WEBVTT NOTE Inflated: How Money and Debt Built the American Dream 1 00:00:00.000 --> 00:00:06.000 I was thrilled when our next speaker was able to do this. 2 00:00:06.000 --> 00:00:14.000 I used to be a big fan of morning financial TV or financial pornography, as I used to call it. 3 00:00:14.000 --> 00:00:17.000 But I'm trying to give it up. 4 00:00:17.000 --> 00:00:21.000 But now I catch him on the Internet. 5 00:00:21.000 --> 00:00:29.000 He's a graduate of Villanova University, co-founder of Institutional Risk Analytics. 6 00:00:29.000 --> 00:00:38.000 He edits the institutional risk analysis, appears frequently, as I mentioned, in the media, 7 00:00:38.000 --> 00:00:46.500 such as CNBC, Bloomberg, NPR, he's everywhere, and today he's with us, and I couldn't be happier about it. 8 00:00:46.500 --> 00:00:52.000 He's talking about inflated, how money and debt builds the American dream. 9 00:00:52.000 --> 00:00:55.000 Please help me welcome Christopher Whalen. 10 00:00:55.000 --> 00:01:24.000 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. 11 00:01:24.000 --> 00:01:54.000 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 12 00:01:54.000 --> 00:01:56.800 and Debt Built the American Dream. 13 00:01:56.800 --> 00:01:59.760 And I thought today I would just talk a little bit about 14 00:01:59.760 --> 00:02:01.560 some of the research I've done in the book. 15 00:02:01.560 --> 00:02:05.720 And in particular, I collect books from the Gilded Age 16 00:02:05.720 --> 00:02:08.520 and from the 30s and I brought one of my favorites. 17 00:02:08.520 --> 00:02:10.560 This is called The New Dealers. 18 00:02:10.560 --> 00:02:15.200 It was published in 1934 by Simon and Schuster anonymously 19 00:02:15.200 --> 00:02:17.680 as was the tendency in those days 20 00:02:17.680 --> 00:02:19.760 because people were so intimidated 21 00:02:19.760 --> 00:02:21.440 by the power of Wall Street 22 00:02:21.440 --> 00:02:22.920 and the power of the politicians 23 00:02:22.920 --> 00:02:52.920 The New York Times used to employ Henry Hazlett. 24 00:02:52.920 --> 00:02:59.420 Spending things like tariffs, believe it or not, asking questions about political leaders 25 00:02:59.420 --> 00:03:05.900 as to their policies and projections about the future growth of the economy and the financial 26 00:03:05.900 --> 00:03:06.900 system. 27 00:03:06.900 --> 00:03:14.420 Now, the title of the chapter of this passage is Mad Money, which we were just talking about. 28 00:03:14.420 --> 00:03:17.880 And again, it shows you that nothing has changed. 29 00:03:17.880 --> 00:03:22.220 The attitude of the bankers towards the monetary policies of the New Deal has been similar 30 00:03:22.220 --> 00:03:27.500 Similar to the attitude of a girl out on a pick-up party towards the mad money, which 31 00:03:27.500 --> 00:03:32.460 is her insurance against being forced literally to walk home. 32 00:03:32.460 --> 00:03:37.420 The attitude of the new dealers towards the bankers is that of the girl's escort towards 33 00:03:37.420 --> 00:03:38.500 the girl. 34 00:03:38.500 --> 00:03:43.120 She won't need the mad money, quote unquote, because she's going to stick with the party 35 00:03:43.120 --> 00:03:45.040 and like it. 36 00:03:45.040 --> 00:03:50.320 So the issue of policy boils down not to who is going to walk home and why, but who is 37 00:03:50.320 --> 00:03:53.680 Who's going to pay whom and why? 38 00:03:53.680 --> 00:03:58.560 On the one hand, you have the good old traditional way of doing business, which required the 39 00:03:58.560 --> 00:04:04.680 entire population of the country to, quote unquote, walk home at 20-year intervals in 40 00:04:04.680 --> 00:04:07.440 the name of God and the gold standard. 41 00:04:07.440 --> 00:04:13.280 On the other hand, you have a new tech geek of the financial chic who claims that you 42 00:04:13.280 --> 00:04:16.640 can use buttons instead of money. 43 00:04:16.640 --> 00:04:20.960 The old school asks, what is the gold standard among friends? 44 00:04:20.960 --> 00:04:23.480 The times are on the side of the new school. 45 00:04:23.480 --> 00:04:30.440 For the financing of a revolution, even an unconscious one, takes a lot of money and 46 00:04:30.440 --> 00:04:32.640 a lot of buttons. 47 00:04:32.640 --> 00:04:38.840 Unfortunately, today we have a monetary system that doesn't have any money. 48 00:04:38.840 --> 00:04:40.940 We basically use buttons. 49 00:04:40.940 --> 00:04:47.180 You probably saw the wonderful parody that was published I think in the Daily Onion talking 50 00:04:47.180 --> 00:04:53.100 about Ben Bernanke appearing before Congress and after making a few comments basically 51 00:04:53.100 --> 00:04:58.780 tossing aside his prepared remarks and saying, well, this is just a piece of paper. It has 52 00:04:58.780 --> 00:05:04.740 no value. And the members of Congress scurrying from the room in horror as the truth has been 53 00:05:04.740 --> 00:05:22.740 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. 54 00:05:22.740 --> 00:05:33.740 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. 55 00:05:33.740 --> 00:05:47.740 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. 56 00:05:47.740 --> 00:06:01.740 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, 57 00:06:01.740 --> 00:06:18.740 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. 58 00:06:18.740 --> 00:06:24.340 You know, I heard before they're beating up on Nixon for departing from the gold standard. 59 00:06:24.340 --> 00:06:32.540 I remember my father, Richard Whalen, talking to me about a conversation he had with Arthur Burns, 60 00:06:32.540 --> 00:06:38.040 and Burns saying to him that, oh, it's a terrible thing, it's an awful thing, but it had to happen. 61 00:06:38.040 --> 00:06:44.740 This goes back to the unconscious revolution of FDR. All these things just had to happen. 62 00:06:44.740 --> 00:06:50.740 Now, you know, you can make fun of my friends at Fast Money. I make fun of them. They have 63 00:06:50.740 --> 00:06:56.380 me on TV all the time because I'm not like everyone else. I deliberately don't have ratings 64 00:06:56.380 --> 00:07:02.040 on stock. I talk about companies or whether they make money or not. In fact, the irony 65 00:07:02.040 --> 00:07:06.600 of the past few weeks is that the financials, at least the reported financials, of the banks 66 00:07:06.600 --> 00:07:11.620 are getting better. The fourth quarter of 2009 is, in fact, going to be what we call 67 00:07:11.620 --> 00:07:21.620 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. 68 00:07:21.620 --> 00:07:26.620 And the problem here, basically, is that there are no retail investors in this market anymore. 69 00:07:26.620 --> 00:07:33.620 You have large financial institutions, and then you have hedge funds who use leverage to enhance their returns. 70 00:07:33.620 --> 00:07:39.620 I would tell you that the hedge fund is in fact the rational response to a fiat money system. 71 00:07:39.620 --> 00:07:47.620 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. 72 00:07:47.620 --> 00:07:59.620 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. 73 00:07:59.620 --> 00:08:07.620 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. 74 00:08:07.620 --> 00:08:15.260 Obviously, he's made a good business over the years by doing the hard work and being 75 00:08:15.260 --> 00:08:20.100 smarter than everyone else. But as our speaker just referred, if you have to spend all of 76 00:08:20.100 --> 00:08:26.300 your time as a speculator, you don't have any time for anything else. In a system where 77 00:08:26.300 --> 00:08:32.020 everything is short-term and everything is ephemeral, where there is no hard reference 78 00:08:32.020 --> 00:08:36.720 point for value, no haven for people who don't feel like following the financial markets 79 00:08:36.720 --> 00:08:56.720 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. 80 00:08:56.720 --> 00:09:02.720 We've actually turned the financial markets not into a service provider for the real economy 81 00:09:02.720 --> 00:09:08.720 and a facilitator for real economic activity, but now they have become an end in themselves. 82 00:09:08.720 --> 00:09:17.720 Indeed, I would tell you that the emergence of things like over-the-counter derivatives, cap and trade, are all merely new games. 83 00:09:17.720 --> 00:09:25.720 If you think of the fiat system as a game, then what are the rest of these new arrangements that we're presented with? 84 00:09:25.720 --> 00:09:32.720 They're merely ways for people to generate returns that have nothing to do with the underlying economy. 85 00:09:32.720 --> 00:09:35.280 They're merely gaming. 86 00:09:35.280 --> 00:09:40.760 Now, you know, it's interesting when people talk about market efficiency, 87 00:09:40.760 --> 00:09:45.480 and this is one of the key things I've gotten into in my book research, 88 00:09:45.480 --> 00:09:51.600 they don't understand that there's two absolutely necessary conditions if you're going to accept that premise. 89 00:09:51.600 --> 00:09:55.240 One is you're heading into a centrally planned world 90 00:09:55.240 --> 00:10:00.440 Because the only way that you can have quote-unquote efficiency that doesn't destroy us periodically, 91 00:10:00.440 --> 00:10:07.740 as we've seen recently, is to manage and plan. That's the only way you can have such a society. 92 00:10:07.740 --> 00:10:14.240 The other interesting thing that I think people have missed, and I spent a lot of time on recently in my writing, 93 00:10:14.240 --> 00:10:20.840 is the nature of the Fed. If you're going to have a central bank, then you have to have an authoritarian, 94 00:10:20.840 --> 00:10:28.440 Centrally Planned Society. A central bank is absolutely antithetical to free market capitalism. 95 00:10:28.440 --> 00:10:33.520 And while it may be a gradual process of diminishing individual liberties, diminishing the rights 96 00:10:33.520 --> 00:10:40.640 of property, diminishing the rights of private businesses, even banks, look at the end result 97 00:10:40.640 --> 00:10:47.960 over time. You know, as was mentioned before, we as humans tend to be in passive mode most 98 00:10:47.960 --> 00:10:52.760 Most of the time, unless a large animal is chasing us with the intent of turning us into 99 00:10:52.760 --> 00:10:57.900 dinner. Then we work with the other side of the brain. And unfortunately, most of us are 100 00:10:57.900 --> 00:11:04.360 not in active mode most of the time. We don't react to things in that way. And we also hope 101 00:11:04.360 --> 00:11:08.300 and expect that the people who run our government, who run our society, are going to do a good 102 00:11:08.300 --> 00:11:13.780 job and are going to have our best interests at heart. But what I think we see instead 103 00:11:13.780 --> 00:11:20.300 That is, if you go back and look at the period really from the end of World War I on forward, 104 00:11:20.300 --> 00:11:26.460 it's that our government and our dutiful friends at the central bank have had to use one expedient 105 00:11:26.460 --> 00:11:31.260 after another to create the impression or the illusion of growth. 106 00:11:31.260 --> 00:11:35.300 I'm not saying that all of the work and all of the industry and all of the building that 107 00:11:35.300 --> 00:11:40.940 occurred between then and today was without value, but when you look at the diminution 108 00:11:40.940 --> 00:11:46.420 of the Purchasing Power of the Dollar, when you look at the other measures of value over 109 00:11:46.420 --> 00:11:52.780 this period, it's hard to escape the conclusion that most of the benefits that we have realized 110 00:11:52.780 --> 00:11:58.060 during this period have come from technology and innovation. All the while our money is 111 00:11:58.060 --> 00:12:02.540 worth less and less. And what I always like to remind people of is having worked in the 112 00:12:02.540 --> 00:12:07.780 technology world a little bit, we never get to put those innovations in our pocket. We're 113 00:12:07.780 --> 00:12:14.280 We're always using technology to catch up and to reclaim what we've lost through inflation, 114 00:12:14.280 --> 00:12:16.340 through the volatility of financial markets. 115 00:12:16.340 --> 00:12:20.580 Because remember, the biggest way you can lose money through inflation is by losing 116 00:12:20.580 --> 00:12:26.180 money in a nominal financial crisis, such as we've seen in the last couple of years. 117 00:12:26.180 --> 00:12:31.060 So I guess, you know, where I'm heading with the book and the thought I wanted to leave 118 00:12:31.060 --> 00:12:40.520 I think that we're reaching a decision point and I was very pleased to see Lew Rockwell 119 00:12:40.520 --> 00:12:46.540 talking about Henry Hazlitt's work and the International Monetary Fund today because 120 00:12:46.540 --> 00:12:52.800 I think we are getting to the point where the notion of globalization, the notion of 121 00:12:52.800 --> 00:12:57.220 global markets, I think is going to start to be challenged more and more and it's going 122 00:12:57.220 --> 00:13:00.920 to be part of a political process in this country that we're going to see start in 123 00:13:00.920 --> 00:13:04.360 in November, but it's not gonna end in November. 124 00:13:04.360 --> 00:13:07.040 A lot of my colleagues in the financial markets thought, 125 00:13:07.040 --> 00:13:09.640 well, we'll pay back the bailout money 126 00:13:09.640 --> 00:13:12.040 and then everything will be okay. 127 00:13:12.040 --> 00:13:14.480 We can go back to what we were doing. 128 00:13:14.480 --> 00:13:17.280 And what they didn't realize is that there is so much pain 129 00:13:17.280 --> 00:13:20.360 and so much angst out there in the hinterland 130 00:13:20.360 --> 00:13:22.920 and in real America, as I like to call it, 131 00:13:22.920 --> 00:13:25.920 that this conversation is gonna be going on for years. 132 00:13:25.920 --> 00:13:28.280 We're gonna turn liberals into conservatives. 133 00:13:28.280 --> 00:13:31.160 We're gonna turn conservatives into protectionists. 134 00:13:31.160 --> 00:13:33.100 We're gonna do a lot of things that most of us 135 00:13:33.100 --> 00:13:35.380 would have thought were impossible. 136 00:13:36.240 --> 00:13:38.560 Most of us would have said, oh well, we can't go back there. 137 00:13:38.560 --> 00:13:40.080 Well, yes we can. 138 00:13:40.080 --> 00:13:42.800 I mean, in my world, I work with banks. 139 00:13:42.800 --> 00:13:46.520 We have the illusion of global regulation. 140 00:13:46.520 --> 00:13:48.760 We have the illusion of global accounting 141 00:13:48.760 --> 00:13:50.760 and global markets. 142 00:13:50.760 --> 00:13:52.520 We thought we had a global market 143 00:13:52.520 --> 00:13:55.280 and residential mortgage-backed securities two years ago, 144 00:13:56.560 --> 00:13:57.400 but we don't. 145 00:13:57.400 --> 00:14:03.400 And I would tell you honestly that I think where we're going to head is where we have always been. 146 00:14:03.400 --> 00:14:08.400 We had this perception of an internationally linked and efficient market. 147 00:14:08.400 --> 00:14:13.400 But what you find instead is that we really still have national treatment in most marketplaces. 148 00:14:13.400 --> 00:14:15.400 You see this in Europe. 149 00:14:15.400 --> 00:14:21.400 In Europe we have 25 countries who still can't agree on the definition of default. 150 00:14:21.400 --> 00:14:26.400 They still can't agree on a bank regulatory scheme for the EU. 151 00:14:26.400 --> 00:14:56.400 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 152 00:14:56.400 --> 00:15:01.000 to do things that we might not have expected that we would do. In Europe, you don't have 153 00:15:01.000 --> 00:15:05.520 that choice. All the decisions have been made in most industries. You don't see de novo 154 00:15:05.520 --> 00:15:11.480 banks. You barely see entrepreneurial activity at all because Europeans have pretty much 155 00:15:11.480 --> 00:15:19.100 decided who's running things. I guess to me, what this implies is that not only we're going 156 00:15:19.100 --> 00:15:22.160 to have to have new political leadership in this country, but we're going to have to start 157 00:15:22.160 --> 00:15:27.360 thinking very hard about the role of the dollar. Do we want the dollar to be the international 158 00:15:27.360 --> 00:15:31.800 currency going forward? I think that's going to be a very key part of the discussion in 159 00:15:31.800 --> 00:15:36.780 the next 10, 20 years in this country. Because if you think about it, go back to World War 160 00:15:36.780 --> 00:15:42.460 I, look at Europe, look at how bad off they were financially after World War I. Then look 161 00:15:42.460 --> 00:15:48.760 at them again going into World War II. Britain was broke. France was broke. We have bailed 162 00:15:48.760 --> 00:16:02.800 When the Europeans decide to get into quantitative easing, which they will, the U.S. will be 163 00:16:02.800 --> 00:16:07.240 standing right there printing money and passing it on to those foreign central banks through 164 00:16:07.240 --> 00:16:08.840 swap lines. 165 00:16:08.840 --> 00:16:12.880 Ben Bernanke has recently had to explain swap lines to members of the Senate. 166 00:16:12.880 --> 00:16:18.480 I understand that was a very amusing discussion. 167 00:16:18.480 --> 00:16:36.980 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. 168 00:16:36.980 --> 00:16:43.260 There's a fascinating article you can find online from the Yale Review from 1933, 169 00:16:43.260 --> 00:16:50.260 where Keynes essentially repudiated the idea of globalization in financial markets, even in trade. 170 00:16:50.260 --> 00:16:56.300 He wanted markets to be entirely national, especially financial markets, and you can see why. 171 00:16:56.300 --> 00:17:02.180 Nothing that has been going on in Europe in the past two weeks really has much to do with most banks. 172 00:17:02.180 --> 00:17:06.860 In fact, while I don't tend to be much of a stock tout, I have been pounding the table 173 00:17:06.860 --> 00:17:09.100 with some of my clients in the past couple weeks 174 00:17:09.100 --> 00:17:11.320 because all of the higher quality banks 175 00:17:11.320 --> 00:17:14.780 that they wanted to buy two years ago but missed 176 00:17:14.780 --> 00:17:16.300 are now trading off. 177 00:17:16.300 --> 00:17:19.460 US Bank, my friends at Cullen Frost down in Texas, 178 00:17:19.460 --> 00:17:23.140 these are all banks that don't have trading bucks. 179 00:17:23.140 --> 00:17:25.380 They don't play the fast money game 180 00:17:25.380 --> 00:17:26.740 and yet they're all going down. 181 00:17:26.740 --> 00:17:29.540 That's my investment recommendation for today, by the way. 182 00:17:30.740 --> 00:17:33.620 And so when you think about where we are today 183 00:17:33.620 --> 00:17:36.440 with our monetary system, with our trade system, 184 00:17:36.860 --> 00:17:38.860 with our financial system. 185 00:17:38.860 --> 00:17:40.860 I think the thing that really has propelled me 186 00:17:40.860 --> 00:17:42.860 in the work on my book project 187 00:17:42.860 --> 00:17:44.860 and I think also to come here today 188 00:17:44.860 --> 00:17:46.860 and talk about it is that I think we are reaching 189 00:17:46.860 --> 00:17:48.860 an inflection point. 190 00:17:48.860 --> 00:17:50.860 Years ago, I wrote a book with my father 191 00:17:50.860 --> 00:17:52.860 called Trade Warriors. 192 00:17:52.860 --> 00:17:54.860 And this was back in the 193 00:17:54.860 --> 00:17:56.860 70s and the 80s when 194 00:17:56.860 --> 00:17:58.860 we were yelling at the Japanese 195 00:17:58.860 --> 00:18:00.860 and we were all excited about trade and foreign 196 00:18:00.860 --> 00:18:02.860 investment and what not. You notice that all went away. 197 00:18:02.860 --> 00:18:04.860 But I suspected 198 00:18:04.860 --> 00:18:10.400 It's going to come back and the reason is going to be twofold. One is that we obviously 199 00:18:10.400 --> 00:18:15.880 can't service the obligations that we've accumulated here in the U.S. while we have been happily 200 00:18:15.880 --> 00:18:22.340 pursuing the policy of free trade and helping our allies to grow their own economies. And 201 00:18:22.340 --> 00:18:25.500 I think that what we're going to probably end up having to do is look at some way of 202 00:18:25.500 --> 00:18:33.540 taxing trade and taxing global economic activity to help us avoid default. Because if you really 203 00:18:33.540 --> 00:18:45.540 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. 204 00:18:45.540 --> 00:18:56.540 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. 205 00:18:56.540 --> 00:18:58.540 You think they're afraid? 206 00:18:58.540 --> 00:19:09.540 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. 207 00:19:09.540 --> 00:19:16.540 They would stop paying each other, too. That was our response to crises prior to the Depression. 208 00:19:16.540 --> 00:19:26.540 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. 209 00:19:26.540 --> 00:19:29.540 and they can see too that tax revenues are down. 210 00:19:29.540 --> 00:19:31.540 But what hasn't gone down? 211 00:19:31.540 --> 00:19:35.540 The mandates, the pension contributions, 212 00:19:35.540 --> 00:19:38.540 everything else here in the state of New York, 213 00:19:38.540 --> 00:19:42.540 which are protected by the constitution of the state. 214 00:19:42.540 --> 00:19:46.540 Can you imagine having a constitutional convention in Albany 215 00:19:46.540 --> 00:19:49.540 to discuss these issues? It's not going to happen. 216 00:19:49.540 --> 00:19:54.540 So what I see going forward is that we are going to have a more protectionist, 217 00:19:54.540 --> 00:20:02.540 more nationalist evolution in this country, going away from the ideas of free trade and globalization. 218 00:20:02.540 --> 00:20:11.540 And while that may seem heretical, especially for someone like myself who has always believed in liberty and freedom 219 00:20:11.540 --> 00:20:18.540 as far as all aspects of human endeavor are concerned, at some point we have to pay our bills. 220 00:20:18.540 --> 00:20:22.540 We can no longer allow the Chinese to get rich at our expense. 221 00:20:22.540 --> 00:20:52.540 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 222 00:20:52.540 --> 00:21:22.540 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. 223 00:21:22.540 --> 00:21:24.540 Well, where do we go from here? 224 00:21:24.540 --> 00:21:30.540 You know, people talk about the economy recovering and I keep saying, well, we have zero interest rates. 225 00:21:30.540 --> 00:21:37.540 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? 226 00:21:37.540 --> 00:21:38.540 It's zero. 227 00:21:38.540 --> 00:21:45.540 How can we look ourselves in the face seriously and say that the economy is recovering when we're giving money away for nothing? 228 00:21:45.540 --> 00:21:48.540 It's like a joke I had last week. 229 00:21:48.540 --> 00:22:05.540 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. 230 00:22:05.540 --> 00:22:15.540 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. 231 00:22:15.540 --> 00:22:24.540 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. 232 00:22:24.540 --> 00:22:38.540 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. 233 00:22:38.540 --> 00:22:43.040 in fact we've been subsidizing it almost one-to-one and yet remember that the 234 00:22:43.040 --> 00:22:47.120 banks are hiding probably half of their defaults right now they're not 235 00:22:47.120 --> 00:22:52.760 foreclosing if they foreclose they will refuse to take title to the property so 236 00:22:52.760 --> 00:22:56.720 whoever the locality is that owns that or collects taxes on that property has to 237 00:22:56.720 --> 00:23:01.520 go sue the bank to get them to admit ownership I don't see this as a 238 00:23:01.520 --> 00:23:07.900 recovering economy in fact I got recruited by Bob Schiller to participate 239 00:23:07.900 --> 00:23:14.300 and his forward-looking, they have a whole group of people who are projecting home prices 240 00:23:14.300 --> 00:23:20.500 to parallel with the K. Schiller index, which is an interesting tool. And I came in with 241 00:23:20.500 --> 00:23:26.020 minus 10 for this year for home prices. And the reason I did that was very simple. We 242 00:23:26.020 --> 00:23:31.060 have no financing, especially for anything that you can't sell to Fannie and Freddie. 243 00:23:31.060 --> 00:23:36.900 And we really have not cleaned out the inventory of foreclosed and not quite foreclosed homes. 244 00:23:36.900 --> 00:23:44.900 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. 245 00:23:44.900 --> 00:23:56.900 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. 246 00:23:56.900 --> 00:24:00.900 I mean, that's what my company does. We distill financials into ratings. 247 00:24:00.900 --> 00:24:09.900 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. 248 00:24:09.900 --> 00:24:16.900 And that narrative gets simplified and carried forward until most of the narratives converge and they are the same. 249 00:24:16.900 --> 00:24:20.900 We have done that with the history of our country over the last hundred years. 250 00:24:20.900 --> 00:24:27.900 We have convinced ourselves that the Depression, World War II, all of this were heroic national efforts 251 00:24:27.900 --> 00:24:31.900 where we picked ourselves up and marched forward into glory. 252 00:24:31.900 --> 00:24:37.900 The television, the cinema, everything has enforced and crystallized this imagery. 253 00:24:37.900 --> 00:24:41.900 But for me, and what I want to leave you with today, 254 00:24:41.900 --> 00:24:45.900 and if we have any time I could maybe take a question or two, 255 00:24:45.900 --> 00:24:50.900 is that I think we're going to have to reevaluate the last hundred years in this country. 256 00:24:50.900 --> 00:24:52.900 We're going to have to think about what we did and why, 257 00:24:52.900 --> 00:24:56.900 what our goals are as a society in terms of growth, employment, 258 00:24:56.900 --> 00:25:26.900 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 259 00:25:26.900 --> 00:25:36.700 There's got to be a way where we can start to make our fellow citizens understand just 260 00:25:36.700 --> 00:25:42.880 how much and how hurtful the current arrangement is for our people, how it prevents them from 261 00:25:42.880 --> 00:25:49.100 accumulating and passing capital along from one generation to the next. 262 00:25:49.100 --> 00:25:52.900 And if we have that conversation, I think what we're going to end up with is a more 263 00:25:52.900 --> 00:26:05.900 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. 264 00:26:05.900 --> 00:26:12.900 That really goes back to the earlier comments we had. Well, the TV's off now and he's worried about cutting hair. 265 00:26:12.900 --> 00:26:20.900 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. 266 00:26:20.900 --> 00:26:22.900 Good afternoon. Thank you. 267 00:26:22.900 --> 00:26:30.900 Applause 268 00:26:30.900 --> 00:26:34.900 Do you have a suggestion for how much money you said could happen, right? 269 00:26:34.900 --> 00:26:36.900 For the 12 years you've been bailing out of the North Bank. 270 00:26:36.900 --> 00:26:38.900 We, I guess, certainly were out by 12. 271 00:26:38.900 --> 00:26:41.900 The estimated debt is $1,500,000. 272 00:26:41.900 --> 00:26:44.900 We're so close to $500,000,000 and $530,000. 273 00:26:44.900 --> 00:26:47.900 Where do you think you're falling? 274 00:26:47.900 --> 00:26:52.420 That magnitude would not surprise me at all. 275 00:26:52.420 --> 00:26:57.860 You know, as I said before, the problem of Europe is not political organization. 276 00:26:57.860 --> 00:26:59.100 I think it's twofold. 277 00:26:59.100 --> 00:27:04.900 One is obviously growth and the social dimensions I touched on briefly. 278 00:27:04.900 --> 00:27:10.820 But the other thing, you know, in a strange way is that they are so, especially the Germans, 279 00:27:10.820 --> 00:27:17.020 they are so chastened by the experience in the 30s that on the one hand they pursue monetary 280 00:27:17.020 --> 00:27:22.020 Orthodoxy, but then they go off and party like drunken sailors on the balance sheet 281 00:27:22.020 --> 00:27:25.740 of the state-owned banks in Europe. That's where the problem is. They bought all our 282 00:27:25.740 --> 00:27:30.420 crap. I mean, you had the City of London, the mortgage-backed securities industry in 283 00:27:30.420 --> 00:27:36.780 the US come together in this glorious communion and create all of these ersatz over-the-counter 284 00:27:36.780 --> 00:27:41.260 securities that were mostly sold in Europe. I mean, the Germans didn't have a housing 285 00:27:41.260 --> 00:27:47.660 Book. They were arbitraging the EC limits on debt issuance. The EC gave them a couple 286 00:27:47.660 --> 00:27:52.060 more years, so they went off and they issued a lot of debt. So the number you mentioned, 287 00:27:52.060 --> 00:27:57.060 trillions of dollars, wouldn't surprise me at all. And I have a feeling that the US government 288 00:27:57.060 --> 00:28:02.460 is going to have to explicitly start talking about maybe almost another Marshall Plan type 289 00:28:02.460 --> 00:28:06.620 arrangement for Europe, because that's what we're doing here. We're simply repeating 290 00:28:06.620 --> 00:28:13.620 The Past Mistakes, and you can drill down on this with Lew after lunch. I think it's a very important subject. 291 00:28:13.620 --> 00:28:42.620 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. 292 00:28:42.620 --> 00:28:51.320 Rights. It reminds me of when Keynes came to the U.S. in 45, he was quite ill and he 293 00:28:51.320 --> 00:28:56.060 led the British delegation. And they wanted two things. They wanted to completely wipe 294 00:28:56.060 --> 00:29:03.980 out the Lend-Lease debt and they wanted a new loan. Right? Number four, I think. So 295 00:29:03.980 --> 00:29:08.320 the discussion was interest-free loan, which was basically a grant. And the politicians 296 00:29:08.320 --> 00:29:12.260 that day said, no, we have to charge you something. We can't get that through the Congress with 297 00:29:12.260 --> 00:29:17.260 with zero interest rate. I think our principle should always be market pricing on everything. 298 00:29:17.260 --> 00:29:25.260 You don't have this today because the Fed has gone so overboard through quantitative easing 299 00:29:25.260 --> 00:29:30.260 and through their swap lines for central banks which barely show up in the numbers. 300 00:29:30.260 --> 00:29:34.260 It's hard to know where we are. They certainly don't know. 301 00:29:34.260 --> 00:29:40.260 The people at the Fed, they occupy a godhead. They think that they have to be in charge, 302 00:29:40.260 --> 00:29:44.260 that they are the guiding light of the U.S. economy, and this goes back to the 30s. 303 00:29:44.260 --> 00:29:50.260 Go back and reread Eugene Mayer and the period before Merriner-Eckles came onto the board. 304 00:29:50.260 --> 00:29:57.260 These were real central planning advocates, and they had almost a Silverite passion for it. 305 00:29:57.260 --> 00:30:03.260 They thought it was just, and this would result in more equitable income distribution in the United States. 306 00:30:03.260 --> 00:30:10.260 That's Meredith Eccles, this kind of weird Mormon perspective of a rich man who felt guilty. 307 00:30:10.260 --> 00:30:16.260 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? 308 00:30:16.260 --> 00:30:22.260 And until recently, it's only been the Fed because we have a new government every four or eight years, right? 309 00:30:22.260 --> 00:30:28.260 They are our continuity. The Fed is like the Queen of England. 310 00:30:28.260 --> 00:30:32.260 I'm getting a little far afield here. 311 00:30:32.260 --> 00:30:55.340 Well, I think they'll do it, I think they'll do it through taxes. They won't internalize 312 00:30:55.340 --> 00:31:00.420 pension assets back into the Treasury. Although if you take a good look at Pension Benefit 313 00:31:00.420 --> 00:31:02.420 Guarantee Corp. 314 00:31:02.420 --> 00:31:07.420 Especially after the glorious tenure of my former colleague Charlie Mallard, Charlie 315 00:31:07.420 --> 00:31:13.420 took Pension Benefit Guarantee Corp. to a more heavy equity weighting right before the 316 00:31:13.420 --> 00:31:14.420 crisis. 317 00:31:14.420 --> 00:31:18.940 PBGC is the only entity in Washington that has its own balance sheet. 318 00:31:18.940 --> 00:31:21.540 They actually keep their assets somewhere else. 319 00:31:21.540 --> 00:31:24.540 Everybody else works off the Treasury General Fund. 320 00:31:24.540 --> 00:31:25.820 So it's a big problem. 321 00:31:25.820 --> 00:31:26.820 I don't know. 322 00:31:26.820 --> 00:31:29.660 I haven't looked at pensions enough to have a real opinion on it. 323 00:31:29.660 --> 00:31:34.660 But I'll tell you this, I think you're going to see Obama float a vat later this year. 324 00:31:34.660 --> 00:31:37.660 They know it won't pass, but they're going to put it out there. 325 00:31:37.660 --> 00:31:43.660 And the lure is going to be cutting income taxes for everybody below a quarter of a million dollars a year. 326 00:31:43.660 --> 00:31:48.660 So I think tax policy is how they'll attack it, and inflation. 327 00:31:48.660 --> 00:32:06.660 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? 328 00:32:18.660 --> 00:32:30.660 What is that calling with your comment on the U.S. bank? 329 00:32:48.660 --> 00:32:51.740 In 05-06, they were as aggressive as everyone else. 330 00:32:51.740 --> 00:32:55.380 But the big difference with USB is that they don't have a trading book. 331 00:32:55.380 --> 00:32:57.260 They really are not in the securities business. 332 00:32:57.260 --> 00:33:00.500 They have a big treasury where they run the bank's liquidity. 333 00:33:00.500 --> 00:33:05.260 And they do have credit losses, but that's all they have to worry about. 334 00:33:05.260 --> 00:33:09.540 You look at Wells Fargo, on the other hand, which also doesn't have a trading book, 335 00:33:09.540 --> 00:33:12.580 but has a huge securitization book. 336 00:33:12.580 --> 00:33:17.300 And keep in mind, when Tim Geithner gets up there and tells you that the banking crisis is over 337 00:33:17.300 --> 00:33:47.300 The Federal Reserve, fiat money, fractional reserve banking, Human Action, 338 00:33:47.300 --> 00:33:53.100 was defective. They'll make Wells Fargo buy it back at par. In fact, I think what you're 339 00:33:53.100 --> 00:33:58.500 going to see, despite all this regulation in Washington, is another dirty deal between 340 00:33:58.500 --> 00:34:03.700 the Congress and the Obama administration and the banks, where Fannie, Freddie, FHA are 341 00:34:03.700 --> 00:34:10.620 going to eat the loss and they're not going to push it back at the banks. Trillion dollars. 342 00:34:10.620 --> 00:34:17.620 You know, what's a few dollars among friends, right? 343 00:34:40.620 --> 00:34:49.620 are non-AEGYS work, as they say, but they told us, well, we have all this data, we can use it in that plan. 344 00:34:49.620 --> 00:34:57.620 We agreed, most, but we can't agree to use it for a certain purpose. 345 00:34:57.620 --> 00:35:09.620 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. 346 00:35:09.620 --> 00:35:34.620 Well here, let me reclaim the floor. 347 00:35:34.620 --> 00:35:38.620 I can fill you in the blanks. 348 00:35:38.620 --> 00:35:43.660 There is an awful lot of talk of disclosure. The SEC and the FDIC both have rules pending 349 00:35:43.660 --> 00:35:49.140 on securitization and the EU in fact is moving forward with greater transparency, so that's 350 00:35:49.140 --> 00:35:54.500 going to help us. But you know, if the loan is bad, it's bad. Giving me more information 351 00:35:54.500 --> 00:35:58.260 about the loan is not going to help me. I have friends who have been pushing this office 352 00:35:58.260 --> 00:36:03.060 of financial research that's in the legislation and we're going to have more data. The great 353 00:36:03.060 --> 00:36:08.600 irony of our time is that we have all of these technologies, we have all these means of collecting 354 00:36:08.600 --> 00:36:29.600 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? 355 00:36:29.600 --> 00:36:41.240 No, and I'll tell you honestly you have legal problems that are vast. If I just give out 356 00:36:41.240 --> 00:36:46.600 the balance on your loan and the zip code, I can figure out whose loan that is. And that's 357 00:36:46.600 --> 00:36:52.680 a violation of federal law. That's right. But the point is the hedge funds will do the 358 00:36:52.680 --> 00:36:57.120 work and pretty soon they'll figure out that's your mortgage. And next thing you know you're 359 00:36:57.120 --> 00:36:59.120 Well, maybe they'll call you and try to buy you out. 360 00:36:59.120 --> 00:37:02.120 Anyway, thank you very much for your questions and your time.