It is important to understand that at a time when we are being told that free-market economists must have egg on their face because their cherished system has collapsed, it was followers of Ludwig Von Mises, F.A Hayek - the great so-called Austrian economists of the 20th Century - who were mostly likely to have predicted this crisis.
So if this was a failure of the free market, why have the free-market economists predicted it more than anyone else? Obviously there must not have been a free market. Specifically, Hayek won the Noble prize in economics for showing that government-established central banks like the Federal Reserve are an intervention into the free market. They are destabilizing, not stabilizing. And by tampering with interest rates and the free market system they cause entrepreneurs and consumers alike to commit massive errors that eventually hit the economy in the form of a major bust.
So what has happened to us is not a failure of the free market but instead the inevitable working out of the consequences of intervention by government into the free market. So in other words, the problem with Alan Greenspan wasn't that he believed in the free market too much, it's that he didn't believe in it enough. He believed that he could be the monetary central planner, planning money and interest rates. The New York Times called him "the infallible maestro of our financial system." This is just goofy. Why doesn't Alan plan steel and concrete production for us while he is at it?
Q: So how did what the government did wrong affect the housing crisis?
A: It's hard to think of anything the government did right. In addition to the usual government policies we've all heard about - like the very existence of Fannie Mae and Freddie Mac -- I have a whole chapter on the housing situation and I identify half a dozen culprits. But, again, the key is the Fed. Because if you had really dumb government policies, you could really have a housing bubble develop - and by bubble I mean a sector of the economy where prices are unsustainably high.
Let's say there had been no Fed but that people had just started buying a lot of houses at random. What would have happened is the banks would have run out of money to lend and so interest rates would have shot up and that would have discouraged the bubble process from continuing; it would have discouraged people with no job from buying five investment properties, for example. It would have stopped it.
But instead, because we have a monetary central planner in our economy, we can create a lot of additional money out of thin air, so the banks feel like, "Oh, wait. Our resources are not depleted after all. We can keep on lending." So you can keep an illusion going and can pump it up and pump it up. But if it hadn't been for the Fed, the housing bubble - and therefore the terrible bust were now feeling the consequences of - could not have begun in the first place.
Q: What should the government do now to fix the problems government itself created?
A: If you were to make a list of all the things the government has been doing and then go down that list, you would actually find that they should be doing the exact opposite of every one of those things. I say that both with the help of the testimony of history, but also with sound economics. The bottom line is that instead of a stimulus package, so-called, which can't possibly help . we should be cutting the budget. I know that is the opposite of what all the drones tell us. But the drones are wrong on this.
Interestingly, when the U.S. was enduring a terrible depression in the year 1920, by 1922 the federal budget had been cut in half. So according to the conventional wisdom, the economy should have plunged deeper into a depression in that year. But instead by mid-1921 the economy was already turning around without the federal government or Federal Reserve involved.
Whereas, whenever you try the current approach - creating money out of thin air, dropping interest rates to zero, stimulus packages, propping up zombie companies - well, that's pretty much what Japan did in 1990 and 19 years later their economy still hasn't recovered. So why would they think it would have a better result now?
Q: As a historian, how do you explain that we - our leaders in government - have not learned from what Japan did and what our government did in the Great Depression, which most economists agree only prolonged the depression?
A: Well, partly, and I know this runs counter to the model of government we are all taught in civics class, government officials are not motivated by truth alone. Sometimes they just want to do whatever will bail out their friends, or whatever will get them some votes in their own district and to heck with country at large. But they frankly don't even care.
Frankly, for government, history is not a source of wisdom or insight. History is a propaganda device to be manipulated on behalf of government. Barack Obama actually has the audacity - pardon that word -- to cite the Japanese example as if it is evidence for his positions - "Well, we can't repeat what Japan did." Yes. You're right! But that's why we shouldn't do what we've been doing. They want to increase their power during times like this.
So therefore, they don't want to hear what the Austrian economists have to say - that you shouldn't do anything; that you should start cutting spending; that you decrease rather than increase your power. Nobody wants to hear that. They want the flattering portrayals of a Paul Krugman who tells them that they are the wise overlords who can steer our ship of state safely through the crisis. That's what they want to hear and that's what they are going to follow.
Q: What's the main point in your book that you would want Barack Obama to both understand and embrace?
A: The simple point would be that not only did the free market not cause the problem, but the free market is in fact the only feasible solution to the problem - and that we would probably already be at the end of the crisis if the market had been allowed to work. I would say that - and the book gives him all the evidence he could ask for to support that point of view.
Q: Why did you get Congressman Ron Paul to write the book's foreword?
A: I think he's almost the only one in Washington who understands anything about what's happening. At a time when every blockhead in the world was saying that the fundamentals of the economy were sound, he was saying, "Wait a minute. There's something wrong with this apparent prosperity. It's not real. It's built on sand; it's not built on a sound foundation." And people laughed at him - "Oh, there's old Ron Paul again."
Q: And when he'd mention the economy during the presidential debates, people would roll their eyes and say, "Get this Martian off the stage."
A: "Hasn't he been watching CNBC? Things are great." Seriously. I thought, "Here's a guy who has serious credibility on this issue - who actually understands economics, which is truly rare for anyone in Washington." And so for him, with his great reservoir of credibility, to lend his name to a very nice foreword, was just about the most flattering thing I could have asked for.
Q: There are not too many people in power in Washington who would agree with your diagnosis of what went wrong or what should be done to avoid future economic meltdowns. Does that depress you or distress you in any way?
A: Well, sure. I know it means that the American people are in for more misery; that the ignorance of their rulers will bring them a lot more misery. At the same time, I am encouraged by the fact that the Austrian interpretation that blames the government central bank intervention for the problems rather than the free market itself is getting a wider audience than it ever has before. Young people are interested in Austrian economics like you wouldn't believe. Mainstream economics, which led us into this impasse, is totally passé and seen as kind of stupid stuff that old guys teach.
Q: You mean this is true in academia?
A: For instance, at our Von Mises Institute we are seeing more students than ever applying for our program and they want to become professional economists. They view the Austrian school as the wave of the future. It makes sense. We predicted the crisis. We're sort of the "cool" school of thought. We are the oldest continuous school of economic thought. Right now we are the smallest, but we're also the fastest growing.
The smart kids - not the drones who just want to get their degree -- are disproportionately being attracted to the Austrian school. I am confident - and pessimistic as I am about other things - that in the future the opinion molders in our society and the economists are going to be much more heavily swayed in our direction than is the case at present. And it will be far, far more difficult to ignore them, as the establishment is desperately trying to do today.
Q: Is there anything the Obama administration, or Congress or the media has said or done that has given you hope that they will do something right?
A: I'm afraid not. I'm slightly encouraged that Republicans - after years of being on a drunken spending binge -- are suddenly getting religion, so to speak. But it's too little too late. They have no credibility whatsoever on this issue. At the same time, there is one thing that's encouraging and that is that Ron Paul's bill to audit the Fed, H.R. 1207, now has 88 cosponsors. That's very important. Because here we have one man (the Fed chairman), who creates all this money he wants to out of thin air and not tell us where it is going. Who on Earth is going to defend that?
I would like to see a congressman say, "You know what? I don't think we need to audit the Fed. I think what we need is a totally secretive organization running the banks." Who in his right mind who is not bought and paid for would say something like that? So I think if there is an audit of the Fed, the irregularities one would find I suspect would be so great that we would suddenly begin to start debating economic issues that have been off the table for a long time.