A critique of Thomas Woods

[Eric21ND]

How would you respond to this comment concerning the Thomas Woods speech on C-SPAN? I'm still in the shock and awe phase :confused: This came from a liberal forum by the way.

http://i2.photobucket.com/albums/y38/Eric21ND/285199-02-m7070.jpg

Tomas Woods C-SPAN Speech (http://www.c-spanarchives.org/library/includes/templates/library/flash_popup.php?pID=285199-2&clipStart=&clipStop=)


More quackery delivered to an audience ready to gulp it down. Like any good half baked theory it grabs a few facts and either ignores the rest of the facts or attempts to explain away inconvenient truths.

His first error in the video is to blame the community reinvestment act as one of the roots of the current economic fiasco. I suppose that perhaps he has a point. After all you first have to have a car before you have drunk drivers. Odd how so many manage to drive sober though, another inconvenient truth.

His great failure here however when he attempts to paint our current problems as if we ignored the Austrian business cycle theory, a theory not unlike libertarians, outside the mainstream at best. In case your not familiar with this, there’s always Wikipedia.

The theory proposes that a sustained period of low interest rates and excessive credit creation results in a volatile and unstable imbalance between saving and investment.[3] According to the theory, the business cycle unfolds in the following way. Low interest rates tend to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the supply of money, through the money creation process in a fractional reserve banking system. This in turn leads to an unsustainable boom during which the artificially stimulated borrowing seeks out diminishing investment opportunities. This boom results in widespread malinvestments, causing capital resources to be misallocated into areas that would not attract investment if the money supply remained stable. A correction or "credit crunch" – commonly called a "recession" or "bust" – occurs when credit creation cannot be sustained. Then the money supply suddenly and sharply contracts when markets finally "clear", causing resources to be reallocated back towards more efficient uses. The main proponents of the Austrian business cycle theory historically were Ludwig von Mises and Friedrich Hayek. Hayek won a Nobel Prize in economics in 1974 (shared with Gunnar Myrdal) in part for his work on this theory.[4][5]

http://en.wikipedia.org/wiki/Austrian_Business_Cycle_Theory

Ok, let’s look deeper at one "This boom results in widespread malinvestments, causing capital resources to be misallocated into areas that would not attract investment if the money supply remained stable."

Malinvestments have occurred throughout history, and not just US history. Google "Dutch Tulip Mania" sometime. However the bad boy in Mr. Woods view is the Federal Reserve. I’ll give him small credit for a try at explaining booms and busts --> before <-- the Federal Reserve was created.

According to Mr. Woods reality, the fed created all this money, except such a statement shows a fundamental misunderstanding of the reality. The Fed creates money? Perhaps in a fashion, not unlike the example of drunk diving. You, your neighbors and anyone working create money. The Feds job is to stabilize banks from "Bank Runs". It also issues most, though not all regulations concerning bank practices.

The Federal Reserve can also contract or expand money, by choosing to lend to banks or not at a interest rate it sets. However that power is limited by the banks themselves. Individual banks can decide for themselves to set reserves high enough to make themselves almost immune from borrowing from the Fed. A bank can decide to limit the amount of loans offered, again which may run counter to Fed interests.

If you want to evaluate this expert you need look for no better an example than 28 minutes into his argument where he states that without the existence of the Federal Reserve, there would be no housing bubble, while at the same time admitting that large private banks have been involved in excessive loans before, but somehow it’s the Feds fault anyway! I suppose if there wasn’t a Ford Motor Company, there wouldn’t be drunk drivers, never mind GM, Dodge or Volkswagen.

Now this is where I could go into great depth and detail into the many factors involved in the current housing/banking problems, causes, ect... but this exists in abundance, it only takes time and a Google search. Let me long story it short for you. Fraud is the heart of it. A group of people decided commit fraud, create crap bonds and dump it on other banks. This wasn’t the Feds work, just a group of folks who created a hole in the system through political connections (deregulation) (think Enron) Kickbacks for steering people into bad loans and people who had incentives to ride this pony until it dropped.

Mr. Woods may have some valid concerns about the Federal Reserve but in this case he’s bending facts to fit his theory.

[foofighter20x]

Reply that they ought to read chapter 11, "Financial Market Instability," of Mindful Economics (http://www.amazon.com/Mindful-Economics-Economy-Matters-Different/dp/1583228470). This book was written by my ultra-liberal econ professor, Joel Magnuson (YouTube - Interview - Joel Magnuson - Mindful Economics (http://www.youtube.com/watch?v=4F0kUWZ5W0k)), so they should be willing to trust HIS judgment at least... :rolleyes:

He discusses the causes of the business cycle, ascribing it to eight steps.

1) New opportunities for speculation; he calls this "displacement"
2) Speculation amplified by credit <--- This is what Woods is talking about. When cheap credit is supplied by the fed, banks are more willing to finanance higher risk investments.
3) Positive, self-reinforcing feedback loop (the boom)
4) Overtrading; he calls these "bubbles"
5) Mania/collective euphoria
6) Price reversal
7) Negative, self-reinforcing feedback loop (the bust)
8) Market hits bottom and the cycle ends (or begins again, if eslewhere)

[Athan]

His first error in the video is to blame the community reinvestment act as one of the roots of the current economic fiasco. I suppose that perhaps he has a point. After all you first have to have a car before you have drunk drivers. Odd how so many manage to drive sober though, another inconvenient truth.

It is one of the roots in that it did cause banks to change their evaluation of loan applicants who would normally not have been approved of massive loans. Yes banks are the ones responsible, however the act did incubate the atmosphere of malinvestment.


Malinvestments have occurred throughout history, and not just US history.

Yes primarily as a result of either 1. Government intervention (tariffs, war, etc) 2. Fiat monetary system/Fractional Reserve banking.


I’ll give him small credit for a try at explaining booms and busts --> before <-- the Federal Reserve was created.
1. Government Intervention at work:
The McKinnley Act which placed high tariffs on imports created a railroad boom and bust that created the panic of 1893
http://en.wikipedia.org/wiki/McKinley_Tariff


The Fed creates money? Perhaps in a fashion, not unlike the example of drunk diving. You, your neighbors and anyone working create money. The Feds job is to stabilize banks from "Bank Runs".

He needs to research the Fed more. I think this the main reason for his writing. He should also read what is on a dollar bill once in a while.


The Federal Reserve can also contract or expand money, by choosing to lend to banks or not at a interest rate it sets. However that power is limited by the banks themselves. Individual banks can decide for themselves to set reserves high enough to make themselves almost immune from borrowing from the Fed. A bank can decide to limit the amount of loans offered, again which may run counter to Fed interests.

True. But do banks set their reserves high enough, or will they go with easy money? The major ones obviously didn't do as he said they would, and we taxpayers and up to our childrens' children are paying for it.


If you want to evaluate this expert you need look for no better an example than 28 minutes into his argument where he states that without the existence of the Federal Reserve, there would be no housing bubble,while at the same time admitting that large private banks have been involved in excessive loans before, but somehow it’s the Feds fault anyway!

This is where Woods is right, but doesn't elaborate enough for the writer to understand. The Fed bailed out the Dot.com bubble investors and kept interest rates ridiculously low. The fed also did not allow bad managed banks to fail and be taken over by more competent banks.


I suppose if there wasn’t a Ford Motor Company, there wouldn’t be drunk drivers, never mind GM, Dodge or Volkswagen.

This analogy would be correct if: Ford and the others kept bailing out drunk drivers instead of letting them get punished.


Fraud is the heart of it. A group of people decided commit fraud, create crap bonds and dump it on other banks. This wasn’t the Feds work, just a group of folks who created a hole in the system through political connections (deregulation) (think Enron) Kickbacks for steering people into bad loans and people who had incentives to ride this pony until it dropped.

Yes. So let them fail. Bailing out criminals is criminal. By bailing them out those who did commit fraud are kept in their competitive positions against honest bankers.


Mr. Woods may have some valid concerns about the Federal Reserve but in this case he’s bending facts to fit his theory.

Perhaps is remarks were designed to preaching to the choir (those who took the time to understand what happened) and he simply didn't address his speech for the type of audience the writer was. A "noob"

[jmlfod87]

In all honesty, I usually jump at every opportunity to set liberals straight, especially in matters of economics. However, it is clear from this liberal's writing that he has no understanding of what Woods said, no capacity for logic, and no expressed knowledge of economics-let alone of the austrian variety. Thus its simply a waste of ink to attempt to educate this individual and I wont even bother formulating a response.

The most common argument I hear from liberals about austrian economics is that it isn't "mainstream". This is by far the stupidest argument to discredit austrian economics. Where were all the "mainstream" economists when this bubble burst? Wasn't it once "mainstream" to believe the Earth was flat and that the Sun revolved around it? Wasn't it once "mainstream" to believe Einstein's theory of relativity was incorrect? Popularity is not a measure of truth. If popularity measured truth, then every action every taken by a democratic government is always the correct one, because the majority of people voted for that government.

Next time someone tells you they think your opinions are wrong because they aren't "mainstream", tell them the Earth is flat and walk away.

[silverhawks]

Reply that they're entitled to their opinion, then buy more ammo and add another layer of iron bars to the inside of your windows for when the SHTF and these people turn into wild animals because their precious and perfect government has left them out to die.

[angelatc]

His first error in the video is to blame the community reinvestment act as one of the roots of the current economic fiasco. I suppose that perhaps he has a point. After all you first have to have a car before you have drunk drivers. Odd how so many manage to drive sober though, another inconvenient truth.

Freaking liberals discussing economics with metaphors and algoreism is supposed to make more sense than Thomas Woods?

If forced to stoop to this level....when they start putting the licensing machines in pubs, the number of drunk drivers on the road will increase. When a mere 10% of the drivers are schnockered, chaos will absolutely result. Sober drivers are likely to be damaged in the carnage.

[Cowlesy]

Reply that they ought to read chapter 11, "Financial Market Instability," of Mindful Economics (http://www.amazon.com/Mindful-Economics-Economy-Matters-Different/dp/1583228470). This book was written by my ultra-liberal econ professor, Joel Magnuson (YouTube - Interview - Joel Magnuson - Mindful Economics (http://www.youtube.com/watch?v=4F0kUWZ5W0k)), so they should be willing to trust HIS judgment at least... :rolleyes:

He discusses the causes of the business cycle, ascribing it to eight steps.

1) New opportunities for speculation; he calls this "displacement"
2) Speculation amplified by credit <--- This is what Woods is talking about. When cheap credit is supplied by the fed, banks are more willing to finanance higher risk investments.
3) Positive, self-reinforcing feedback loop (the boom)
4) Overtrading; he calls these "bubbles"
5) Mania/collective euphoria
6) Price reversal
7) Negative, self-reinforcing feedback loop (the bust)
8) Market hits bottom and the cycle ends (or begins again, if eslewhere)

Foo? Good to see you are still around my man. Are you in the states?

[silverhawks]

Reply that they ought to read chapter 11, "Financial Market Instability," of Mindful Economics (http://www.amazon.com/Mindful-Economics-Economy-Matters-Different/dp/1583228470). This book was written by my ultra-liberal econ professor, Joel Magnuson

I don't think this is a reflection on the author, but not liking the comments on Amazon about the book:


For decades now, economic history has been deliberately suppressed in colleges and universities by a group of very deluded academics who worship Ayn Rand and her ideology of selfishness. Margaret ("There is no society") Thatcher and Alan (It's not my fault) Greenspan are among her devotees. Also known as the Chicago School, they launched their first major master plan using Pinochet in Chile in 1977 to overthrow the democratically elected socialist Allende (on 9/11 of that year, by the way. It was a disaster but they called it a success. (Mission Accomplished!) Various members of these minions went on to loot national currencies from Wall Street, and indoctrinate our country into a embracing selfish greed and gains at the unjust expense of others.


This book is an excellent overview and critique of capitalism. But what is to replace it? What will a post-growth, non-profit Earth Community look like?

Magnuson is certainly correct in saying that we need new institutions that embody "mindful economics", where the ownership of major economic enterprises includes all stakeholders, not just investors bent on maximizing profits. But how do we get there? He suggests that we revitalize cooperatives and work from the bottom up, learning as we go.

Meanwhile the giant corporations are ruling the world, unchallenged except by a scattering of us progressives. A better approach would be to work toward political / economic democracy at all levels, from local to global. Yet, Magnuson, in common with most progressive economists these days, focuses mostly on relocalization.

He needs to write another book, to give us more guidance on specific national and global objectives. For example, what legislation is needed to make it more attractive to form cooperatives? So attractive, in fact, that leaders and employees will want to convert existing businesses and non-profits to cooperatives.

What kind of transnational institutions are needed to regulate businesses engaged in transnational trade or investment, and how should they be governed in this very diverse world? What specific kinds of regulations are needed? In particular, new kinds of semi-public organiztional models will be needed for large scale global enterprises, even if many of these enterprises need to be broken up or scaled down. Right now is the perfect time for new initiatives to regulate global finance in more democratic ways.

A major problem with constructing such a large scale, multi-faceted political and economic democracy is simply the time, energy, and expertise required of its participants. Most people, especially those just struggling to get by, can hardly cope now, let alone if they become stakeholders in dozens of enterprises, from local to global.

One way handle this would be to empower a broad array of knowledgeable advocacy organizations to directly represent individuals in legislative matters, letting individuals do the choosing and directing governmental financial support with each individual choice. In the US we have such organizations, but their support depends on the wealth of the participants and their influence is indirect, through campaign contributions and campaigns to mobilize people to contact legislators.

Let us hope than in the future, Magnuson will help develop a program with specific suggestions for political and economic democracy, from local to global, designed for a post-growth, post-capitalist world. The ideologies of communism and capitalism have failed, but they were grand in scope and captured people's imagination. The time is ripe for a new grand vision.

Stupid collectivists who can't tell the difference between capitalism and corporatism!

And they're actually "progressively" advocating for fascism (merging corporate powers with government powers) without even realising it, because they don't even understand the definition of that. There's a reason why Magnuson is advocating for relocalisation, and they're glossing over it because they're looking for global solutions to local problems.

[TastyWheat]

We weren't without similar cycles before the Federal Reserve, but it was nowhere near the same magnitude. The purpose of the Federal Reserve, if not to have a monopoly on the creation of credit, is to coordinate lending policies with member banks. The individual banks don't get to say what their own reserve level would be. That would just "gum up the works" and work against the centralized policies of the Federal Reserve.

Also, the "Tulip Mania" the poster referred to was likely smaller than our smallest bubble and may have simply been part of typical consumer trends (got to have the newest coolest thing).

I don't think the poster could argue though, if the bankers started the fire it was the Fed that brought the fuel.

[Epic]

Regarding Tulip Mania: http://mises.org/story/2564

Yep, it was due to credit creation.

"The end result was a large increase in the supply of coin and bullion in 1630s Amsterdam. Free coinage laws then served to create more money from this increased supply of coin and bullion, than what the market demanded. This acute increase in the supply of money served to foster an atmosphere that was ripe for speculation and malinvestment, which manifested itself in the intense trading of tulips."

[foofighter20x]

Foo? Good to see you are still around my man. Are you in the states?

Yeah. I've been back in the States for a year. Been separated from the Air Force just as long. I got back and hit the ground running on school, and have been VERY focused on that (much to the detriment of my moderator duties :o).

[foofighter20x]

I don't think this is a reflection on the author, but not liking the comments on Amazon about the book:

Stupid collectivists who can't tell the difference between capitalism and corporatism!

And they're actually "progressively" advocating for fascism (merging corporate powers with government powers) without even realising it, because they don't even understand the definition of that. There's a reason why Magnuson is advocating for relocalisation, and they're glossing over it because they're looking for global solutions to local problems.

Oh, Joel knows the difference between the two... He specifically pointed out the economic trend toward corpratism in the U.S. in one of my classes. I was ecstatic on the inside when he did.

Also, I have the book (it was the text for his class). Nothing in the first review you quoted was in the book. Seems like it might have been a 'Shock Doctrine' plant trying to hype that book. Stupid Klein-ites. :rolleyes: The other review is a really boosted slant on what's in the book. It doesn't really lean THAT far to the left. If I had to place it, I'd say left-center to center-left.

Most of the reviews are probably gushing over the last three chapters and the book's conclusions (which I no doubt have issues with), which talk about economic sustainability and the need for government intervention to bring it about.

The rest, from an Austrian's eyes, is a fair treatment of economic history and economic basics (but sadly leaves out any of Mises's genius).

And the chapter on the Fed is GREAT!