First, Fannie Mae and Freddie Mac were seized—Communist style—by the federal government. Then Lehman Brothers—which was worth $45 billion as recently as November—announced plans to file for bankruptcy. And now AIG, formerly one of the largest companies in the world, has been taken over by the Federal Reserve.
In 2000, American International Group, an insurance giant, was worth $250 billion. As late as August of 2008, the market set the battered company’s value at $80.4 billion. But following heavy losses on “Black Monday” (September 15, 2008) and the following day, AIG’s market cap now stands at just $10 billion—down over 94% for the year.
What Austrian Economists Knew All Along
These losses may be unprecedented, but they’re not unpredicted. Theorists from the Austrian school of economics have been prognosticating the implosion of the fiat-money-fueled financial system for decades. And according to Cato Adjunct Scholar Dr. Robert Higgs, we haven’t seen anything yet.
Higgs, who’s also a Senior Fellow at the Independent Institute and an Adjunct Scholar at the Ludwig von Mises Institute, predicts that many more financial dominoes will fall, with the end game being the collapse of Social Security and Medicare. “The question is not whether they will fail, but when,” Higgs says, “and then how the government that can no longer sustain them in their previous Ponzi-scheme form will alter them to salvage what little can be salvaged with minimal damage to the government itself.”
Higgs compares what he sees as the impending collapse of the U.S. financial system to what happened to the Soviet Union. And he points out that Keynesian economists—such as textbook king Paul Samuelson—didn’t see the Russian collapse coming, just like they didn’t see the collapse of Fannie Mae and Freddie Mac. Austrian theorists, however, did.
“Who Killed the Economy? …Greenspan’s the Popular Choice”
And their theories are starting to catch on. Key to the Austrian view is the notion that the birth of the Federal Reserve and subsequent inflation of the U.S. money supply created the boom of the Roaring Twenties and the subsequent bust of the Great Depression. Adherents to the teachings of leading Austrians such as Ludwig von Mises, Murray Rothbard and Nobel Laureate Friedrich von Hayek have long held that Alan Greenspan’s inflationist policies would produce another major depression, and now that it’s come to pass, people are for once correctly fingering the culprit.
For example, a recent front-page story on Yahoo! Finance was titled, “Who Killed the Economy? So Far, Greenspan’s the Popular Choice.” The reasons stated in support of this view are Greenspan’s push for “financial deregulation,” his “unwavering support” for the Bush tax cuts and his role in “keeping interest rates too low for too long.”
The Three Indictments Against Greenspan’s Fed
The first—the idea that “deregulation” is responsible for the meltdown—is completely at odds with the Austrian view and conveniently in line with the views of the political establishment. Yes, the same leaders who have rejected Austrian theories in favor of Keynesianism and Monetarism, and who lavished praise on Greenspan as he split his tenure almost equally over Republican (a little Reagan, Bush I and a little Bush II) and Democratic (eight years of Clinton) presidential administrations, are now calling for more regulations. Why should the people who support this view be given any consideration when they’ve been 100% wrong up to this point?
There is a hint of truth in Greenspan’s second supposed crime: his support for the Bush tax cuts. While the Austrian view rejects taxation entirely, Bush’s “tax cuts” were anything but—they were redistributions. After all, the government’s budget deficit increased as the tax cuts were implemented, and government spending went through the roof. Obviously, the federal government was borrowing and printing money to pay its bills—thus expanding the money supply—and these tricks are only possible under a fiat money regime.
Finally, the third argument strikes the heart of the truth. Alan Greenspan kept interest rates “too low for too long.” But what is “too low”? Who is to decide? In the Austrian view, it’s the free market—not central economic planners at the Federal Reserve—that should set interest rates.
There is No Silver (or Gold) Bullet
The Austrian school demonstrates that central economic planning cannot work. The Austrians stood alone in their prediction that the Soviet Union would collapse under its own weight, and for now, they’re largely standing alone in making a similar prediction for the U.S. financial system. More regulation—becoming more Soviet-like—would only hasten the system’s demise. Raising taxes, while arguably preferable to inflationary deficit spending, would definitely worsen the current recession/depression. Obviously, interest rates should have been higher during the Greenspan years, but what can be done about that now?
The harsh reality: nothing. A recession or depression will be necessary to set things right. Government cannot magically fix problems—bad investments need to be liquidated, and intervention only makes the inevitable worse when it finally does come to pass. The question we must ask ourselves is how do we prevent this from happening again?
The obvious answer is that we need to stop the Federal Reserve’s artificial money creation. The only way for interest rates to be neither “too low” nor “too high” is if they are set on the basis of savings and demand. We must stop ignoring the enormous entity—half elephant, half donkey, and all evil—in the room. That hybrid monstrosity, of course, is the Federal Reserve System itself, which was created by Congress and can be destroyed by Congress.