WEBVTT NOTE How the Fed is Retarding Recovery 1 00:00:00.000 --> 00:00:05.360 I was asked to explain, Doug just alluded to the fact that we're developing a high school 2 00:00:05.360 --> 00:00:12.720 curriculum. It's actually, I think you would be amazed at what the kids are reading these 3 00:00:12.720 --> 00:00:16.900 days and I mean that in a good sense that, you know, I will, at every Mises University 4 00:00:16.900 --> 00:00:22.200 that we go to, and for those of you who don't know, Mises University is every summer where 5 00:00:22.200 --> 00:00:27.920 typically college undergraduate kids go down to the Mises Institute and we have a week 6 00:00:27.920 --> 00:00:36.280 Conference, and every year, the stuff they've read, it gets more and more impressive. In 7 00:00:36.280 --> 00:00:42.240 other words, when I was going there, I was one of the few people who had read Human Action, 8 00:00:42.240 --> 00:00:46.160 let's say, and other people had read parts of it or they had read easier things, but 9 00:00:46.160 --> 00:00:49.480 I was one of the few as a student who had read it from cover to cover, but now there's 10 00:00:49.480 --> 00:00:53.120 more and more people that that's just, yeah, of course I read that, why wouldn't I have 11 00:00:53.120 --> 00:00:56.600 read that? It's online, it's free, why wouldn't I have done that? 12 00:00:56.600 --> 00:01:01.280 And it really is impressive, and so my point is just that actually I think this curriculum 13 00:01:01.280 --> 00:01:06.060 we're working on, we had conceived of it as, you know, for high school kids, maybe homeschoolers, 14 00:01:06.060 --> 00:01:10.960 but actually I think it'll be good for precocious seventh and eighth graders. And the announcement 15 00:01:10.960 --> 00:01:14.600 that I was asked to relay is that it might not be appropriate for you guys, but if you 16 00:01:14.600 --> 00:01:19.640 know people in the area, this coming Friday, the 20th, I guess that would be, they are 17 00:01:19.640 --> 00:01:24.240 going to have an event at the Mises Institute for high schoolers and their parents who are 18 00:01:54.240 --> 00:01:58.320 where is talking to high schoolers that they have no idea if what you're saying is right or not so 19 00:01:58.880 --> 00:02:02.880 on the other hand you guys presumably won't throw spitballs at me whereas that that is always a 20 00:02:02.880 --> 00:02:09.760 danger with the high school kids okay so the uh what i'm talking about today is how the Fed is 21 00:02:09.760 --> 00:02:16.960 retarding recovery and what i want to sort of combat is the this conventional wisdom that when 22 00:02:16.960 --> 00:02:21.600 you it's true whether you're reading the Wall Street Journal or watching CNBC or you're reading 23 00:02:21.600 --> 00:02:26.640 in the New York Times or CNN, let's say, you know, that's the spectrum that we're supposed 24 00:02:26.640 --> 00:02:32.960 to have, or Fox News, I guess, from the so-called, you know, free marketeers to the interventionists, 25 00:02:32.960 --> 00:02:37.320 that's, we're supposed to be getting the full palette there of possible views, but I mean, 26 00:02:37.320 --> 00:02:41.520 every, almost everybody is saying, with the occasional, except there's a few op-ed writers 27 00:02:41.520 --> 00:02:45.240 in the Wall Street Journal, but the typical line is, even if you're against what the Fed 28 00:02:45.240 --> 00:02:51.200 is doing, in terms of since the crisis set in, the things the Fed has done, people, they 29 00:02:51.200 --> 00:02:55.920 They generally are saying things to the effect that, yes, the Fed rescued us and it prevented 30 00:02:55.920 --> 00:03:01.240 another Great Depression, but we think maybe it's time to pull back that emergency measure, 31 00:03:01.240 --> 00:03:05.560 to take that medicine away, because now it's done the job and now we run the risk of over-medicating 32 00:03:05.560 --> 00:03:10.600 the economy, and that's the threat awards, to put it in more economic terms. 33 00:03:10.600 --> 00:03:15.240 They say, yes, the Fed, by lowering interest rates, it has stimulated recovery and it was 34 00:03:15.240 --> 00:03:20.640 a much-needed dose of help from the Federal Reserve, and thank God we have the Fed, but 35 00:03:20.640 --> 00:03:25.640 The Federal Reserve, fiat money, fractional reserve banking, Human Action and State, The Theory of Money and Credit 36 00:03:50.640 --> 00:04:20.640 that by doubling the monetary base in six months or whatever the exact figure is the Fed has sown the seeds for future price inflation and that's the only downside to be weighed against all the benefits of doubling the monetary base in six months that no, doubling the monetary base in six months in and of itself has been a bad thing and I want to just go through some of the reasons for that in the talk today. Alright, so first and foremost just the very you know the thing that everyone thinks is the help, the benefit of low interest rates. 37 00:04:20.640 --> 00:04:50.640 So the idea is that if we didn't have a FED, if we had a purely free market, or if Bernanke had been a mean guy and didn't want to help people, when the crisis set in, what happened, and when I say when the crisis set, I guess largely people have in mind September and October of 2008, but even the rescue measures started well before then, but let's just join the debate the way most people have in mind and talk about things like after the fall of Lehman. 38 00:04:50.640 --> 00:04:55.360 And let me just go on a little bit of a tangent, even right there, the debate is all screwed 39 00:04:55.360 --> 00:04:59.520 up when people say that, oh, you know, we had a totally free market and then Lehman 40 00:04:59.520 --> 00:05:03.840 fells and, you know, the credit markets are royal, everyone's panicking, it would have 41 00:05:03.840 --> 00:05:08.480 been the end of the world financial system, but for the interventions, but I don't think 42 00:05:08.480 --> 00:05:09.480 that's true. 43 00:05:09.480 --> 00:05:12.860 So for one thing, there was a good article, actually it was in the Wall Street Journal 44 00:05:12.860 --> 00:05:18.620 by Zingales and I think John Cochran, I might have had my economist mix up, but there was 45 00:05:18.620 --> 00:05:24.360 These two Chicago school guys, and they actually had a great chart showing that the real panic 46 00:05:24.360 --> 00:05:30.820 in terms of looking at the spreads between corporate bonds and other types of debt versus 47 00:05:30.820 --> 00:05:34.860 what was considered to be really safe debt in terms of U.S. treasuries, those spreads 48 00:05:34.860 --> 00:05:39.700 didn't explode the day Lehman failed or the day after, it was only a little bit further 49 00:05:39.700 --> 00:05:40.700 after. 50 00:05:40.700 --> 00:05:45.420 If you look at the timeline, when Paulson and Bernanke were telling Congress, we need 51 00:05:45.420 --> 00:05:49.420 We need $700 billion for this TARP or else the world is going to end. 52 00:05:49.420 --> 00:05:51.820 So that was what really made the panic start. 53 00:05:51.820 --> 00:05:54.120 So it wasn't the fall of Lehman per se. 54 00:05:54.120 --> 00:06:00.180 You really saw the objective measures of panic or crisis in the system kick in only when 55 00:06:00.180 --> 00:06:04.620 Bernanke and Paulson were pointing at the Lehman failure and saying because of this 56 00:06:04.620 --> 00:06:06.100 we need $700 billion. 57 00:06:06.100 --> 00:06:10.580 The idea is that maybe it wasn't that the system itself was really that precarious. 58 00:06:10.580 --> 00:06:14.580 It was that investors wondered, well gee, what the heck does Paulson know that we don't 59 00:06:14.580 --> 00:06:23.540 No. In retrospect, what he knew was that this will help Goldman Sachs. You see what I'm saying? 60 00:06:23.540 --> 00:06:27.300 So even the conventional story, the way they tell it, isn't quite right. And then even 61 00:06:27.300 --> 00:06:32.300 pushing it further, even if it were true that the Lehman collapse, per se, was really where 62 00:06:32.300 --> 00:06:36.540 we can point to, oh man, it's a good thing we've had the Fed and the Treasury doing extraordinary 63 00:06:36.540 --> 00:06:42.340 measures since then. Otherwise, the free market would have brought us to our knees. Well no, 64 00:06:42.340 --> 00:06:55.340 So part of why Lehman was such a shock is that they had earlier either directly bailed out or the Fed behind the scenes sort of brokered takeovers of Bear Stearns and other things that were in trouble, right? 65 00:06:55.340 --> 00:07:02.340 And so part of why Lehman was such a shock was that was an about face from what the government had been doing up until then. 66 00:07:02.340 --> 00:07:10.780 In contrast, if, say, way back in the summer of 07, when it was clear that the subprime 67 00:07:10.780 --> 00:07:15.060 thing was a problem and that there was a lot of losses that were going to be on the books 68 00:07:15.060 --> 00:07:20.860 of these firms that had dabbled in mortgage-backed securities, if at that point, George Bush 69 00:07:20.860 --> 00:07:24.180 had said, hey, guess what, I'm supposed to be a free market guy, we're not doing anything 70 00:07:24.180 --> 00:07:29.840 to help you, this is a profit and loss system, and if you screwed up, that's tough for you, 71 00:07:29.840 --> 00:07:32.600 and you're going to go out of business and the Fed had said we're not going to do anything 72 00:07:32.600 --> 00:07:36.740 special we're going to look at what interest rates should be looking at GDP and looking 73 00:07:36.740 --> 00:07:40.980 at inflation expectations we're not going to alter our policy based on the financial 74 00:07:40.980 --> 00:07:45.660 system if you screwed up that's tough for you if they had done that consistently since 75 00:07:45.660 --> 00:07:50.000 the onset of these problems then the Lehman failure wouldn't have been such a big deal 76 00:07:50.000 --> 00:07:55.100 right whereas again the reason it was such a surprise was people had been led to believe 77 00:07:55.100 --> 00:07:58.500 no big firm is just going to be allowed to collapse because it's too big to fail because 78 00:07:58.500 --> 00:08:19.500 So anyway, the very first step in the argument when people are trying to explain why the Fed has saved us is wrong and that the crisis that they say would have happened had we just followed laissez-faire capitalism, we don't know because they didn't allow laissez-faire capitalism at any stage in this. 79 00:08:19.500 --> 00:08:25.940 but okay what about the idea of bringing interest rates down in here the what 80 00:08:25.940 --> 00:08:28.900 they're the people who are for the Fed the people who are saying the Fed 81 00:08:28.900 --> 00:08:33.180 rescued us and provided temporary relief perhaps at the risk of long-run 82 00:08:33.180 --> 00:08:38.660 inflation they're they're going to say that the idea is pretty simple that you 83 00:08:38.660 --> 00:08:43.220 know high interest rates are tough if you're a business person and you have 84 00:08:43.220 --> 00:08:46.260 bad loans on your books and you're having trouble getting financing well 85 00:08:46.260 --> 00:08:49.980 surely other things equal, if the Fed has low interest rates, it's cheaper for you to 86 00:08:49.980 --> 00:08:55.140 borrow money from the Fed, or even if you're the third firm in line, somewhere up the high 87 00:08:55.140 --> 00:08:59.540 chain of lending, if they can get money from the Fed at 0% or a quarter percent interest 88 00:08:59.540 --> 00:09:03.100 rates, that's got to be a good thing, right? 89 00:09:03.100 --> 00:09:06.820 And I want to say that, yeah, it's good from any individual firm's point of view if you 90 00:09:06.820 --> 00:09:12.520 want to go borrow, but it's not good from the system as a whole's point of view or the 91 00:09:12.520 --> 00:09:16.920 the economy's point of view, because those prices mean something. 92 00:09:16.920 --> 00:09:21.960 So let me just give you an analogy, and a lot of you have studied free market economics 93 00:09:21.960 --> 00:09:27.440 and you'll recognize this, that what happens when you try to motivate the problems with 94 00:09:27.440 --> 00:09:31.840 price controls, let's say there's a blizzard in some small town somewhere and they're cut 95 00:09:31.840 --> 00:09:36.480 off from the outside world, there's a huge blizzard, and a lot of people think, oh well, 96 00:09:36.480 --> 00:09:41.080 the way to help those people is to make sure that the local shopkeepers, they don't engage 97 00:09:41.080 --> 00:09:45.740 and Price Gouging, right, that they don't, for generators and batteries and canned goods 98 00:09:45.740 --> 00:09:49.520 and bottled water, that they don't just jack up the price and take advantage of those poor 99 00:09:49.520 --> 00:09:51.600 people because they get hit with the blizzard. 100 00:09:51.600 --> 00:09:54.900 But actually, if you've studied economics, you know that that's not true. 101 00:09:54.900 --> 00:09:58.460 What happens in that situation is, you know, you've got a fixed supply, the demand goes 102 00:09:58.460 --> 00:10:03.340 way up because people are panicked that, uh-oh, the trucks from Sam's or whatever might not 103 00:10:03.340 --> 00:10:05.380 be able to get in here for a few days. 104 00:10:05.380 --> 00:10:10.400 And so the inclination is every household runs to the store to clean out the shelves, 105 00:10:10.400 --> 00:10:40.400 to stock up their pantry, but you don't want that to happen. You don't want the first ten people who get to the store to clean up the shelves and get six weeks of canned tuna and bottled water, and then the person who's eleventh in line gets to the store and the shelves are empty. So how do you ration the available stockpile so that everybody gets enough to get through the few days until the blizzard gets, you know, the streets get cleared and so on, is you allow the prices to go up. So that's, just to give you an example, so you might think that, 106 00:10:40.400 --> 00:10:43.040 isn't it nice isn't it helping the people 107 00:10:43.040 --> 00:10:46.680 by checking the evil greedy profits seeking of the merchants who want to 108 00:10:46.680 --> 00:10:49.640 exploit them in their time of need in this in this emergency 109 00:10:49.640 --> 00:10:52.560 but no actually you're not helping them yet you're helping the people who get 110 00:10:52.560 --> 00:10:53.800 to the store first 111 00:10:53.800 --> 00:10:55.440 but you're actively hurting 112 00:10:55.440 --> 00:10:58.560 the people who show up after the tuna runs out or whatever it is that the 113 00:10:58.560 --> 00:11:00.040 thing that's in short supply 114 00:11:00.040 --> 00:11:04.480 okay so that the the broader point there is market prices really mean something 115 00:11:04.480 --> 00:11:09.080 and you're not creating more wealth by holding prices below where they should be 116 00:11:09.080 --> 00:11:12.760 so then in the context of the financial crisis 117 00:11:12.760 --> 00:11:16.900 yeah when when investors realize oh my gosh all these mortgage-backed securities 118 00:11:16.900 --> 00:11:17.640 that 119 00:11:17.640 --> 00:11:20.920 that these firms are sitting on actually aren't worth what we thought 120 00:11:20.920 --> 00:11:24.380 and so now a company that has a lot of these things on its books 121 00:11:24.380 --> 00:11:27.080 if it wants to borrow money from me well I'm going to 122 00:11:27.080 --> 00:11:31.200 ask them for a much higher interest rate because they're a much riskier 123 00:11:31.200 --> 00:11:34.840 proposition right now than I would have thought a month ago 124 00:11:34.840 --> 00:11:38.120 and so that's why you see you know the the interest rate on certain corporate 125 00:11:38.120 --> 00:11:41.840 Debt, especially for particular companies, started going way up. 126 00:11:41.840 --> 00:11:48.340 And so it's not true to say that by the Fed's interventions, and part of the way they try 127 00:11:48.340 --> 00:11:52.560 to measure the effectiveness, they say, look at Bernanke's save the day, is they'll show 128 00:11:52.560 --> 00:11:57.880 charts of the spread between corporate debt and treasuries, things like that. 129 00:11:57.880 --> 00:12:02.360 So what that means, I know some of you are new to this, you don't have a finance background, 130 00:12:02.360 --> 00:12:04.080 I'll try to simplify it. 131 00:12:04.080 --> 00:12:09.320 The idea is what investors were demanding in terms of an interest rate to lend money to 132 00:12:09.320 --> 00:12:16.680 the U.S. government as opposed to a major financial institution or even just to a regular 133 00:12:16.680 --> 00:12:21.840 Fortune 500 company, that the gap between that, because the U.S. government is considered 134 00:12:21.840 --> 00:12:28.400 safer, that it's much more likely, even though the way they get their money is a bit dubious 135 00:12:28.400 --> 00:12:33.640 to some of us in the room. The idea is that, you know, if you buy a ten-year bond from 136 00:12:33.640 --> 00:12:39.480 Uncle Sam, chances are you're going to get that money paid back to you. You know, Uncle 137 00:12:39.480 --> 00:12:45.440 Sam's not going to default to the same probability as even, you know, some other private company. 138 00:12:45.440 --> 00:12:49.120 Even if it's a strong company, ultimately the government can just tax people and pay 139 00:12:49.120 --> 00:12:53.440 you off, or they can print the money and pay you. So people aren't so much worried about 140 00:12:53.440 --> 00:13:00.720 The Treasury literally defaulting on its bonds, although the probability of that event, it's 141 00:13:00.720 --> 00:13:05.960 like two, two and a half to three times higher now than it was like 18 months ago. 142 00:13:05.960 --> 00:13:11.480 If you look at the prices for certain things protecting you from that event, so even though 143 00:13:11.480 --> 00:13:15.520 it's still considered, the US Treasury is still considered a safe investment, it's a 144 00:13:15.520 --> 00:13:20.440 lot riskier now in investors' opinions than it was even just 18 months ago. 145 00:13:20.440 --> 00:13:26.280 But anyway, the point is, that's one way that they were gauging the fear in the credit markets 146 00:13:26.280 --> 00:13:30.440 and what people thought in terms of the stability of the system as they looked at the gap. 147 00:13:30.440 --> 00:13:34.680 The premium investors needed to be paid in order to lend their money to a private institution 148 00:13:34.680 --> 00:13:38.240 versus giving it to the safe U.S. government. 149 00:13:38.240 --> 00:13:43.480 And so those spreads exploded, as I say, in the fall of 2008 and since then they've come 150 00:13:43.480 --> 00:13:45.440 way down. 151 00:13:45.440 --> 00:13:48.280 And so that's, again, people are pointing that to say that shows that Bernanke's been 152 00:13:48.280 --> 00:13:55.280 and Successful. But no, he hasn't because, again, that's equivalent or analogous to if, 153 00:13:55.280 --> 00:13:58.840 right when the blizzard sets in, if the free market price of tuna and bottled water and 154 00:13:58.840 --> 00:14:03.840 generators went through the roof and then the government did all sorts of measures, 155 00:14:03.840 --> 00:14:08.320 you know, like threatening fines and maybe using tax incentives to bring the price of 156 00:14:08.320 --> 00:14:13.820 tuna back down to the pre-crisis level, that wouldn't be a good thing. And so you see something 157 00:14:43.820 --> 00:14:48.260 They run out of dollar bills because Bernanke just you know make it you know spend all you want 158 00:14:48.260 --> 00:14:52.020 We'll make more right you see so it's a little bit weird there 159 00:14:52.020 --> 00:14:55.540 But that but the principle is still the same to the extent that you think interest rates mean something 160 00:14:55.740 --> 00:15:02.980 Then clearly by them pushing them down below where they should be they they've distorted things and in particular what what happens is 161 00:15:03.100 --> 00:15:04.740 You know think of what? 162 00:15:04.740 --> 00:15:07.580 The mistakes people were making during the credit and the housing boom 163 00:15:08.260 --> 00:15:13.180 Part of what was going on there is consumers weren't saving enough right that people 164 00:15:13.820 --> 00:15:43.820 in the years 2003, 2004 and 2005, they were getting their paychecks, their salaries, whatever, their normal sources of income and then they weren't putting much of it aside into their 401k or whatever their sources of savings were because their house was going up at double digit rates in some areas and so they quite rationally thought, you know, if that house price rise were legitimate and were going to last, well it's dumb for me to be putting aside 15% of my paycheck in the bank or in the stock market or whatever when my house is appreciating so much. 165 00:15:43.820 --> 00:16:13.820 And so then when the market crashed, the housing market crashed, people in a sense realized they had a lot less saved up than they thought they were going to have in the year 2008, when they were, you know, planning their behavior for earlier years and they thought how much net wealth am I going to have in 08 and 09 and 2010, their plans were totally screwed up by the collapse in the housing market. And so people needed to be saving more. And one of the ways the market would sort of give them a kick in the pants is if interest rates went way up. And so people now, you know, 166 00:16:43.820 --> 00:16:53.820 And we'll get through this. There's no reason to alter your behavior. And we know that that's the case. They're trying to get people to spend more, to go out and borrow more, and stop paying down your debt. That's a bad thing. 167 00:16:53.820 --> 00:17:09.820 Okay. So again, lowering interest rate per se is not a good thing if the interest rate should have been really high. Another problem with what the Fed's doing is it's fulfilling or perpetuating what's called moral hazard. 168 00:17:09.820 --> 00:17:14.320 There, I'll be brief on this particular point, it's a pretty simple case or simple argument 169 00:17:14.320 --> 00:17:18.820 that what the Fed has done, among all the other things it's done, is it's bailed out 170 00:17:18.820 --> 00:17:22.600 these large institutions that should have gone bankrupt, or they should have been taken 171 00:17:22.600 --> 00:17:28.860 over by rival firms, through various mechanisms, but largely because part of what the Fed has 172 00:17:28.860 --> 00:17:35.580 done is, and this morning I didn't check the latest figure, but the Fed has taken onto 173 00:17:35.580 --> 00:17:42.580 the Federal Reserve, fiat money, fractional reserve banking, Human Action, Man Economy and State, The Theory of Money and Credit 174 00:18:05.580 --> 00:18:06.580 May and Freddie Mac. 175 00:18:06.580 --> 00:18:13.180 Actually, it's over a trillion at this point since the inception of the crisis. 176 00:18:13.180 --> 00:18:17.740 So part of what happened is specific firms that made bad bets, that they invested in 177 00:18:17.740 --> 00:18:21.860 mortgage-backed securities, for example, they're sitting and then they should have gone under, 178 00:18:21.860 --> 00:18:26.220 they should have been taken over, but instead the Fed comes in the night on the white horse 179 00:18:26.220 --> 00:18:30.420 and buys them off their books, so the banks clear off their books a little bit and now 180 00:18:30.420 --> 00:18:35.240 they're no longer insolvent, but only because the Fed rescued them. 181 00:18:35.240 --> 00:18:39.800 So in terms of the system as a whole, that malinvestment is still there. 182 00:18:39.800 --> 00:18:41.920 It's not that the Fed undid the mistake. 183 00:18:41.920 --> 00:18:44.960 All the Fed did was say, okay, instead of you, the person who made the mistake, instead 184 00:18:44.960 --> 00:18:49.640 of you bearing the brunt of it, we'll just basically spread it to everyone who uses U.S. 185 00:18:49.640 --> 00:18:50.640 currency. 186 00:18:50.640 --> 00:18:55.440 Because when the Fed creates money out of thin air to absorb that loss, in a sense, 187 00:18:55.440 --> 00:19:00.880 it's who loses, it's the people who hold U.S. dollars that now are depreciated. 188 00:19:00.880 --> 00:19:07.200 And one way to see that is if the Fed had done nothing, you saw prices, remember prices 189 00:19:07.200 --> 00:19:13.640 were falling in the winter of 2008, they would have fallen a lot more if the Fed had done 190 00:19:13.640 --> 00:19:14.640 nothing. 191 00:19:14.640 --> 00:19:18.920 The Fed, in addition to all the other things, the Fed increased the actual supply of money 192 00:19:18.920 --> 00:19:19.920 in people's pockets. 193 00:19:19.920 --> 00:19:24.040 So I'm not talking about the banking system, but I mean currency and circulation, people's 194 00:19:24.040 --> 00:19:30.360 checking balances, that number went up something like 17% in the second half of 08. 195 00:19:30.360 --> 00:19:38.060 And so as much as prices fell anyway, the price fall was being bullied up by the fact 196 00:19:38.060 --> 00:19:40.620 that they allowed the money supply to expand. 197 00:19:40.620 --> 00:19:45.020 And so if they had really done nothing and just sat back and let the thing run its course, 198 00:19:45.020 --> 00:19:46.320 prices would have fallen a lot more. 199 00:19:46.320 --> 00:19:51.920 So you would have seen a lot of firms failing, but people who had nothing to do with mortgage-backed 200 00:19:51.920 --> 00:19:56.240 securities, people who were just living on a fixed income, let's say, or other workers 201 00:19:56.240 --> 00:19:59.600 who weren't getting laid off, they would have gone to the store and they would have seen 202 00:20:29.600 --> 00:20:59.600 The simple transfer of wealth from people who had nothing to do with the mistakes to giving it hundreds of billions to the people who made these mistakes, the problem is the precedent it sets that to the extent that a lot of the mistakes made during the housing boom years were because managers were incompetent or rather what they were doing is they were being a bit too aggressive during the housing boom. They were making money hand over fist when home prices were rising at double digit rates there was a lot of money to be made in 203 00:20:59.600 --> 00:21:29.600 Financial institutions, you know, going around to banks saying, I don't care who you lend the money to, just get people into houses, get mortgages, we'll take them off your books, we'll combine them, slice them and dice them and then sell them off to investors in China and elsewhere, and then we'll earn our commissions, the, you know, people at the time, some people knew that that's risky, what if the housing market collapses? And so the way, if you were a firm that didn't engage in such riskiness, the way you could justify your lower profits to your shareholders is to say, 204 00:21:29.600 --> 00:21:33.100 Don't worry, we think that with these people, they're going to get caught with their pants 205 00:21:33.100 --> 00:21:36.760 down and the housing market collapses, we don't know exactly when, but then you'll see 206 00:21:36.760 --> 00:21:39.520 why the prudence of our approach is better. 207 00:21:39.520 --> 00:21:43.960 That yeah, we're not making the huge returns and our executives aren't getting these multimillion 208 00:21:43.960 --> 00:21:46.920 dollar bonuses, but we're looking at the long term. 209 00:21:46.920 --> 00:21:51.280 Well that advice now has just been rendered moot, that was a dumb thing for them to do. 210 00:21:51.280 --> 00:21:56.320 The ideal strategy is make a bunch of money during the housing boom, pay your investors 211 00:21:56.320 --> 00:22:26.320 of Money, The Theory of Money and State, The Theory of Money and State, The Theory 212 00:22:26.320 --> 00:22:31.320 The rules are going to change. You don't know what's going to happen. 213 00:22:31.320 --> 00:22:34.320 Tim Geithner could just wake up next week and say, 214 00:22:34.320 --> 00:22:36.320 we're going to cancel all these types of loans, 215 00:22:36.320 --> 00:22:38.320 or we're going to introduce some new lending program 216 00:22:38.320 --> 00:22:40.320 to bail out firms that are getting in trouble. 217 00:22:40.320 --> 00:22:45.320 So you see that the incentives have all been changed. 218 00:22:45.320 --> 00:22:47.320 Let me move on a little bit here. 219 00:22:47.320 --> 00:22:54.320 Another downfall of what the Fed's been doing is it's picking winners and losers. 220 00:22:54.320 --> 00:22:58.920 okay so it's a lot of people talk as if it's just lending help to the economy in 221 00:22:58.920 --> 00:23:03.600 general and then you know again at the expense of all possible inflation down 222 00:23:03.600 --> 00:23:07.760 the road but no the Fed has come in and specifically bailed out individual 223 00:23:07.760 --> 00:23:12.440 sectors and we can only assume sectors that you know it's not that they 224 00:23:12.440 --> 00:23:15.720 randomly chose them or that they asked a bunch of social workers which areas of 225 00:23:15.720 --> 00:23:19.320 the economy should we help you know and they said well I think we you should buy 226 00:23:19.320 --> 00:23:24.300 you know debt issued by companies that make baby formula and and you know 227 00:23:54.300 --> 00:23:58.260 Goldman Sachs, Credit Default Swap, so that if AIG went down, Goldman would have been 228 00:23:58.260 --> 00:24:05.020 one of the ones hurt. And also the foreign banks that benefited from all these Fed interventions, 229 00:24:05.020 --> 00:24:10.600 they also, a lot of them, it's now coming to light over the last few weeks, the positions 230 00:24:10.600 --> 00:24:14.820 they were in, the reason they were so vulnerable was because of deals brokered by Goldman Sachs 231 00:24:14.820 --> 00:24:18.960 employees. So it's not merely the direct losses that Goldman would have suffered if the Fed 232 00:24:18.960 --> 00:24:30.960 The Fed literally did nothing when Lehman failed and AIG was on the ropes, but also a lot of their business partners would have lost billions and they would have blamed that in a sense on the advice and the deals that they got through Goldman Sachs. 233 00:24:30.960 --> 00:24:43.960 So again, it's not just Goldman Sachs of course, but the point is if you look at the Fed's balance sheet, it did not just say, oh the economy needs a trillion dollars in liquidity, so let's throw a dart at the board and just start buying stocks to the dart lands. 234 00:24:43.960 --> 00:25:13.960 Art Lands. No, they intervene in specific sectors to the detriment of others. So that's bad on many accounts. Again, it teaches businesses that what you need to do to succeed is not serve your customer, is not make sure you're returning value to your shareholder and watching the assets on your balance sheet, but rather the way to succeed is to make sure you remain in good with whoever's running the Fed. Bernanke right now is incredibly powerful. He's arguably one of the most powerful people on the planet if you assume that he really does 235 00:25:13.960 --> 00:25:16.220 you know behind the scenes we don't know 236 00:25:16.220 --> 00:25:18.740 exactly how much power he has maybe somebody 237 00:25:18.740 --> 00:25:21.040 tells him what to do we don't know 238 00:25:21.040 --> 00:25:23.860 but in terms of what the fed chair ostensibly has the power to do that's 239 00:25:23.860 --> 00:25:26.280 incredibly powerful he literally 240 00:25:26.280 --> 00:25:29.560 could destroy the economy tomorrow he could just say you know we're gonna 241 00:25:29.560 --> 00:25:33.000 we're gonna uh... sell everything off the books right you know and that would 242 00:25:33.000 --> 00:25:34.460 just cause the markets in turmoil 243 00:25:34.460 --> 00:25:35.940 or he could say 244 00:25:35.940 --> 00:25:39.880 we're gonna buy up every mortgage in america and technically he has 245 00:25:39.880 --> 00:25:41.520 claimed the right to do that 246 00:25:41.520 --> 00:25:43.920 and many of you probably know this but 247 00:25:43.920 --> 00:25:50.200 So the Fed had injected, at the time, I think it was about $700-800 billion into the financial 248 00:25:50.200 --> 00:25:56.120 markets. This was in December of 2008, so a few months after the rescues really got in 249 00:25:56.120 --> 00:26:00.760 a full swing, and Congress called Bernanke before them and said, can you please tell 250 00:26:00.760 --> 00:26:04.880 us who you're giving this money to? We're not disputing that you have the right to create 251 00:26:04.880 --> 00:26:08.140 hundreds of billions out of thin air and just hand it out to people, can you at least tell 252 00:26:08.140 --> 00:26:13.120 us who you're giving it to? And he said, no, that would defeat the purpose of the program. 253 00:26:13.120 --> 00:26:19.480 Now, his rationale was it would cause a stigma, you know, if people knew that we gave 13 billion 254 00:26:19.480 --> 00:26:24.480 to the Citi group to, you know, take something off their books, then people, you know, and 255 00:26:24.480 --> 00:26:26.320 you don't want the bankers to feel bad. 256 00:26:26.320 --> 00:26:30.040 So it's all about self-esteem on Wall Street, right? 257 00:26:30.040 --> 00:26:33.880 So, but literally, I mean, if you just think about it, that's shocking that not only does 258 00:26:33.880 --> 00:26:37.560 Bernanke walk around literally with the ability to write checks with, you know, it's not like 259 00:26:37.560 --> 00:26:42.120 there's a pile of money and every time Bernanke writes a check up, now he has less reserves, 260 00:26:42.120 --> 00:26:45.960 He can write as much as he wants. 261 00:26:45.960 --> 00:26:49.360 They have a hard time grasping it because it's such a crazy idea, but they've literally 262 00:26:49.360 --> 00:26:54.400 added more than a trillion dollars of assets to their books and the only way he gets penalized 263 00:26:54.400 --> 00:26:59.640 is on the balance sheet, your assets went up and then your liabilities went up, but 264 00:26:59.640 --> 00:27:01.920 there's nothing to stop him from doing that. 265 00:27:01.920 --> 00:27:05.360 Like I say, he doesn't even have to tell Congress who he's given the money to. 266 00:27:05.360 --> 00:27:09.400 So anyway, that's part of the impetus behind the audit, the Fed bill is just to say, well, 267 00:27:09.400 --> 00:27:13.120 at least let us know who you're shoveling these billions into the pockets of. 268 00:27:13.120 --> 00:27:19.560 Okay, let me have a few minutes left here, a few other problems and what the Fed's been doing. 269 00:27:19.560 --> 00:27:24.840 The whole, remember the whole ostensible purpose of these interventions in the credit market is 270 00:27:24.840 --> 00:27:29.000 we got to get businesses lending, or sorry, banks lending to businesses, right? 271 00:27:29.000 --> 00:27:34.600 That they say there's, you know, all these businesses out there that the way they pay their employees 272 00:27:34.600 --> 00:27:36.280 is they borrow money every month, right? 273 00:27:36.280 --> 00:27:40.840 in which it's crazy that you talk to an actual especially a small business owner and say 274 00:27:40.840 --> 00:27:45.320 do you actually use you know borrow money in order to pay your employees and make payroll every month 275 00:27:45.320 --> 00:27:49.400 and i talked to a few of them and they said well i'd be in real serious trouble if i did do that 276 00:27:49.400 --> 00:27:53.000 right that that that would be a sign of an emergency that that's not a standard operating 277 00:27:53.000 --> 00:27:56.760 procedure that you borrow money just to be able to pay your employees that month but anyway that 278 00:27:56.760 --> 00:28:01.320 was that was the whole rationale if you remember from tarp and all the things that the fed's been 279 00:28:01.320 --> 00:28:05.160 doing and that's always why they say you know Geithner when he was on his town hall meeting of 280 00:28:05.160 --> 00:28:10.400 of CNBC. You know, they never say, oh, we're bailing out the bankers because they made 281 00:28:10.400 --> 00:28:15.000 a bunch of losses and they shouldn't have to deal with that. They say, no, it's regrettable. 282 00:28:15.000 --> 00:28:21.280 We'd like to let them all fail and eat the results of their past mistakes, but we can't 283 00:28:21.280 --> 00:28:25.360 because then the financial system collapses and then you lose that credit intermediation 284 00:28:25.360 --> 00:28:30.720 process that you got savers over here, borrowers over here, and the banks are in the middle 285 00:28:30.720 --> 00:28:33.840 channeling the savings into the hands of the borrowers. 286 00:28:33.840 --> 00:28:39.240 So beyond the problems that we've talked about, that by the moral hazard they've 287 00:28:39.240 --> 00:28:41.240 the people in the middle who are 288 00:28:41.240 --> 00:28:44.280 responsible are the ones who prove themselves to be incompetent 289 00:28:44.280 --> 00:28:47.660 and besides the fact that the price, the terms on which these 290 00:28:47.660 --> 00:28:50.440 these borrowings are occurring are not the right prices, 291 00:28:50.440 --> 00:28:53.680 besides those two problems you've got the fact that the borrowing is way down 292 00:28:53.680 --> 00:28:57.160 and we don't know in the alternate universe the Fed had done nothing 293 00:28:57.160 --> 00:29:00.400 what would the borrowing be like but it's just, I think it's ironic, 294 00:29:00.400 --> 00:29:07.000 If you look at the loans to businesses from banks, commercial loans to businesses, they 295 00:29:07.000 --> 00:29:13.480 were at an all-time historical high in October of 2008. And since then, they have plummeted 296 00:29:13.480 --> 00:29:18.680 something like 17%. So I'll say that again, the thing that we're trying to rescue was 297 00:29:18.680 --> 00:29:23.680 at an all-time high right when TARP kicked in, and then since then, it's fallen like 298 00:29:23.680 --> 00:29:27.200 17%. So if you looked at a chart from your point of view, it's like this, and then it's 299 00:29:27.200 --> 00:29:57.200 is like this, and the inflection point is right when all these emergency measures to boost lending to small businesses are kicked in, and it's, proponents of it will say, well, if it hadn't been for TARP, it would have fallen even faster, and that perhaps that's true, but again, the people are, you probably wouldn't have known that unless I told you, or if you heard it from somewhere else, if you listen to the conventional wisdom and people justifying the interventions, you would have thought loans to businesses were collapsing, especially real estate loans were collapsing, and then they finally started picking back up, 300 00:29:57.200 --> 00:30:06.200 The so-called credit crunch, when people were worried about it, it was just the rate of increase of loans was tapering off. 301 00:30:06.200 --> 00:30:08.200 But it didn't actually start plummeting until after. 302 00:30:08.200 --> 00:30:16.200 And one of the specific things the Fed has been doing, and some economists, you know, they can't understand why, is the Fed's paying interest on reserves. 303 00:30:16.200 --> 00:30:23.200 So it's a little bit technical, but if you're a commercial bank, you could have reserves, it's basically your checking account with the Fed. 304 00:30:23.200 --> 00:30:30.200 In the Fed, which is a relatively new thing, it didn't used to do this, is paying interest to banks to keep their money parked at the Fed. 305 00:30:30.200 --> 00:30:35.200 So many of you may have thought, gee, I thought the Fed was doing everything in its power to get banks to make new loans. 306 00:30:35.200 --> 00:30:39.200 No, it's not. It's in a sense, literally paying banks to not make loans. 307 00:30:39.200 --> 00:30:46.200 And again, we don't know how much loan making would have occurred because it is a bad environment and the banks are, you know, they have huge losses. 308 00:30:46.200 --> 00:30:55.700 My point is just, it's ironic that we think the Fed is trying to promote lending when, no, they're literally paying banks, not to make new loans, but to keep money on deposit with the Fed. 309 00:30:55.700 --> 00:31:03.200 Okay, the very last point, I want to make out a minute left here, is, of course, the thing everyone talks about, the inflation concern. 310 00:31:03.200 --> 00:31:13.200 But there, people are acting as if, so far it hasn't been a problem, but once price inflation gets to five, six, seven percent down the road, we don't know exactly when, 311 00:31:13.200 --> 00:31:18.640 and then we'll see the downside of all the beneficial things the Fed has done up till now. 312 00:31:18.640 --> 00:31:23.280 And I want to say, no, right now, the threat of that is retarding recovery. 313 00:31:23.280 --> 00:31:29.480 I mean, just think about it, you personally, you haven't been trying to find the best ways 314 00:31:29.480 --> 00:31:33.320 to serve customers or to, you know, where's my money going to make the highest rate of 315 00:31:33.320 --> 00:31:37.120 return over the next few years in that sense, you know, channeling resources to where they're 316 00:31:37.120 --> 00:31:38.880 going to yield the most fruit for consumers. 317 00:31:38.880 --> 00:31:43.880 No, you're wondering, man, is this inflationary time bomb real, and where am I going to put my money? 318 00:31:43.880 --> 00:31:47.880 Should I just put it in gold or silver, or should I buy real estate in Asia? 319 00:31:47.880 --> 00:31:52.880 So when people are worried about massive inflation, they're not doing what they're supposed to be doing. 320 00:31:52.880 --> 00:31:56.880 That sort of, in a sense, takes away the whole benefit of a monetary economy, 321 00:31:56.880 --> 00:32:01.880 is when people start thinking in terms of barter, and I've been talking to some of you guys, 322 00:32:01.880 --> 00:32:04.880 and you guys are more paranoid than I am, which is saying something, 323 00:32:04.880 --> 00:32:34.880 about, you know, we need to get, you know, oh, I got my shit, I got this much, you know, ammunition and this much bottled water and, you know, this stuff, and it's, you know, hybrid seeds, what have you, and that's not good for the economy, you know, in terms of, if those, it would be good if those threats weren't there and people didn't need to worry about stocking up on hybrid seeds but instead could worry about, you know, let me try to get more customers from my business or whatever the issue is, okay? So, my point is just even though the price inflation threat has 324 00:32:34.880 --> 00:32:41.880 the Federal Reserve, fiat money, fractional reserve banking, Human Action, Man Economy and State, The Theory of Money and Credit 325 00:33:04.880 --> 00:33:09.600 600, because it would have kept falling the way oil prices collapsed. 326 00:33:09.600 --> 00:33:13.720 People would have been directing their resources and their time into productive things rather 327 00:33:13.720 --> 00:33:18.600 than just trying to hang on to their principle in light of this coming inflationary storm. 328 00:33:18.600 --> 00:33:21.400 So with that wonderfully chipper note, I will end. 329 00:33:21.400 --> 00:33:21.840 Thanks a lot.