas? "I'm not sure these big Wall Street banks are really necessary, and I'm not sure we'd miss them much if they were gone," Landsburg says." (pp. 147-148)