WEBVTT

NOTE Luxury Condos? The Housing Bubble Comes to Auburn

1
00:00:00.000 --> 00:00:06.000
It is great to be invited back here on campus, back to the AU Libertarians, it's an organization

2
00:00:06.000 --> 00:00:10.800
that's been around a long time now and very active and one of the coolest student organizations

3
00:00:10.800 --> 00:00:11.800
on campus.

4
00:00:11.800 --> 00:00:16.760
And I want to salute you all for a lot of the great work that you've been doing the

5
00:00:16.760 --> 00:00:18.880
last year or so.

6
00:00:18.880 --> 00:00:28.880
My topic tonight is the housing, whoo, it was the housing bubble, yeah, the housing

7
00:00:28.880 --> 00:00:35.280
And what's going on in the housing market and why are they tearing down all of Auburn

8
00:00:35.280 --> 00:00:40.340
to build game day condominiums for people who are only coming to campus like six days

9
00:00:40.340 --> 00:00:41.340
a year?

10
00:00:41.340 --> 00:00:45.640
It's kind of very strange.

11
00:00:45.640 --> 00:00:53.360
Auburn, I've been here for 24 years and Auburn sort of has changed a little bit over time

12
00:00:53.360 --> 00:00:59.020
But it's changed a lot in the last few years, and a lot of the landmark institutions of

13
00:00:59.020 --> 00:01:07.300
Auburn are no longer with us, and in a few cases that's probably a good thing, but we've

14
00:01:07.300 --> 00:01:12.060
gone through this period of rapid change, and it's not just here in Auburn, it's all

15
00:01:12.060 --> 00:01:13.900
across the country.

16
00:01:13.900 --> 00:01:17.160
All across the country there's basically been a housing bubble.

17
00:01:17.160 --> 00:01:23.020
It's different as you go from city to city, from county to county, from state to state

18
00:01:23.020 --> 00:01:28.780
in terms of what the manifestations of that bubble is, but it's all over the country.

19
00:01:28.780 --> 00:01:35.660
I just read a story today about a brain surgeon in Miami, Florida.

20
00:01:35.660 --> 00:01:45.060
This brain surgeon paid $3.6 million for an option to buy 100 acres of land that he was

21
00:01:45.060 --> 00:01:46.940
going to build houses on.

22
00:01:46.940 --> 00:01:53.100
So that means he's paying $36,000 per acre just for the right to buy the property.

23
00:01:53.100 --> 00:01:55.880
So he hadn't even bought it with $3.6 million.

24
00:01:55.880 --> 00:02:00.260
And he decided not to exercise that option when it came due.

25
00:02:00.260 --> 00:02:06.380
So he just basically, $3.6 million evaporates for him.

26
00:02:06.380 --> 00:02:10.080
So it's happening all over the country.

27
00:02:10.080 --> 00:02:16.580
In Auburn, across the country, California, Florida, New England.

28
00:02:16.580 --> 00:02:18.580
The Theory of Money and Credit

29
00:02:46.580 --> 00:03:00.580
to explain exactly why these things happen and what are the results and ultimately what are the consequences that result from these kind of bubbles.

30
00:03:00.580 --> 00:03:10.580
So first of all, what is a bubble? Well, it's basically asset prices increasing by a very extensive degree.

31
00:03:10.580 --> 00:03:15.580
There are three types of factors that are involved in any kind of bubble.

32
00:03:15.580 --> 00:03:24.580
Before I get into those factors though, I want to say something about the nature and significance of this type of talk because it's a little unusual for this group.

33
00:03:24.580 --> 00:03:30.580
Usually it's about politics, it's about the drug war, it's about the war in Iraq, it's all that kind of stuff.

34
00:03:30.580 --> 00:03:36.580
economics is really not the forte of what goes on around here but I want to

35
00:03:36.580 --> 00:03:42.660
tell you that the what causes the housing bubble is more important to us

36
00:03:42.660 --> 00:03:48.860
than the war on drugs or the war on Iraq is as important as those things are to

37
00:03:48.860 --> 00:03:55.780
our economy to our lives to our civil liberties and so on this is more

38
00:03:55.780 --> 00:04:02.220
is more important than all of that combined. This is going to ultimately be about the standard

39
00:04:02.220 --> 00:04:07.640
of liberty in this country. So it's something that libertarians should hear and as a matter

40
00:04:07.640 --> 00:04:14.280
of fact it's the most important thing that libertarians should hear. So when we look

41
00:04:14.280 --> 00:04:19.920
at the housing bubble, there's three basic factors that go into a bubble. There are real

42
00:04:19.920 --> 00:04:26.040
Real factors, real economic factors, there are psychological factors, and then there

43
00:04:26.040 --> 00:04:28.360
is the Federal Reserve.

44
00:04:28.360 --> 00:04:35.000
Real factors with housing are things like, for example, tax breaks that you get on residential

45
00:04:35.000 --> 00:04:36.000
housing.

46
00:04:36.000 --> 00:04:41.640
You get to write it off on your taxes, there's now an exemption on capital gains that you

47
00:04:41.640 --> 00:04:46.720
can get on houses, so that people are interested in investing in real estate because it has

48
00:04:46.720 --> 00:04:53.000
has these tax advantages, and there are other real factors like population growth.

49
00:04:53.000 --> 00:04:59.900
And then there are psychological factors that develop over time, the type of speculation

50
00:04:59.900 --> 00:05:06.360
that goes on where people who are otherwise unconnected to the housing market start investing

51
00:05:06.360 --> 00:05:11.420
in housing, that they already have their own house, but they're buying additional houses

52
00:05:11.420 --> 00:05:14.680
for the simple reason of trying to resell them.

53
00:05:14.680 --> 00:05:19.600
The term there is called flipping houses, where you buy them and then you resell them

54
00:05:19.600 --> 00:05:22.600
at a higher price in a very short period of time.

55
00:05:22.600 --> 00:05:29.040
It's very similar to the stock traders of the late 1990s, the day traders, who would

56
00:05:29.040 --> 00:05:33.880
buy stocks in the morning and sell them at night and make a profit during the day, and

57
00:05:33.880 --> 00:05:35.400
that's what they would live on.

58
00:05:35.400 --> 00:05:39.600
And that's what these house flippers were living on until recently, where they would

59
00:05:39.600 --> 00:05:45.760
to buy a house or a condominium and then resell it for a big profit.

60
00:05:45.760 --> 00:05:51.960
And finally there's the Federal Reserve, the easy monetary policy, the easy credit policy

61
00:05:51.960 --> 00:05:56.760
of the Federal Reserve in terms of generating the housing bubble itself.

62
00:05:56.760 --> 00:06:01.220
They did the same thing for the tech stocks in the late 1990s that they've been doing

63
00:06:01.220 --> 00:06:04.840
in recent years, funneling credit into the housing market.

64
00:06:04.840 --> 00:06:11.840
I'm going to talk a little bit about that, but basically it involves reducing the interest rate on mortgages.

65
00:06:11.840 --> 00:06:17.840
If you reduce the interest rate on mortgages, it reduces your payment and makes it easier to buy housing.

66
00:06:17.840 --> 00:06:30.840
This increases the overall amount of credit that goes into the economy, so that there are more loans available through banks and other financial corporations than there otherwise would be.

67
00:06:30.840 --> 00:06:39.840
It's easy to get a loan when the Federal Reserve is keeping the interest rate down and increasing the supply of money and credit.

68
00:06:39.840 --> 00:06:50.840
And if there's more credit that's going into the economy artificially from the Fed, that means that lending standards at the banks have to decline.

69
00:06:50.840 --> 00:06:58.840
They have to make it easier for people to qualify for a loan in order to give more loans away.

70
00:06:58.840 --> 00:07:28.840
Giveaway. You've only got so many good customers and if you've got extra credit to give away then you have to take progressively people with worse credit ratings. The upshot of this is that the Federal Reserve policy creates bad investments. You give more money away to people with poor credit and ultimately you're going to find that bad investments are being made and we're finding that out in today's marketplace.

71
00:07:28.840 --> 00:07:40.840
There's a website called foreclosure.com where you can go look at the houses that have been foreclosed or where they've gone into bankruptcy in a particular area.

72
00:07:40.840 --> 00:07:48.840
When I first looked at that website, there were like 36 houses in Auburn that were either foreclosed or in bankruptcy.

73
00:07:48.840 --> 00:07:54.840
And that was after Thanksgiving, so it was like early December when I checked that.

74
00:07:54.840 --> 00:08:00.840
Today, when I checked it, there were 74. So the number has basically doubled in a month and a half.

75
00:08:00.840 --> 00:08:04.840
So more people are unable to make their payments.

76
00:08:04.840 --> 00:08:10.840
There are 400 houses in foreclosure or bankruptcy in Lee County.

77
00:08:10.840 --> 00:08:16.840
And there are 18,000 houses under foreclosure or bankruptcy in the state of Alabama

78
00:08:16.840 --> 00:08:20.840
and 1.4 million in the United States.

79
00:08:20.840 --> 00:08:30.840
There's a lot of people who haven't been able to make their payments and they're going personal bankruptcy or the house is being foreclosed by the bank that made the loan.

80
00:08:30.840 --> 00:08:46.840
So there are too many houses being built. The houses have tended to be very expensive, very large, the wrong type of housing, sometimes in the wrong location or even the type of construction that's been done on these houses.

81
00:08:46.840 --> 00:08:51.840
There's a lot of bad investment, in part, in terms of the construction companies themselves.

82
00:08:51.840 --> 00:09:00.840
They've bought a lot of equipment, they've bought a lot of land and things of that nature that they've invested in, and now they can't sell houses.

83
00:09:00.840 --> 00:09:04.840
And they've stopped, in many cases, stopped building houses.

84
00:09:04.840 --> 00:09:11.840
And in the recent quarter, the last three months, the major home builders in the country,

85
00:09:11.840 --> 00:09:26.840
The top six or seven companies that build homes all over the United States wrote down one and a half billion dollars of losses on the land that they bought prospectively to build houses on.

86
00:09:26.840 --> 00:09:35.840
So the Fed has created this easy monetary policy and interest rates were as low as 1% there for a while, 2004, 2005.

87
00:09:35.840 --> 00:09:43.720
and now we're seeing many many more of these investments that were made in that

88
00:09:43.720 --> 00:09:49.760
period of time turning out to be bad investments. We have some more federal

89
00:09:49.760 --> 00:09:55.680
government intervention here as well in the form of Fannie Mae and Freddie Mac

90
00:09:55.680 --> 00:10:01.240
and some of these other government sponsored corporations and they have the

91
00:10:01.240 --> 00:10:08.240
They have a nice purpose of making it easier for people to get a home mortgage.

92
00:10:08.240 --> 00:10:14.240
And so they're in the business of making more mortgage money available to banks.

93
00:10:14.240 --> 00:10:18.240
And essentially what they do is they buy the loans from banks.

94
00:10:18.240 --> 00:10:20.240
The banks have made their money.

95
00:10:20.240 --> 00:10:24.240
They buy these loans, package them up and sell them to Wall Street

96
00:10:24.240 --> 00:10:29.240
as a big $50 million chunks of home mortgages.

97
00:10:29.240 --> 00:10:36.240
So that the people who buy these things are protected against things like foreclosure and bankruptcy.

98
00:10:36.240 --> 00:10:41.240
The American taxpayer is not protected, but the buyers of these securities are.

99
00:10:41.240 --> 00:10:47.240
So the number one point, and the most important point you want to take away from this,

100
00:10:47.240 --> 00:10:54.240
is that it's really the government that's causing these economic bubbles to appear in our economy.

101
00:10:54.240 --> 00:11:12.240
It's the Federal Reserve's easy money credit, easy credit policy, and it's the Fannie Mays and Freddie Macs that have reduced the credit quality of the loans that are being made out there and creating a big tax liability for taxpayers.

102
00:11:12.240 --> 00:11:22.240
It's not the marketplace. You do see people in the market who are speculating, but it's not the marketplace itself.

103
00:11:22.240 --> 00:11:39.240
In the absence of the Federal Reserve, in the absence of this easy credit policy and insured losses, the marketplace wouldn't get out of whack the way it has in the last couple of years with the housing market, the real estate market.

104
00:11:39.240 --> 00:11:44.240
It wouldn't have gotten out of whack with the tech stock bubble of the late 1990s.

105
00:11:44.240 --> 00:11:52.400
in the 90s, there's automatic corrective mechanisms in the marketplace and with all this easy

106
00:11:52.400 --> 00:11:58.560
government credit coming into play, ultimately the money is going to be misused, abused and

107
00:11:58.560 --> 00:12:00.560
creating bad investments.

108
00:12:00.560 --> 00:12:06.200
You may not remember, but the Enron crisis with the Enron company was basically a case

109
00:12:06.200 --> 00:12:14.000
where banks were giving Enron all of this money, lending them all this money without

110
00:12:14.000 --> 00:12:18.120
not even checking into their credit. They were just giving it away and Enron was taking

111
00:12:18.120 --> 00:12:27.120
it in and using it in many cases for some stupid things. So the results, the results

112
00:12:27.120 --> 00:12:33.400
here are not pretty. First of all, it creates too much debt in the economy. The American

113
00:12:33.400 --> 00:12:42.040
consumer right now has an all-time record personal debt to the tune of about, well it's

114
00:12:42.040 --> 00:12:50.240
It's over $12 trillion of debt that the American public owes to banks and financing companies

115
00:12:50.240 --> 00:12:53.720
for auto loans and all the rest.

116
00:12:53.720 --> 00:12:56.360
They've taken on way too much debt.

117
00:12:56.360 --> 00:13:01.080
The results are ultimately going to be a lot of bankruptcy, personal bankruptcy, business

118
00:13:01.080 --> 00:13:04.000
bankruptcy and unemployment.

119
00:13:04.000 --> 00:13:08.920
Right now we've only seen the tip of the iceberg, I suppose, in terms of unemployment in the

120
00:13:08.920 --> 00:13:11.080
construction industry itself.

121
00:13:11.080 --> 00:13:16.080
We're told in the business press day after day that it's not spreading, it's going to take care of itself.

122
00:13:16.080 --> 00:13:21.080
By the next few months, this housing bubble will be all over.

123
00:13:21.080 --> 00:13:25.080
I think it's all going to be all over too, but in a much more negative way.

124
00:13:25.080 --> 00:13:28.080
Ultimately, this could bring on a recession.

125
00:13:28.080 --> 00:13:31.080
And for those who don't know the cause and effect of all this,

126
00:13:31.080 --> 00:13:37.080
it also brings a kind of psychological injury to people who have been forced into bankruptcy,

127
00:13:37.080 --> 00:13:44.120
who have lost their homes, who have lost their jobs, because they see that the system is

128
00:13:44.120 --> 00:13:45.120
not working.

129
00:13:45.120 --> 00:13:50.080
Okay, the system, their society that they're living in, they haven't done anything wrong,

130
00:13:50.080 --> 00:13:54.360
they were playing by the rules, they were going to work, they bought a home, and yet

131
00:13:54.360 --> 00:13:59.880
they end up with bankruptcy, they end up losing their home, maybe their job, the system just

132
00:13:59.880 --> 00:14:00.880
isn't fair.

133
00:14:00.880 --> 00:14:02.960
And in a sense, it isn't.

134
00:14:02.960 --> 00:14:08.640
There's this big game going on in Washington D.C. behind the scenes of manipulating money

135
00:14:08.640 --> 00:14:12.560
and credit, and they don't really have any idea about any of that.

136
00:14:12.560 --> 00:14:17.120
They just see the system is failing and what do they naturally call for?

137
00:14:17.120 --> 00:14:19.120
What's the first thing they're going to call for?

138
00:14:19.120 --> 00:14:21.520
More government intervention, exactly.

139
00:14:21.520 --> 00:14:22.520
They're going to want help.

140
00:14:22.520 --> 00:14:24.040
They're going to want bailouts.

141
00:14:24.040 --> 00:14:25.040
They're going to want subsidies.

142
00:14:25.040 --> 00:14:32.600
To give you a little magnitude of the problem, the amount of real estate loans in the U.S.

143
00:14:32.600 --> 00:14:38.080
This economy hit $1 trillion in November of 1994.

144
00:14:38.080 --> 00:14:51.200
In November of 2002, it hit $2 trillion, and in May of 2006, it hit $3 trillion.

145
00:14:51.200 --> 00:15:00.000
Over that same time, total debt by consumers was $5 trillion in 1994, $7.5 trillion in

146
00:15:00.000 --> 00:15:10.400
2002, and an amazing 12 plus trillion in May 2006. And this is all at a time when the

147
00:15:10.400 --> 00:15:16.280
personal savings rate in the U.S., the amount of our paychecks that we don't spend and

148
00:15:16.280 --> 00:15:21.600
that we leave in the bank is hit zero. And actually we've had a couple of months where

149
00:15:21.600 --> 00:15:27.920
it's been negative. So the Americans are spending everything they have and then some. As a matter

150
00:15:27.920 --> 00:15:57.920
As a matter of fact, a lot of Americans have used this easy credit to take money out of their house, so say for example they've been paying on a mortgage for 10 or 15 years and they've built up a lot of equity because they've been paying down the mortgage, well they just go to the bank and refinance, take out $100,000 and spend it on a boat, motorcycle, RV, game day condo, all of a sudden you've got $100,000 of cash

151
00:15:57.920 --> 00:16:04.720
Payments Lower, seems like a great deal. So the debt has increased tremendously. The money

152
00:16:04.720 --> 00:16:11.120
supply that's created by the Federal Reserve has also increased very rapidly in recent

153
00:16:11.120 --> 00:16:17.520
years. If we go back to a time when we had a, when our monetary system was based loosely

154
00:16:17.520 --> 00:16:24.460
on gold and silver from like the 1960s, when our monetary system was still on basically

155
00:16:24.460 --> 00:16:31.740
The money supply increased at about 5% per year on average.

156
00:16:31.740 --> 00:16:39.560
From 1971 to 1984, after we had gone off of the gold standard initially, the money supply

157
00:16:39.560 --> 00:16:42.860
increased at an average of 8% per year.

158
00:16:42.860 --> 00:16:49.200
And since 1984, when we sort of deregulated the money supply, the money supply has been

159
00:16:49.200 --> 00:16:52.140
increasing at over 10% per year.

160
00:16:52.140 --> 00:16:59.260
So we start out in 1959 with a money supply of 150 billion dollars.

161
00:16:59.260 --> 00:17:04.420
Today the money supply exceeds 7 trillion dollars.

162
00:17:04.420 --> 00:17:06.700
That doesn't make us any better off.

163
00:17:06.700 --> 00:17:10.780
It's just pieces of paper and we just have a lot more of them now.

164
00:17:10.780 --> 00:17:17.020
We might think of ourselves as a lot richer, but ultimately it's an illusion.

165
00:17:17.020 --> 00:17:18.620
Prices have just gone up.

166
00:17:18.620 --> 00:17:22.620
In 1959, you could buy a gallon of gas for like 12 cents a gallon.

167
00:17:22.620 --> 00:17:27.620
To give you some idea about the magnitude of how many houses have been created,

168
00:17:27.620 --> 00:17:33.620
the normal number of housing starts or housing construction in the U.S. is about 1 million houses per year.

169
00:17:33.620 --> 00:17:43.620
Maybe 1 to 1.1 million houses per year is the number that we need in terms of population growth and income growth and that sort of thing.

170
00:17:43.620 --> 00:17:53.620
For the last four years, housing starts and construction have been between 1.5 and 1.8 million houses.

171
00:17:53.620 --> 00:17:58.620
So basically we have about three million extra houses out there.

172
00:17:58.620 --> 00:18:04.620
Does anybody know anybody who owns more than one house? Yeah.

173
00:18:04.620 --> 00:18:12.620
Well that's the type of thing that we've gotten into in the U.S. and there's nothing wrong with owning more than one house.

174
00:18:12.620 --> 00:18:25.620
It's great, but it's become pervasive in our economy that people owning, you know, a house here, a gameday condominium there, a beach house, a house in the mountains and so on.

175
00:18:25.620 --> 00:18:37.620
So there's been this big ballooning of the housing stock. In the last couple of months, housing construction has come back down to normal levels, about 1.1 million.

176
00:18:37.620 --> 00:18:46.600
As I said, the Federal Reserve is basically all responsible for this in terms of reducing

177
00:18:46.600 --> 00:18:49.100
the interest rate down to 1%.

178
00:18:49.100 --> 00:18:54.260
That's the interest rate that it charges, banks charge to one another and basically

179
00:18:54.260 --> 00:18:56.820
they can get money from the Federal Reserve at 1%.

180
00:18:56.820 --> 00:19:04.900
You can't get 1%, I can't get 1%, but the big banks can get that low interest credit.

181
00:19:04.900 --> 00:19:08.780
They've since raised those rates, of course, to about five percent.

182
00:19:08.780 --> 00:19:14.860
I want to give you a little insight into exactly how they do this, and I'm not going to go

183
00:19:14.860 --> 00:19:16.580
into the technical details.

184
00:19:16.580 --> 00:19:23.380
When I teach money in banking, I spend the whole course on this, and they still don't

185
00:19:23.380 --> 00:19:24.380
get it.

186
00:19:24.380 --> 00:19:29.380
So, it's kind of confusing.

187
00:19:29.380 --> 00:19:34.460
Let me just give it a try here, how the Federal Reserve creates credit.

188
00:19:34.460 --> 00:19:41.460
Let's see what the Federal Reserve does, is it buys U.S. government bonds from banks.

189
00:19:41.460 --> 00:19:44.460
You know, how does that increase the money supply?

190
00:19:44.460 --> 00:19:53.460
Well, if the bank sells bonds and gets money in return, then it can make that money available for loans.

191
00:19:53.460 --> 00:19:56.460
And this is how they keep interest rates low.

192
00:19:56.460 --> 00:20:01.460
If they buy a bunch of government bonds, inject a bunch of money into the economy,

193
00:20:01.460 --> 00:20:04.460
When that helps keep down interest rates.

194
00:20:04.460 --> 00:20:08.460
Now how does the Fed buy these bonds?

195
00:20:08.460 --> 00:20:10.460
This is where it gets interesting.

196
00:20:10.460 --> 00:20:15.460
They open an account for the bank at the Federal Reserve.

197
00:20:15.460 --> 00:20:19.460
And then they put a deposit in that account.

198
00:20:19.460 --> 00:20:22.460
Say the Fed buys a million dollars from your bank.

199
00:20:22.460 --> 00:20:25.460
It puts a million dollars in your account at the Fed.

200
00:20:25.460 --> 00:20:29.460
Banks have to hold a certain amount of reserves by law.

201
00:20:29.460 --> 00:20:37.460
So they use that money at the Fed as part of their reserves and they take their reserves at the bank and they lend them out.

202
00:20:37.460 --> 00:20:38.460
Does that make sense?

203
00:20:38.460 --> 00:20:45.460
The interesting thing about this is that the Fed doesn't actually put money into an account.

204
00:20:45.460 --> 00:20:47.460
They just enter it on the computer.

205
00:20:47.460 --> 00:20:52.460
So there's no actual money the Fed is actually giving these banks.

206
00:20:52.460 --> 00:20:54.460
It's just an electronic entry.

207
00:20:54.460 --> 00:21:00.620
So it would be like saying, okay, you give me all of your bonds and I'll make this little

208
00:21:00.620 --> 00:21:04.300
account for you in my bank and we'll just pretend.

209
00:21:04.300 --> 00:21:05.820
And that's what they do.

210
00:21:05.820 --> 00:21:12.860
They pretend there's no money, the money is in effect is ejected from the banks into the

211
00:21:12.860 --> 00:21:17.540
economy through an electronic bookkeeping at the Fed.

212
00:21:17.540 --> 00:21:19.260
And it works real well for the Fed.

213
00:21:19.260 --> 00:21:23.900
They've got hundreds of billions of dollars of government bonds and they earn the interest

214
00:21:23.900 --> 00:21:24.900
on the Internet.

215
00:21:24.900 --> 00:21:27.360
And then that's where they get their money to spend.

216
00:21:27.360 --> 00:21:32.420
And so they have so much money, they don't know what to do with all of it.

217
00:21:32.420 --> 00:21:35.340
They make like 60 billion dollars a year.

218
00:21:35.340 --> 00:21:40.660
And they have elaborate offices, huge buildings, unbelievable security.

219
00:21:40.660 --> 00:21:46.660
If you're ever, if we're ever in a nuclear war and you work at the Fed, you'll be okay.

220
00:21:46.660 --> 00:21:52.260
Nuclear proof shelters, great paying jobs, just all sorts of resources.

221
00:21:52.260 --> 00:21:59.260
resources. As a matter of fact, they don't come anywhere close to spending all of the money they take and they give some of it back to the government.

222
00:21:59.260 --> 00:22:10.260
It's the only governmental agency that actually makes a profit. So that's the whole trick. It's just an electronic bookkeeping entry at the Fed.

223
00:22:10.260 --> 00:22:21.260
The government bonds come off the table and artificial credit is injected into the economy and ultimately, if they do enough of it, they're going to cause bad investments

224
00:22:21.260 --> 00:22:25.260
So what's going to happen with the housing bubble?

225
00:22:25.260 --> 00:22:31.260
Well, the truth be known, we really don't know exactly what's going to happen.

226
00:22:31.260 --> 00:22:40.260
One of the points about Austrian economics and the Mises Institute is that we can't actually accurately forecast the economy.

227
00:22:40.260 --> 00:22:46.260
We can't predict with precision over and over and over again what's going to happen in the economy.

228
00:22:46.260 --> 00:22:52.100
There are way too many variables, too many economic variables, too many political variables,

229
00:22:52.100 --> 00:22:58.660
too many geopolitical things like war and terrorism to make accurate predictions.

230
00:22:58.660 --> 00:23:03.980
So we can't tell for sure, but we can have some pretty good ideas.

231
00:23:03.980 --> 00:23:08.460
Some people believe we are at the beginning of the end of the housing bubble.

232
00:23:08.460 --> 00:23:15.580
They think that the worst is over and that after a few months all of the excess inventory

233
00:23:15.580 --> 00:23:21.180
is going to be worked out and that housing will start to regenerate itself and that it's

234
00:23:21.180 --> 00:23:23.260
not going to lead to a recession.

235
00:23:23.260 --> 00:23:29.300
So there's some very optimistic people out there, but unfortunately these are the same

236
00:23:29.300 --> 00:23:35.560
people who denied that there ever was a housing bubble starting in the first place.

237
00:23:35.560 --> 00:23:42.620
So if we look at government economists, real estate industry economists, the Wall Street

238
00:23:42.620 --> 00:23:49.740
Bulls, who were interested in selling you shares in these companies.

239
00:23:49.740 --> 00:23:53.500
They all think that things are really turning around already.

240
00:23:53.500 --> 00:23:58.500
It's just unfortunate they're the same ones who denied that there was ever a housing bubble

241
00:23:58.500 --> 00:23:59.500
in the first place.

242
00:23:59.500 --> 00:24:06.940
Alan Greenspan, who was the chairman of the Fed before he left office, he said there is

243
00:24:06.940 --> 00:24:10.940
He is not, definitely, there's definitely not a housing bubble.

244
00:24:10.940 --> 00:24:17.940
And he went to outline various reasons why there could not be a national housing bubble.

245
00:24:17.940 --> 00:24:26.940
And then right before he left office, he said that there was apparently some frothiness in the real estate market.

246
00:24:26.940 --> 00:24:28.940
Nice coffee analogy.

247
00:24:28.940 --> 00:24:37.220
Then, when he got out of office, his first speech, which I think he made like $100,000,

248
00:24:37.220 --> 00:24:39.500
he said that the housing bubble was over.

249
00:24:39.500 --> 00:24:43.420
He said it was over, he'd been denying all along that it existed, and then all of a sudden

250
00:24:43.420 --> 00:24:48.100
he gets out of office, first thing he does he says, well, you know, it's over with.

251
00:24:48.100 --> 00:24:52.860
So these are all the same people who did not predict the housing bubble in the first place

252
00:24:52.860 --> 00:25:00.660
in a place who denied its actual existence right through the whole bubble when it seemed

253
00:25:00.660 --> 00:25:04.700
to a lot of people that there were tremendous excesses in the economy.

254
00:25:04.700 --> 00:25:10.020
My brother moved out to Napa Valley, one of the most expensive real estate markets in

255
00:25:10.020 --> 00:25:11.740
the country.

256
00:25:11.740 --> 00:25:15.500
He bought a house for $250,000.

257
00:25:15.500 --> 00:25:19.180
He described it as the worst house in Napa County.

258
00:25:19.180 --> 00:25:26.780
It was 782 square feet of a house on a major highway.

259
00:25:26.780 --> 00:25:30.300
Four years later, he sold it for a half a million dollars.

260
00:25:30.300 --> 00:25:33.540
And there's stuff like that going on all across the country.

261
00:25:33.540 --> 00:25:38.700
There are other people such as myself who think we are only at the end of the beginning.

262
00:25:38.700 --> 00:25:40.680
We're not at the beginning of the end.

263
00:25:40.680 --> 00:25:45.340
We're just at the end of the beginning of the housing bubble.

264
00:25:45.340 --> 00:25:51.300
And this would include the Austrian economist, basically.

265
00:25:51.300 --> 00:25:56.300
There were a few other people who predicted the housing bubble in advance, but basically

266
00:25:56.300 --> 00:26:01.980
the people who predicted it in print from the same school of economic thought as myself.

267
00:26:01.980 --> 00:26:08.980
I just noticed today, for example, that the homeowner vacancy rates in the U.S., this

268
00:26:08.980 --> 00:26:14.980
This is single-family houses, condominiums and multi-family units.

269
00:26:14.980 --> 00:26:23.980
Homeowner vacancy rates, these are houses that are owned by somebody who is not currently living there, hit an all-time high.

270
00:26:23.980 --> 00:26:35.980
The statistics go back for decades and the homeowner vacancy rates for single-family houses were about 1%, on average.

271
00:26:35.980 --> 00:26:47.980
So they might be 0.5, 0.6, 0.7, 0.11, 0.12, and the series goes for years and years and years and then all of a sudden the last couple of years straight up and it's more than doubled in the last year.

272
00:26:47.980 --> 00:26:55.980
21 sub-prime lenders. These are companies that make loans to people who do not have good credit.

273
00:26:55.980 --> 00:27:04.680
Subprime. So I would be, you know, a prime person to sell a mortgage to, you guys would be subprime.

274
00:27:04.680 --> 00:27:15.560
Okay? 21 such companies have closed, ceased operations since December 1st. So none of them

275
00:27:15.560 --> 00:27:25.300
closed for like the last six or seven years, and now 21 have closed in about 70 days. Another thing

276
00:27:25.300 --> 00:27:37.300
The thing that has yet to really happen in this economy is that a lot of people who have taken out loans refinance their house with the use of creative financing with teaser rates.

277
00:27:37.300 --> 00:27:49.300
A teaser rate is, for example, you take a mortgage loan and you only have to pay 2.9% interest for the first six months and then it goes up to the real rate.

278
00:27:49.300 --> 00:27:57.300
The credit card, well they only charge you 1.9% interest, and then six months later it's 12.9 or 16.9.

279
00:27:57.300 --> 00:28:05.300
So a lot of people have financed their house that way, and they only really qualified at the 2.9% level.

280
00:28:05.300 --> 00:28:12.300
They really don't have the money to pay for the mortgage payment on a real interest rate.

281
00:28:12.300 --> 00:28:23.300
They also have a lot of people on variable rate loans and those loans, the rates on those loans are going to be increasing because interest rates have increased since they first took out their loan.

282
00:28:23.300 --> 00:28:35.300
These are people who barely fit in to their loan in the first place because when the housing bubble was in full swing and everybody was desperate to get a house and were just willing to do anything,

283
00:28:35.300 --> 00:28:41.300
they were basically lying to the loan officers about their ability to pay.

284
00:28:41.300 --> 00:28:47.500
and the loan officers were doing anything they could possibly do to make that loan go through

285
00:28:47.500 --> 00:28:52.500
because they would just resell it to somebody else. They were just interested in the commission.

286
00:28:52.500 --> 00:28:59.500
So all of these teaser rates and variable rates and creative financing, all of this is set, reset.

287
00:28:59.500 --> 00:29:04.900
In other words, the payment that you have to make on your mortgage is going to change this year.

288
00:29:04.900 --> 00:29:12.400
I think it's up to a trillion dollars of loans are set to reset during the year 2007.

289
00:29:12.400 --> 00:29:17.740
And finally, another piece of disturbing information I think in terms of the housing bubble and

290
00:29:17.740 --> 00:29:22.880
how it might pan out and how long it might last is the case of Japan.

291
00:29:22.880 --> 00:29:28.540
Japan had a stock market bubble during the 1980s.

292
00:29:28.540 --> 00:29:32.640
The stock market there increased by four or five hundred percent.

293
00:29:32.640 --> 00:29:38.640
And then at the end of the late 1980s, the market crashed and in Japan it's basically

294
00:29:38.640 --> 00:29:43.760
been at about half the level it reached in 1990.

295
00:29:43.760 --> 00:29:49.800
Since that time, since 1991, real estate prices in Japan have been declining.

296
00:29:49.800 --> 00:29:55.920
Since 1991, real estate prices in Japan have been declining.

297
00:29:55.920 --> 00:29:58.920
They didn't go down and then come back up.

298
00:29:58.920 --> 00:30:03.320
And they've been going down for 15 years.

299
00:30:03.320 --> 00:30:06.040
Hopefully our situation won't be anything like that.

300
00:30:06.040 --> 00:30:12.640
Their central bank rushed in to save everybody with very, very low rates of interest so that

301
00:30:12.640 --> 00:30:19.700
the problems in their economy never worked themselves out, and they still have it.

302
00:30:19.700 --> 00:30:26.960
But that gives you some idea of how long and how lingering those problems can last.

303
00:30:26.960 --> 00:30:33.920
In Japan, at the height of their bubble, banks were making mortgages for 100 years, so you

304
00:30:33.920 --> 00:30:37.800
get 100 years to pay back the loan.

305
00:30:37.800 --> 00:30:38.800
What's up with that?

306
00:30:38.800 --> 00:30:45.200
I mean, the Japanese live a long time, but not 100 years.

307
00:30:45.200 --> 00:30:46.200
Yeah.

308
00:30:46.200 --> 00:30:51.400
Yeah, I don't think you're going to get one.

309
00:30:51.400 --> 00:30:58.680
Yes. Yeah, they hand their property down from one generation to another, which is all fine

310
00:30:58.680 --> 00:31:05.640
and good, but their monetary policy stinks. Culture, good. Central bank, bad. And I think

311
00:31:05.640 --> 00:31:14.700
that's where I want to end up on is the important message about central banking that most libertarians

312
00:31:14.700 --> 00:31:20.280
never hear and need to hear, because it is the central bank of a country that is the

313
00:31:20.280 --> 00:31:35.280
The Central Banks emerged in this world at the end of the 1600s. We didn't have central banking. We had gold and silver coins and very little banking at all.

314
00:31:35.280 --> 00:31:49.280
And that's how the West developed on a strong monetary system. Central Banks came along at the end of the 1600s and the big states, France and England, emerged.

315
00:31:49.280 --> 00:31:59.080
States that could go deeply into debt. They could borrow money because they had these central banks that everybody could bail them out.

316
00:31:59.080 --> 00:32:09.880
And so they borrowed a lot of money, they spent a lot of money, wars and colonies and slave companies and all sorts of really nasty, dirty things.

317
00:32:09.880 --> 00:32:20.880
They built up huge national debts, they increased taxes on the population, literally centuries of war, all on the backs of these central banks.

318
00:32:20.880 --> 00:32:32.880
And basically the central banks is a way in which politicians can get a hold of a lot more resources in order to give it to themselves and give it to their friends.

319
00:32:32.880 --> 00:32:42.880
These wars and these colonies and things that they engaged in in the 1700s and 1800s, they did nothing for the average citizen.

320
00:32:42.880 --> 00:32:50.880
They only ended up suppressing the economy, raising taxes, building a huge national debt that had to be paid off.

321
00:32:50.880 --> 00:32:58.880
If you don't have these central banks and you're on a gold standard, nations can't engage in those types of things.

322
00:32:58.880 --> 00:33:03.880
They don't have the financial flexibility that a central bank allows them.

323
00:33:03.880 --> 00:33:20.880
As I explained to you about what the Fed does nowadays, this little switcheroo where money is given to certain sectors of the economy like Wall Street, like the banks, the stock markets, construction.

324
00:33:20.880 --> 00:33:25.880
Few sectors of the economy get all this money that ultimately is made up of thin air.

325
00:33:25.880 --> 00:33:33.280
It doesn't really benefit the average ordinary citizen, the average ordinary worker is taking

326
00:33:33.280 --> 00:33:35.280
advantage of all of this.

327
00:33:35.280 --> 00:33:41.000
We get a larger national debt, we get heavier taxes and we don't even know that it's going

328
00:33:41.000 --> 00:33:46.000
out because we have no idea what exactly the central bank is doing to us.

329
00:33:46.000 --> 00:33:50.520
They seem to be our friend, they cut interest rates but actually they're not our friend

330
00:33:50.520 --> 00:33:55.520
and they're responsible, they make it possible for the warfare state, they make it possible

331
00:33:55.520 --> 00:34:02.520
The Federal Reserve is essential for nations to do stupid things like the war on drugs or fight the war in Iraq.

332
00:34:03.040 --> 00:34:06.140
You know, that's all easily papered over.

333
00:34:06.140 --> 00:34:09.500
It's going to cost us $2 trillion. Well, we'll just borrow the money.

334
00:34:09.500 --> 00:34:14.940
And nobody is going to find out about it because the Fed is going to keep interest rates low while we're borrowing all this money.

335
00:34:16.280 --> 00:34:20.840
So it really is important. It really is the key to big government.

336
00:34:20.840 --> 00:34:25.280
And if we can stop the central bank and if we can get back on

337
00:34:25.280 --> 00:34:34.980
and Honest Monetary Policy, like the gold standard, then we can limit big government.

338
00:34:34.980 --> 00:34:43.180
It is the most, the gold standard is the most effective limit on big government and on the bad behavior of government.

339
00:34:43.180 --> 00:34:53.980
Irresponsible government is an automatic check on the ability for big government to go rampaging around and acting irresponsibly.

340
00:34:53.980 --> 00:35:03.980
It also helps clear up, a good monetary system helps clear up these problems, these booms and crashes and periods in our economy

341
00:35:03.980 --> 00:35:11.980
where people feel like they've been disenfranchised or they've been taken advantage of and that they can't no longer trust the system

342
00:35:11.980 --> 00:35:13.980
because in fact the system is geared against them.

343
00:35:13.980 --> 00:35:22.980
A gold standard system is a system where everybody knows what's going on, everybody, you can see the physical solid gold and silver coins

344
00:35:22.980 --> 00:35:27.860
and there's no counterfeiting there's no playing behind the scenes and taking

345
00:35:27.860 --> 00:35:31.380
advantage of people so we always need to remember that we need to fight the

346
00:35:31.380 --> 00:35:34.820
battles of the drug war and the war in Iraq and all the stupid programs that

347
00:35:34.820 --> 00:35:38.420
the government does but we always have to remember that we're not going to be

348
00:35:38.420 --> 00:35:43.260
able to stop big government until we can stop the power of central banks thank you

349
00:35:43.260 --> 00:35:45.420
very much