I was thrilled when our next speaker was able to do this.
I used to be a big fan of morning financial TV or financial pornography, as I used to call it.
But I'm trying to give it up.
But now I catch him on the Internet.
He's a graduate of Villanova University, co-founder of Institutional Risk Analytics.
He edits the institutional risk analysis, appears frequently, as I mentioned, in the media,
such as CNBC, Bloomberg, NPR, he's everywhere, and today he's with us, and I couldn't be happier about it.
He's talking about inflated, how money and debt builds the American dream.
Please help me welcome Christopher Whalen.
Thank you Douglas. It's a thrill for me to be here. Years ago I was exiled from one of your kindred organizations, the Committee for Monetary Research and Education, for having the temerity to bring Martin Mayer to speak to them one day about the nature of gold.
and Marty got up there and basically said well it used to be a store of value but we're not allowed to do that anymore and it used to even be a unit of account but we're not allowed to do that anymore either so I guess it's just a means of exchange that experience stuck in the back of my mind because it really propelled me to write the book I'm working on now which is our previous speaker referred is called inflated how money
and Debt Built the American Dream.
And I thought today I would just talk a little bit about
some of the research I've done in the book.
And in particular, I collect books from the Gilded Age
and from the 30s and I brought one of my favorites.
This is called The New Dealers.
It was published in 1934 by Simon and Schuster anonymously
as was the tendency in those days
because people were so intimidated
by the power of Wall Street
and the power of the politicians
The New York Times used to employ Henry Hazlett.
Spending things like tariffs, believe it or not, asking questions about political leaders
as to their policies and projections about the future growth of the economy and the financial
system.
Now, the title of the chapter of this passage is Mad Money, which we were just talking about.
And again, it shows you that nothing has changed.
The attitude of the bankers towards the monetary policies of the New Deal has been similar
Similar to the attitude of a girl out on a pick-up party towards the mad money, which
is her insurance against being forced literally to walk home.
The attitude of the new dealers towards the bankers is that of the girl's escort towards
the girl.
She won't need the mad money, quote unquote, because she's going to stick with the party
and like it.
So the issue of policy boils down not to who is going to walk home and why, but who is
Who's going to pay whom and why?
On the one hand, you have the good old traditional way of doing business, which required the
entire population of the country to, quote unquote, walk home at 20-year intervals in
the name of God and the gold standard.
On the other hand, you have a new tech geek of the financial chic who claims that you
can use buttons instead of money.
The old school asks, what is the gold standard among friends?
The times are on the side of the new school.
For the financing of a revolution, even an unconscious one, takes a lot of money and
a lot of buttons.
Unfortunately, today we have a monetary system that doesn't have any money.
We basically use buttons.
You probably saw the wonderful parody that was published I think in the Daily Onion talking
about Ben Bernanke appearing before Congress and after making a few comments basically
tossing aside his prepared remarks and saying, well, this is just a piece of paper. It has
no value. And the members of Congress scurrying from the room in horror as the truth has been
You know, the thing of it is that we all know what the reality is. We all know that where we are today is bad. It's bad for money. It's bad for anyone who does not play in the financial markets.
I work with investors. I have hedge funds and people who buy banks as clients. And as our first speaker alluded, they all want to have a happy ending.
They don't want bad news. When we started describing subprime debt and banks and all the issues that are embedded therein, back in 2006, 2005, people thought we were being horribly pessimistic.
And the reason for this is that if you go back even to the turn of the last century, in the United States there has been, I think, a conflict between what people thought they were entitled to,
and how quickly they could get it and whether or not they could get it for doing a lot of work or not much work and particularly if they could dig it up out of the ground and sell it to somebody, kind of that extraction mentality.
You know, I heard before they're beating up on Nixon for departing from the gold standard.
I remember my father, Richard Whalen, talking to me about a conversation he had with Arthur Burns,
and Burns saying to him that, oh, it's a terrible thing, it's an awful thing, but it had to happen.
This goes back to the unconscious revolution of FDR. All these things just had to happen.
Now, you know, you can make fun of my friends at Fast Money. I make fun of them. They have
me on TV all the time because I'm not like everyone else. I deliberately don't have ratings
on stock. I talk about companies or whether they make money or not. In fact, the irony
of the past few weeks is that the financials, at least the reported financials, of the banks
are getting better. The fourth quarter of 2009 is, in fact, going to be what we call
is the peak in loan loss reserve bill for the banking industry, and yet, as you can see, with problems in Greece and elsewhere, the markets are selling off.
And the problem here, basically, is that there are no retail investors in this market anymore.
You have large financial institutions, and then you have hedge funds who use leverage to enhance their returns.
I would tell you that the hedge fund is in fact the rational response to a fiat money system.
I think the people in the hedge fund industry are some of the only people in this marketplace of agents who actually do any work.
Look at poor John Paulson, being vilified for actually doing the work and figuring out that the securities that people were buying were essentially crap, and he positioned himself accordingly.
Did he do anything wrong? I don't know. I have a fee. I personally think he was defending the interests of his clients and himself, obviously.
Obviously, he's made a good business over the years by doing the hard work and being
smarter than everyone else. But as our speaker just referred, if you have to spend all of
your time as a speculator, you don't have any time for anything else. In a system where
everything is short-term and everything is ephemeral, where there is no hard reference
point for value, no haven for people who don't feel like following the financial markets
It becomes a handicap for the real economy. Indeed, I have friends on Wall Street, people I really respect a lot, who have picked up a new mantra, which I want all of you to watch for, that the financial markets are going to lead the economic recovery in the United States.
We've actually turned the financial markets not into a service provider for the real economy
and a facilitator for real economic activity, but now they have become an end in themselves.
Indeed, I would tell you that the emergence of things like over-the-counter derivatives, cap and trade, are all merely new games.
If you think of the fiat system as a game, then what are the rest of these new arrangements that we're presented with?
They're merely ways for people to generate returns that have nothing to do with the underlying economy.
They're merely gaming.
Now, you know, it's interesting when people talk about market efficiency,
and this is one of the key things I've gotten into in my book research,
they don't understand that there's two absolutely necessary conditions if you're going to accept that premise.
One is you're heading into a centrally planned world
Because the only way that you can have quote-unquote efficiency that doesn't destroy us periodically,
as we've seen recently, is to manage and plan. That's the only way you can have such a society.
The other interesting thing that I think people have missed, and I spent a lot of time on recently in my writing,
is the nature of the Fed. If you're going to have a central bank, then you have to have an authoritarian,
Centrally Planned Society. A central bank is absolutely antithetical to free market capitalism.
And while it may be a gradual process of diminishing individual liberties, diminishing the rights
of property, diminishing the rights of private businesses, even banks, look at the end result
over time. You know, as was mentioned before, we as humans tend to be in passive mode most
Most of the time, unless a large animal is chasing us with the intent of turning us into
dinner. Then we work with the other side of the brain. And unfortunately, most of us are
not in active mode most of the time. We don't react to things in that way. And we also hope
and expect that the people who run our government, who run our society, are going to do a good
job and are going to have our best interests at heart. But what I think we see instead
That is, if you go back and look at the period really from the end of World War I on forward,
it's that our government and our dutiful friends at the central bank have had to use one expedient
after another to create the impression or the illusion of growth.
I'm not saying that all of the work and all of the industry and all of the building that
occurred between then and today was without value, but when you look at the diminution
of the Purchasing Power of the Dollar, when you look at the other measures of value over
this period, it's hard to escape the conclusion that most of the benefits that we have realized
during this period have come from technology and innovation. All the while our money is
worth less and less. And what I always like to remind people of is having worked in the
technology world a little bit, we never get to put those innovations in our pocket. We're
We're always using technology to catch up and to reclaim what we've lost through inflation,
through the volatility of financial markets.
Because remember, the biggest way you can lose money through inflation is by losing
money in a nominal financial crisis, such as we've seen in the last couple of years.
So I guess, you know, where I'm heading with the book and the thought I wanted to leave
I think that we're reaching a decision point and I was very pleased to see Lew Rockwell
talking about Henry Hazlitt's work and the International Monetary Fund today because
I think we are getting to the point where the notion of globalization, the notion of
global markets, I think is going to start to be challenged more and more and it's going
to be part of a political process in this country that we're going to see start in
in November, but it's not gonna end in November.
A lot of my colleagues in the financial markets thought,
well, we'll pay back the bailout money
and then everything will be okay.
We can go back to what we were doing.
And what they didn't realize is that there is so much pain
and so much angst out there in the hinterland
and in real America, as I like to call it,
that this conversation is gonna be going on for years.
We're gonna turn liberals into conservatives.
We're gonna turn conservatives into protectionists.
We're gonna do a lot of things that most of us
would have thought were impossible.
Most of us would have said, oh well, we can't go back there.
Well, yes we can.
I mean, in my world, I work with banks.
We have the illusion of global regulation.
We have the illusion of global accounting
and global markets.
We thought we had a global market
and residential mortgage-backed securities two years ago,
but we don't.
And I would tell you honestly that I think where we're going to head is where we have always been.
We had this perception of an internationally linked and efficient market.
But what you find instead is that we really still have national treatment in most marketplaces.
You see this in Europe.
In Europe we have 25 countries who still can't agree on the definition of default.
They still can't agree on a bank regulatory scheme for the EU.
in the EU. They can't even give us the same data that I get from the FDIC on banks. It's all private. There's no right to know in the EU. There's no individual rights at all. It's really quite a nightmare. I lived in the UK during two periods of my life, and I'm very happy to be back here. Because whatever the problems we may have in this country, we still have a degree of freedom and a degree of random chance in our lives that gives us the ability
to do things that we might not have expected that we would do. In Europe, you don't have
that choice. All the decisions have been made in most industries. You don't see de novo
banks. You barely see entrepreneurial activity at all because Europeans have pretty much
decided who's running things. I guess to me, what this implies is that not only we're going
to have to have new political leadership in this country, but we're going to have to start
thinking very hard about the role of the dollar. Do we want the dollar to be the international
currency going forward? I think that's going to be a very key part of the discussion in
the next 10, 20 years in this country. Because if you think about it, go back to World War
I, look at Europe, look at how bad off they were financially after World War I. Then look
at them again going into World War II. Britain was broke. France was broke. We have bailed
When the Europeans decide to get into quantitative easing, which they will, the U.S. will be
standing right there printing money and passing it on to those foreign central banks through
swap lines.
Ben Bernanke has recently had to explain swap lines to members of the Senate.
I understand that was a very amusing discussion.
But you know, the fact of the matter is, when the great evil one, John Maynard Keynes, was out predicting his gospel, or excuse me, preaching his gospel of deficit spending, he was also repudiating free trade.
There's a fascinating article you can find online from the Yale Review from 1933,
where Keynes essentially repudiated the idea of globalization in financial markets, even in trade.
He wanted markets to be entirely national, especially financial markets, and you can see why.
Nothing that has been going on in Europe in the past two weeks really has much to do with most banks.
In fact, while I don't tend to be much of a stock tout, I have been pounding the table
with some of my clients in the past couple weeks
because all of the higher quality banks
that they wanted to buy two years ago but missed
are now trading off.
US Bank, my friends at Cullen Frost down in Texas,
these are all banks that don't have trading bucks.
They don't play the fast money game
and yet they're all going down.
That's my investment recommendation for today, by the way.
And so when you think about where we are today
with our monetary system, with our trade system,
with our financial system.
I think the thing that really has propelled me
in the work on my book project
and I think also to come here today
and talk about it is that I think we are reaching
an inflection point.
Years ago, I wrote a book with my father
called Trade Warriors.
And this was back in the
70s and the 80s when
we were yelling at the Japanese
and we were all excited about trade and foreign
investment and what not. You notice that all went away.
But I suspected
It's going to come back and the reason is going to be twofold. One is that we obviously
can't service the obligations that we've accumulated here in the U.S. while we have been happily
pursuing the policy of free trade and helping our allies to grow their own economies. And
I think that what we're going to probably end up having to do is look at some way of
taxing trade and taxing global economic activity to help us avoid default. Because if you really
If you look at the states in the U.S., like New York, for example, I don't think there is any way short of hyperinflation that you can meet all of the objectives and all of the obligations that we have.
I sit on the advisory committee for my little village, Croton on Hudson in New York, and our Democratic town council has cut taxes two years in a row.
You think they're afraid?
This kind of goes back to President McKinley, really, because in the pre-FDR period, we would typically, when we had a financial crisis, everyone would stop spending money.
They would stop paying each other, too. That was our response to crises prior to the Depression.
And you see that today. Nothing has really changed. People are retrenching. They know in their heart of hearts that their house they're living in is probably worth less than it was a couple of years ago.
and they can see too that tax revenues are down.
But what hasn't gone down?
The mandates, the pension contributions,
everything else here in the state of New York,
which are protected by the constitution of the state.
Can you imagine having a constitutional convention in Albany
to discuss these issues? It's not going to happen.
So what I see going forward is that we are going to have a more protectionist,
more nationalist evolution in this country, going away from the ideas of free trade and globalization.
And while that may seem heretical, especially for someone like myself who has always believed in liberty and freedom
as far as all aspects of human endeavor are concerned, at some point we have to pay our bills.
We can no longer allow the Chinese to get rich at our expense.
and I think it was funny I did an interview a couple weeks ago with Fritz Hollings who I worked with as an intern a long time ago and Fritz is retired now living in Charleston and he was a liberal Democrat from a poor southern state who had a balanced budget amendment he understood what it meant to balance the books every year and that when you wanted to help people especially down along the water region where there was no development when he was governor you had to raise taxes you notice we never talk about taxes in this
The Fed gave our entire government a pass last year. They gave the banks a pass on any kind of losses on securities. The Congress didn't have to raise money. And we did a number of other things to basically rejigger the system so we didn't have to have a come to Jesus event. Marking down balance sheets is actually recognizing the inflation and the lack of substance on the balance sheets of many financial institutions.
Well, where do we go from here?
You know, people talk about the economy recovering and I keep saying, well, we have zero interest rates.
If we ever get to going back to von Mises' comments about the natural rate of interest, what is the natural rate of interest today?
It's zero.
How can we look ourselves in the face seriously and say that the economy is recovering when we're giving money away for nothing?
It's like a joke I had last week.
The press is, what do you say about them there? They're like children, and I guess when you're 52 years old, you can say things like that, but they go on and on about trading profits, like the swashbuckling, daring do at Goldman Sachs who are out there taking risk.
This is carry trade. The Fed gives you money for nothing, and you buy treasuries, agencies and corporates, and you make 3% for doing absolutely nothing.
And in that process, of course, we are transferring value from everyone in this room, all of the savers, all the people who have real assets that they want to protect, to the banks.
In fact, if you look at it in the statistics that I use in my work, the amount of reduction in interest expense that the Fed has engineered is almost exactly equal to the credit loss that they had to pay.
in fact we've been subsidizing it almost one-to-one and yet remember that the
banks are hiding probably half of their defaults right now they're not
foreclosing if they foreclose they will refuse to take title to the property so
whoever the locality is that owns that or collects taxes on that property has to
go sue the bank to get them to admit ownership I don't see this as a
recovering economy in fact I got recruited by Bob Schiller to participate
and his forward-looking, they have a whole group of people who are projecting home prices
to parallel with the K. Schiller index, which is an interesting tool. And I came in with
minus 10 for this year for home prices. And the reason I did that was very simple. We
have no financing, especially for anything that you can't sell to Fannie and Freddie.
And we really have not cleaned out the inventory of foreclosed and not quite foreclosed homes.
There's an awful lot of stuff out there for sale and not for sale that will come back into the market as soon as prices start to stabilize.
So, you know, where all of this leads me is to remind all of us that, you know, as humans, going back to the earlier comments, we tend to distill.
I mean, that's what my company does. We distill financials into ratings.
Well, humans do the same thing. We distill history, we distill events, we simplify our understanding of events and we turn it into a narrative.
And that narrative gets simplified and carried forward until most of the narratives converge and they are the same.
We have done that with the history of our country over the last hundred years.
We have convinced ourselves that the Depression, World War II, all of this were heroic national efforts
where we picked ourselves up and marched forward into glory.
The television, the cinema, everything has enforced and crystallized this imagery.
But for me, and what I want to leave you with today,
and if we have any time I could maybe take a question or two,
is that I think we're going to have to reevaluate the last hundred years in this country.
We're going to have to think about what we did and why,
what our goals are as a society in terms of growth, employment,
and Employment, all of the things that our people want, because at the end of the day, it's fine to sit in this room and tell one another that we're right, but the challenge I want to give all of you today, especially the younger people, is we have to take the truths and the values and the thought processes that people like von Mises left for us as a legacy, and we have to turn that into a message that's politically relevant, because sitting in a room like this is great, but if we keep losing at the polls every two
There's got to be a way where we can start to make our fellow citizens understand just
how much and how hurtful the current arrangement is for our people, how it prevents them from
accumulating and passing capital along from one generation to the next.
And if we have that conversation, I think what we're going to end up with is a more
I remember, as a closing aside, during the bubble, my barber, who's a couple blocks away from here, had a TV and he had CNBC on every day.
That really goes back to the earlier comments we had. Well, the TV's off now and he's worried about cutting hair.
So with that, let me just leave my comments and I'll be happy to take any questions you have because I won't be able to participate this afternoon.
Good afternoon. Thank you.
Applause
Do you have a suggestion for how much money you said could happen, right?
For the 12 years you've been bailing out of the North Bank.
We, I guess, certainly were out by 12.
The estimated debt is $1,500,000.
We're so close to $500,000,000 and $530,000.
Where do you think you're falling?
That magnitude would not surprise me at all.
You know, as I said before, the problem of Europe is not political organization.
I think it's twofold.
One is obviously growth and the social dimensions I touched on briefly.
But the other thing, you know, in a strange way is that they are so, especially the Germans,
they are so chastened by the experience in the 30s that on the one hand they pursue monetary
Orthodoxy, but then they go off and party like drunken sailors on the balance sheet
of the state-owned banks in Europe. That's where the problem is. They bought all our
crap. I mean, you had the City of London, the mortgage-backed securities industry in
the US come together in this glorious communion and create all of these ersatz over-the-counter
securities that were mostly sold in Europe. I mean, the Germans didn't have a housing
Book. They were arbitraging the EC limits on debt issuance. The EC gave them a couple
more years, so they went off and they issued a lot of debt. So the number you mentioned,
trillions of dollars, wouldn't surprise me at all. And I have a feeling that the US government
is going to have to explicitly start talking about maybe almost another Marshall Plan type
arrangement for Europe, because that's what we're doing here. We're simply repeating
The Past Mistakes, and you can drill down on this with Lew after lunch. I think it's a very important subject.
Well, you know, central banks have this bad habit of doing things for one another for free. They call it reciprocity. I would charge them market rates.
Rights. It reminds me of when Keynes came to the U.S. in 45, he was quite ill and he
led the British delegation. And they wanted two things. They wanted to completely wipe
out the Lend-Lease debt and they wanted a new loan. Right? Number four, I think. So
the discussion was interest-free loan, which was basically a grant. And the politicians
that day said, no, we have to charge you something. We can't get that through the Congress with
with zero interest rate. I think our principle should always be market pricing on everything.
You don't have this today because the Fed has gone so overboard through quantitative easing
and through their swap lines for central banks which barely show up in the numbers.
It's hard to know where we are. They certainly don't know.
The people at the Fed, they occupy a godhead. They think that they have to be in charge,
that they are the guiding light of the U.S. economy, and this goes back to the 30s.
Go back and reread Eugene Mayer and the period before Merriner-Eckles came onto the board.
These were real central planning advocates, and they had almost a Silverite passion for it.
They thought it was just, and this would result in more equitable income distribution in the United States.
That's Meredith Eccles, this kind of weird Mormon perspective of a rich man who felt guilty.
And that's the mindset they have today. I mean, if you think about it in our system, someone has to be in charge, right?
And until recently, it's only been the Fed because we have a new government every four or eight years, right?
They are our continuity. The Fed is like the Queen of England.
I'm getting a little far afield here.
Well, I think they'll do it, I think they'll do it through taxes. They won't internalize
pension assets back into the Treasury. Although if you take a good look at Pension Benefit
Guarantee Corp.
Especially after the glorious tenure of my former colleague Charlie Mallard, Charlie
took Pension Benefit Guarantee Corp. to a more heavy equity weighting right before the
crisis.
PBGC is the only entity in Washington that has its own balance sheet.
They actually keep their assets somewhere else.
Everybody else works off the Treasury General Fund.
So it's a big problem.
I don't know.
I haven't looked at pensions enough to have a real opinion on it.
But I'll tell you this, I think you're going to see Obama float a vat later this year.
They know it won't pass, but they're going to put it out there.
And the lure is going to be cutting income taxes for everybody below a quarter of a million dollars a year.
So I think tax policy is how they'll attack it, and inflation.
Q. If you were right about, you might have had to turn on housing, but you would not have the person who is not on the bank, had their balance sheet, and they wouldn't make profit, and what would you do with the U.S. bank, otherwise would you drag down the net profit?
What is that calling with your comment on the U.S. bank?
In 05-06, they were as aggressive as everyone else.
But the big difference with USB is that they don't have a trading book.
They really are not in the securities business.
They have a big treasury where they run the bank's liquidity.
And they do have credit losses, but that's all they have to worry about.
You look at Wells Fargo, on the other hand, which also doesn't have a trading book,
but has a huge securitization book.
And keep in mind, when Tim Geithner gets up there and tells you that the banking crisis is over
The Federal Reserve, fiat money, fractional reserve banking, Human Action,
was defective. They'll make Wells Fargo buy it back at par. In fact, I think what you're
going to see, despite all this regulation in Washington, is another dirty deal between
the Congress and the Obama administration and the banks, where Fannie, Freddie, FHA are
going to eat the loss and they're not going to push it back at the banks. Trillion dollars.
You know, what's a few dollars among friends, right?
are non-AEGYS work, as they say, but they told us, well, we have all this data, we can use it in that plan.
We agreed, most, but we can't agree to use it for a certain purpose.
We wrote to the Treasury and said, hey, we can make the AEGYS, long-term data available for all that data that is in the Hinchpin Bank and Analyze Fund.
Well here, let me reclaim the floor.
I can fill you in the blanks.
There is an awful lot of talk of disclosure. The SEC and the FDIC both have rules pending
on securitization and the EU in fact is moving forward with greater transparency, so that's
going to help us. But you know, if the loan is bad, it's bad. Giving me more information
about the loan is not going to help me. I have friends who have been pushing this office
of financial research that's in the legislation and we're going to have more data. The great
irony of our time is that we have all of these technologies, we have all these means of collecting
If you can connect the ADA deal to the loans that have been made, would you be able to be a gauge deal to the loans that have been made?
No, and I'll tell you honestly you have legal problems that are vast. If I just give out
the balance on your loan and the zip code, I can figure out whose loan that is. And that's
a violation of federal law. That's right. But the point is the hedge funds will do the
work and pretty soon they'll figure out that's your mortgage. And next thing you know you're
Well, maybe they'll call you and try to buy you out.
Anyway, thank you very much for your questions and your time.