Review of Meltdown
Today I finished reading the book Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse
Why Did I Choose to Read It: The book was published very recently in February of 2009 and it promised to explain why there is a systemic crisis going on in our current U.S. economy. Although I have read numerous articles from leading journalists at the NYT and WSJ, I never felt I had a good idea of why all of this was happening and why it seems our economy keeps falling apart every 4-5 years (recall the tech bubble anyone?). That can’t be normal, right? So I thought, hey why not give this book a try and see if the author can explain things. Added in the fact that this book has 4.5 stars with 160 reviews on amazon, it was a pretty easy choice.
What I Learned: I’ll admit many parts of this book was rather eye-opening. The main thesis for this book is based on the Austrian Theory of Economics. I’ve heard of this school of thought before but never really learned it in-depth, even though I do read Peter Schiff’s website almost daily. This book asserts that the real why we are in this mess today (and all our prior messes) is due to the tinkering of our money supply and interest rates by the Federal Reserve.
There is so much information covered in the book that I’ll just touch upon the author’s explanation of interest rates and how the Fed’s manipulation of them is negatively affecting our economy. As the book explains, in a sustainable economy the interest rate should be left floating and changed only by the actual supply and demand of people.
For example, if our citizens turned into a population of savers then the supply of saved money in our country’s banks would increase and thus lower the interest rate. Businesses seeing the lowered interest rate would then borrow the money from the banks to invest in future ventures. Economically this makes sense to the businesses because the low interest rate gives indication that the people are not spending now and thus will have money to spend in the future when their ventures are completed and hence they would become profitable.
Likewise, if the population instead turns into spendthrifts then the interest rate should naturally go up in the banks because they have a lower money supply (less of an asset results in higher costs to acquire the asset). Thus, less businesses will borrow money from the banks since the high interest rate would make certain ventures prohibitively expensive. Rather, the higher interest rate would give a signal to the banks that people are spending money now and thus would have less money in the future to spend on your ventures.
As you can see, it all makes sense and everything is interrelated. When the Fed comes in and starts making the interest rate artifically low, it throws the entire system out of whack. Businesses spend money on ventures that will never become profitable because people are also spending money and so will not have money to spend in the future. Our normal interest rate (not muddled by the Fed) is a natural indicator of where the economy is at. Unfortunately, due to the ways our system is constructed the Fed often manipulates the interet rate which then lead to boom and bust cycles.
Overall Review: I would recommend reading this book if you want to have a greater understanding of how our economy works. Although the author does sometimes go on rampages about our government, given the current situation our economy is in, I believe it is warranted. The only part I don’t like are threaded comments throughout the book emphasizing gold as the be and end all solution to our economy’s problems. I’ve met enough gold bugs to last me a lifetime and so that part was particularly annoying. However, the simple and concise explanation of our money supply, interest rates, and the hidden underbelly of the Fed made the book worth reading.
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Quick question – The FED has manipulated interest rates for a long time. Why didn’t the economy fail every 4 to 5 years all that time? Why is it just happening now? Was the book able to explain this? Thanks in advance for your reply.
Actually the US has had a multitude of booms and busts for the last hundred years and many of them resulted from interest rate manipulations. The current meltdown that we are going through is much more serious than prior ones (with the exception of the Great Depression) because we have two booms to unwind from, the stock market and the housing market… the ramifications (industries in construction to housing to finance) from the resulting busts will take longer than prior ones.