Book Review

Book Review: Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and the Government Bailout Will Make Things Worse

Meltdown by Tom E. Woods Jr., an Austrian economist, is an excellent read. In the first part, Woods outlines the reasons why the financial crises of 2008 started in US. The reasons were numerous (Woods discusses six “culprits” starting with Fannie Mae and Freddie Mac and their role in perpetrating the crisis), but one major cause was a political angle behind subprime lending that contributed to housing bubble. The Democrats in Clinton administration revised and updated the Community Reinvestment Act (CRA) – that forced banks to lend to minority groups for buying houses or face discrimination lawsuits – to fulfill their own political agendas. [Note: For more information about CRA, check out this Federal Reserve webpage.] Fed’s artificially low interest rates did not help matters either.

There wasn’t much of a choice. Caught between the Devil (lawsuits for discriminating against Hispanics and certain other groups) and the deep blue sea (lending to members of said minority groups), banks chose the latter. That choice had far-reaching consequences not only for USA but also for the rest of the world, because other currencies are pegged to US dollar. From 2005 to 2008, American banks ignored the sound business practice of checking the credit-worthiness of a borrower before lending money and refusing to give loans to those with low credit scores. Bear Stearns’ argument supporting CRA was this: “Unfortunately, CRA loans do not fit neatly into the standard credit score framework. We believe a broader array of credit analysis data is needed to get a clearer perspective of the situation.”  These activities created a housing bubble that burst. I suppose the situation became clear enough to Bear Stearns when it did.

The second half of the book deals with general economic theories. Even though this book is written in a style that is easy to read, I’d recommend it to someone who already has a basic understanding of Austrian economic theories.

Advertisements

One thought on “Book Review: Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and the Government Bailout Will Make Things Worse

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s