Bitter Medicine Prescribed for World's Ailing Economies

The Washington Times (Washington, DC), February 10, 2009 | Go to article overview
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Bitter Medicine Prescribed for World's Ailing Economies


As th e 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 for-

mer 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.

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Bitter Medicine Prescribed for World's Ailing Economies


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