WEBVTT NOTE Predicting Booms and Busts 1 00:00:00.000 --> 00:00:06.000 When I first got into Austrian economics, there were only a couple of dozen Austrian economists in the whole world. 2 00:00:06.000 --> 00:00:16.000 And as a student, none of us thought that there would be any conceivable idea that Austrian economics would be discussed on The Tonight Show. 3 00:00:16.000 --> 00:00:25.000 And that there was any possibility whatsoever that Austrian economics would be featured prominently in an article in Time magazine. 4 00:00:25.000 --> 00:00:32.000 But both of those things happened this week of the Austrian Student Scholars Conference. 5 00:00:32.000 --> 00:00:37.000 So I think it's an amazing sign of greater things to come. 6 00:00:37.000 --> 00:00:44.000 I want to thank you all for the opportunity to speak with you here tonight on the occasion of the Austrian Student Scholars Conference. 7 00:00:44.000 --> 00:00:49.000 Indeed, I consider it a great honor to be asked by Grove City and to be asked back by Grove City. 8 00:00:49.000 --> 00:00:56.440 You have a very beautiful campus here, but you distinguish yourself with your independence. 9 00:00:56.440 --> 00:01:02.720 Education must be independent from government funding for it to truly accomplish its goal. 10 00:01:02.720 --> 00:01:08.520 Federal money undermines education at all levels and has turned college education into 11 00:01:08.520 --> 00:01:15.400 mostly government propaganda and fadism at government and many private schools alike. 12 00:01:15.400 --> 00:01:20.320 So I'd like to commend Grove City for their commitment to independence, and you will see 13 00:01:20.320 --> 00:01:27.520 that independence looms large in my talk tonight. Furthermore, it is a tremendous honor to be 14 00:01:27.520 --> 00:01:32.660 delivering the Hans Sennholz Lecture. I was introduced to much of Austrian economics by 15 00:01:32.660 --> 00:01:38.040 reading articles by Hans Sennholz, although I only got a chance to meet him in recent 16 00:01:38.040 --> 00:01:45.040 years, especially on the occasion of his award of the Schlagerbaum Lifetime Achievement Award 17 00:01:45.040 --> 00:01:50.220 and more recently at the Grove City College Conference celebrating the 50th anniversary 18 00:01:50.220 --> 00:01:57.040 awarding the honorary doctor to Ludwig von Mises, Professor Senhold's great teacher. 19 00:01:57.040 --> 00:02:04.340 Hans was a man of immense intelligence and energy, but he was also maybe more importantly 20 00:02:04.340 --> 00:02:07.040 a man of unrelenting courage. 21 00:02:07.040 --> 00:02:12.160 He was a great example of independence that we can remember for inspiration. 22 00:02:12.160 --> 00:02:15.360 So again, thank you very much. 23 00:02:15.360 --> 00:02:20.340 The title of my speech tonight is, Our Crisis, and you're wondering, well, what crisis is 24 00:02:20.340 --> 00:02:21.340 that? 25 00:02:21.340 --> 00:02:26.040 Well, I'm going to get to that and describe the current economic crisis, but I want to 26 00:02:26.040 --> 00:02:35.460 explain how economists of the Austrian School view the business cycle, why this approach 27 00:02:35.460 --> 00:02:41.460 which is unique and distinguished, and maybe most important of all, why it is a superior approach. 28 00:02:41.460 --> 00:02:50.460 This will hopefully provide you with a valuable insight into the economy and to some of our more important economic problems. 29 00:02:50.460 --> 00:02:56.460 First of all, Austrians do not view the business cycle as something that's inherent to the market economy. 30 00:02:56.460 --> 00:03:02.460 We identify the source of the business cycle with institutional flaws in money and banking, 31 00:03:02.460 --> 00:03:08.260 Banking, in particular Central Banking which you know by the Federal Reserve Bank. 32 00:03:08.260 --> 00:03:13.520 The Federal Reserve's policies of inflation, that is increasing the supply of money out 33 00:03:13.520 --> 00:03:20.420 of thin air, initiate disturbances in credit markets which can result in booms and bubbles 34 00:03:20.420 --> 00:03:24.180 in asset markets such as the real estate market. 35 00:03:24.180 --> 00:03:29.140 Once the boom has started, the bust becomes inevitable. 36 00:03:29.140 --> 00:03:33.380 Outside of the Austrian School, there are two basic views of the business cycle. 37 00:03:33.380 --> 00:03:37.540 The first says that there is no such thing as a business cycle, and according to this 38 00:03:37.540 --> 00:03:44.180 view the economy is always in a boom unless there is a major mistake, a major shock or 39 00:03:44.180 --> 00:03:46.500 a policy mistake. 40 00:03:46.500 --> 00:03:50.860 Here the boom of the economy is not related to the bust, so that the tech stock bubble 41 00:03:50.860 --> 00:03:57.140 of the 1990s was not related to the meltdown in the NASDAQ stock market crash. 42 00:03:57.140 --> 00:04:00.840 It was all just a technological shock. 43 00:04:00.840 --> 00:04:06.040 The second approach holds that there is a business cycle, but it's all psychological. 44 00:04:06.040 --> 00:04:09.620 We the people get enthusiastic about the economy. 45 00:04:09.620 --> 00:04:15.020 We begin to engage in speculative behavior, and the next thing you know, we have made 46 00:04:15.020 --> 00:04:16.800 the economy boom. 47 00:04:16.800 --> 00:04:22.540 At some point people become disappointed in their wild expectations because they have 48 00:04:22.540 --> 00:04:25.060 not been met. 49 00:04:25.060 --> 00:04:30.180 They become discouraged, scandals emerge, and pretty soon the economy enters a recession 50 00:04:30.180 --> 00:04:31.900 or depression. 51 00:04:31.900 --> 00:04:36.420 Both of these views of the business cycle have two important things in common. 52 00:04:36.420 --> 00:04:40.380 The first is that they're not economic points of view. 53 00:04:40.380 --> 00:04:45.340 They're only psychological or technological. 54 00:04:45.340 --> 00:04:48.460 Second, they don't blame the Federal Reserve. 55 00:04:48.460 --> 00:04:54.180 They blame the happenstance of technological change and mass psychology. 56 00:04:54.180 --> 00:05:00.020 Economists in the mainstream of economics have decidedly different views on methodology 57 00:05:00.020 --> 00:05:02.120 as well. 58 00:05:02.120 --> 00:05:07.700 Austrians believe that economics should be as realistic as possible, treating people 59 00:05:07.700 --> 00:05:13.580 as they actually are in economies as they actually function. 60 00:05:13.580 --> 00:05:19.940 Mainstream economists believe that you can use unrealistic assumptions if and as long 61 00:05:19.940 --> 00:05:24.860 is they help you make better predictions about the economy and that's very important. 62 00:05:24.860 --> 00:05:31.260 Predicting the future is pretty important stuff and for mainstream economists it's everything. 63 00:05:31.260 --> 00:05:39.300 Austrians believe that you cannot make scientific predictions about the future and askew forecasting. 64 00:05:39.300 --> 00:05:45.380 We seek to understand how the economy works and how sometimes it doesn't work and then 65 00:05:45.380 --> 00:05:52.380 and to use this understanding to make informed guesses concerning the economy. 66 00:05:52.380 --> 00:05:59.940 What I'm going to explore tonight is how well the Austrians perform against the mainstream 67 00:05:59.940 --> 00:06:07.940 economist using the mainstream criteria of how well each group is able to predict the 68 00:06:07.940 --> 00:06:11.340 major swings in business cycles. 69 00:06:11.340 --> 00:06:16.620 The superiority of the Austrian approach rests with its realistic approach to understanding 70 00:06:16.620 --> 00:06:21.580 the business cycle by correctly identifying cause and effect. 71 00:06:21.580 --> 00:06:26.740 Once you understand cause and effect, you become forward-looking. 72 00:06:26.740 --> 00:06:30.700 You are better to be able to anticipate changes in the economy. 73 00:06:30.700 --> 00:06:37.900 So while you cannot make definitive predictions, you can make well-informed speculations. 74 00:06:37.900 --> 00:06:43.260 The Austrian theory shows that when the central bank, the Federal Reserve, increases the supply 75 00:06:43.260 --> 00:06:48.040 of money, it causes the market rate of interest to fall below the natural rate that would 76 00:06:48.040 --> 00:06:51.540 have existed in the absence of intervention. 77 00:06:51.540 --> 00:06:57.500 This causes investors to borrow more money than they otherwise would, to expand their 78 00:06:57.500 --> 00:07:01.420 investments and to undertake riskier projects. 79 00:07:01.420 --> 00:07:07.180 As these borrowers compete for assets and resources, price inflation eventually occurs 80 00:07:07.180 --> 00:07:13.480 and Nominal Interest Rates rise. This in turn will negatively affect the economy and some 81 00:07:13.480 --> 00:07:20.040 of the riskier projects will be discovered to be bad investments, as well as other pre-existing 82 00:07:20.040 --> 00:07:25.740 investments may get caught up in the wake of the bust. According to the Austrian theory, 83 00:07:25.740 --> 00:07:33.240 if the Fed simply does not pursue a loose monetary policy, then bubbles can be avoided. 84 00:07:33.240 --> 00:07:39.800 If the Fed does follow a loose monetary policy, then bubbles can develop, whether it's stocks, 85 00:07:39.800 --> 00:07:42.680 real estate or tulip bulbs. 86 00:07:42.680 --> 00:07:48.440 If the new money is directed towards housing, a bubble can develop in housing. 87 00:07:48.440 --> 00:07:54.560 Austrian economists further emphasize that the additional resources allocated to housing 88 00:07:54.560 --> 00:07:59.360 are resources that are not available elsewhere in the economy, so that while more resources 89 00:07:59.360 --> 00:08:21.360 are allocated towards housing construction. Fewer resources are available to other areas of the economy such as manufacturing, which will experience higher costs for their inputs, labor and materials, and will produce a proportionally smaller amount at higher prices and will be less competitive internationally. 90 00:08:21.360 --> 00:08:31.360 It is this mismatching of resources across industries and sectors that has to be resolved painfully in the inevitable bust or correction. 91 00:08:31.360 --> 00:08:40.360 And this also allows us to understand why when housing was booming, other sectors of our economy were actually shrinking. 92 00:08:40.360 --> 00:08:46.360 That's all within the Austrian model, although it's kind of a puzzle for mainstream economists. 93 00:08:46.360 --> 00:09:01.360 According to the Austrian theory, when the central bank makes loans or purchases government bonds from banks, it's injecting new bank reserves into the economy. Banks now have excess reserves which they can loan. 94 00:09:01.360 --> 00:09:14.360 Excess Loanable Funds means that banks not only must reduce the interest rate they charge, they also reduce the credit quality standards they require of borrowers. 95 00:09:14.360 --> 00:09:17.360 Some of this may sound familiar to you. 96 00:09:17.360 --> 00:09:26.360 The result is a greater quantity of borrowing and investing, particularly in projects that pay off over a long period of time. 97 00:09:26.360 --> 00:09:32.200 Lower interest rates also discourage savings because the return on savings is now lower. 98 00:09:33.000 --> 00:09:37.960 In this manner, the Federal Reserve drives the market rate below the natural one. 99 00:09:38.760 --> 00:09:44.680 A unique feature of the Austrian approach is that it does not see a need for prices to increase 100 00:09:44.680 --> 00:09:51.960 uniformly across markets, or for prices to increase to extreme levels. Many doubters of 101 00:09:51.960 --> 00:10:21.960 The numbers of the housing bubble pointed to the smaller price increases in the center of the country compared to the coastal regions, but price is only one dimension of a bubble. Quantity can also increase beyond sustainable levels. In fact, you can even conceptually think of a bubble where prices stayed about the same, but the quantity of houses doubled in economy. 102 00:10:21.960 --> 00:10:40.960 If we had barely budged, we would still have too many houses for the population and all that labor and all that material that went into the doubling of the housing stock would be tied up and unavailable to serve more urgent needs after the bursting of the bubble revealed that these houses were bad investments. 103 00:10:40.960 --> 00:10:46.960 The Austrian Theory of the Cycle points the finger of Blaine directly at the Federal Reserve. 104 00:10:46.960 --> 00:10:49.960 The facts support the case against the Federal Reserve. 105 00:10:49.960 --> 00:10:57.960 They certainly are responsible for the reduction of credit standards that inevitably happen when it floods the market with credit. 106 00:10:57.960 --> 00:11:03.960 Inflation by the Federal Reserve is the cause, the business cycle is the effect. 107 00:11:03.960 --> 00:11:09.960 Now the weakness of the mainstream approach is that they do not identify a cause of the business cycle. 108 00:11:09.960 --> 00:11:15.120 Business Cycle, and as I mentioned, some even deny the existence of the business cycle. 109 00:11:15.120 --> 00:11:21.240 Their models are purely empirical and they are essentially backward looking. 110 00:11:21.240 --> 00:11:27.200 Looking backward at the data of the past, they simply cannot determine if the economy 111 00:11:27.200 --> 00:11:33.200 is experiencing a psychological bubble or just a change in trend. 112 00:11:33.200 --> 00:11:39.880 Most notably, the former chairman of the Federal Reserve, Alan Greenspan, in the late 1990s 113 00:11:39.880 --> 00:11:45.840 could not make up his mind if the economy was experiencing irrational exuberance or 114 00:11:45.840 --> 00:11:51.200 simply an improvement in productivity. 115 00:11:51.200 --> 00:11:55.800 Mainstream economists paint a picture of the economy that falters for psychological reasons. 116 00:11:55.800 --> 00:12:00.600 We the people get overly optimistic, engage in risky speculations and become euphoric 117 00:12:00.600 --> 00:12:07.080 during the boom only to become less optimistic when corruption appears until we become downright 118 00:12:07.080 --> 00:12:08.940 depressed. 119 00:12:08.940 --> 00:12:13.160 We are then to be rescued from our depression by the wise leaders of the Federal Reserve 120 00:12:13.160 --> 00:12:19.800 who restore order by lowering interest rates and giving the economy a dose of liquidity. 121 00:12:19.800 --> 00:12:25.420 The psychological approach is naturally preferred by the Federal Reserve itself. 122 00:12:25.420 --> 00:12:27.420 What happens if you have a psychological problem? 123 00:12:27.420 --> 00:12:32.620 Well, you call the doctor, Dr. Greenspan or Dr. Bernanke. 124 00:12:32.620 --> 00:12:33.700 They have the cures for you. 125 00:12:33.700 --> 00:12:39.220 They can apply shock therapy if the economy to tame the demons of inflation and they can 126 00:12:39.220 --> 00:12:45.820 inject the economy with liquidity for depression. 127 00:12:45.820 --> 00:12:50.900 It should sound suspicious that economists resort to psychological explanations for the 128 00:12:50.900 --> 00:12:57.740 business cycle when the foundation of mainstream economics is rational economic man. 129 00:12:57.740 --> 00:13:03.220 Now on the Austrian side, we don't deny the psychological aspects of the cycle, but 130 00:13:03.220 --> 00:13:10.220 But psychology can only help us describe the cycle and the dynamics, it does not explain 131 00:13:10.220 --> 00:13:12.080 the cycle. 132 00:13:12.080 --> 00:13:18.380 The real story is that people get overly optimistic, highly speculative and corrupt when the Federal 133 00:13:18.380 --> 00:13:22.900 Reserve reduces interest rates in the economy. 134 00:13:22.900 --> 00:13:27.740 Not only are interest rates too low, but more credit is being injected in the economy and 135 00:13:27.740 --> 00:13:31.100 being distributed to less credit worthy borrowers. 136 00:13:31.100 --> 00:13:37.900 People are able to simultaneously consume more and invest more because of this inflation. 137 00:13:37.900 --> 00:13:43.920 This not only creates a boom, it inaugurates the bad investments in credit scandals and 138 00:13:43.920 --> 00:13:46.080 therefore the bust is inevitable. 139 00:13:46.080 --> 00:13:51.460 The truth is that the Federal Reserve is the problem, not the solution. 140 00:13:51.460 --> 00:13:55.720 You know, mainstream economists are great at prediction as long as it stays on the trend 141 00:13:55.720 --> 00:13:59.080 line and that's the easy thing to do. 142 00:13:59.080 --> 00:14:03.720 But they are terrible at predicting changes in the trend, which is really the important 143 00:14:03.720 --> 00:14:05.400 thing. 144 00:14:05.400 --> 00:14:11.200 I would say don't trust economists when it comes to predicting markets. 145 00:14:11.200 --> 00:14:17.480 Their collective record is so dreadful that a monkey in a dart board can do a better job. 146 00:14:17.480 --> 00:14:23.240 And their record is so bad that it even hints at some kind of deception. 147 00:14:23.240 --> 00:14:28.680 I'm not suggesting some kind of grand conspiracy here, but you do need to know that the overwhelming 148 00:14:28.680 --> 00:14:44.660 Most monetary and macroeconomic economists work for or benefit from the research pork 149 00:14:44.660 --> 00:14:47.460 money provided by the Federal Reserve. 150 00:14:47.460 --> 00:14:51.980 An Austrian economist Larry White has recently shown that over three-quarters of all the 151 00:14:51.980 --> 00:14:57.640 articles published in prestigious academic journals on the topic of money and banking 152 00:14:57.640 --> 00:15:03.360 had at least one co-author with an affiliation with the Federal Reserve, and that if you 153 00:15:03.360 --> 00:15:08.880 took the editorial boards of those same journals, you'd find that 85 percent of the editorial 154 00:15:08.880 --> 00:15:15.440 board had members with affiliations with the Federal Reserve. 155 00:15:15.440 --> 00:15:20.280 In fact, most academic articles on the subject are directly published in Federal Reserve 156 00:15:20.280 --> 00:15:27.240 publications, and they do not hide the fact that they openly try to influence research 157 00:15:27.240 --> 00:15:34.120 on these topics, and that they are unreceptive to anything critical of the Federal Reserve. 158 00:15:34.120 --> 00:15:42.080 Dissent is simply not tolerated. In fact, the Fed cut the research budget of two federal 159 00:15:42.080 --> 00:15:49.160 district banks after they published articles that were mildly critical of the Federal Reserve. 160 00:15:49.160 --> 00:15:55.440 And you need to know that the Federal Reserve is a very lucrative outfit. They have as much 161 00:15:55.440 --> 00:16:15.000 Obviously, if the Fed is able to induce any bias in research, its highest objective would 162 00:16:15.000 --> 00:16:20.400 be to deflect blame for the business cycle away from the Federal Reserve and to place 163 00:16:20.400 --> 00:16:27.300 Place it on something nebulous like mass psychology or technological change. 164 00:16:27.300 --> 00:16:32.240 The more vague and scary the explanation, the better for the Federal Reserve. 165 00:16:32.240 --> 00:16:37.200 And Wall Street economists basically tell the same story, that everything's great because 166 00:16:37.200 --> 00:16:41.680 they are interested in having you invest your money in their products. 167 00:16:41.680 --> 00:16:47.720 If you sold some of your investments during a bubble and invest them in treasury bills 168 00:16:47.720 --> 00:16:53.280 or gold coins, their income from fees would go down. 169 00:16:53.280 --> 00:16:59.120 I believe that we have good reason to question the validity of the mainstream approach. 170 00:16:59.120 --> 00:17:04.160 In addition to their horrible record, they appear to have a problem with their self-interest. 171 00:17:04.160 --> 00:17:10.160 And their psychological diagnosis is at odds with the foundation of psychology itself. 172 00:17:10.160 --> 00:17:14.200 For these reasons and many more, I urge you to treat their pronouncements from the Federal 173 00:17:14.200 --> 00:17:26.200 Alan Greenspan, the second longest serving chairman of the Federal Reserve, was as revered as he was powerful. 174 00:17:26.200 --> 00:17:36.200 The truth is that he was a political player for both parties, willing to solve problems near and far with various doses of money and credit. 175 00:17:36.200 --> 00:17:42.200 His tenure at the Fed is as marked with bubbles and busts just as the moon is marked with craters. 176 00:17:42.200 --> 00:17:46.040 Despite his recent denials, he set the conditions for the housing bubble 177 00:17:46.040 --> 00:17:49.320 and the preconditions for future economic calamity. 178 00:17:50.840 --> 00:17:57.240 Greenspan's semi-annual testimony before Congress was always much anticipated by market watchers, 179 00:17:57.240 --> 00:18:04.600 much dissected in the media, and much looked at by market analysts for any nougat of the future they 180 00:18:04.600 --> 00:18:11.400 might hold. The reality is that his testimony was usually about deception. On Wall Street, 181 00:18:11.400 --> 00:18:29.400 The Theory, they called it green speak, as it was called, referred to as torturous twisting of words with endless assumptions, conjectures and qualifications, so as to basically misinform, but to leave everybody with the impression that all was well, especially at the Fed. 182 00:18:29.400 --> 00:18:38.400 For your own sake, think of his and current Chairman Ben Bernanke's testimony as green spam. 183 00:18:38.400 --> 00:18:43.640 about your green money, but otherwise it is an attempt at deception. You should do the 184 00:18:43.640 --> 00:18:49.460 equivalent of deleting it and installing a spam filter on your computer. All of his statistics 185 00:18:49.460 --> 00:18:56.460 are used to paint a rosy picture. For example, he has recently been insisting that the weak 186 00:18:56.460 --> 00:19:02.140 dollar is good for the U.S. economy. But a few years ago he was telling us that a strong 187 00:19:02.140 --> 00:19:07.200 dollar was good for the U.S. economy. How convenient. 188 00:19:07.200 --> 00:19:11.860 Of course, he does mention regularly that there are some risks in the economy, but that 189 00:19:11.860 --> 00:19:17.500 he's always willing to step in to take charge and to make everything better again. 190 00:19:17.500 --> 00:19:22.280 For an example of his accuracy, however, let's take a look at his opening statement of his 191 00:19:22.280 --> 00:19:28.520 congressional testimony February 23rd in the year 2000, right before the stock market began 192 00:19:28.520 --> 00:19:32.780 to crash and the economy sank into a recession. 193 00:19:32.780 --> 00:19:46.780 There is little evidence that the American economy, which grew more than 4% in 1999 and surged forward even faster in the second half of the year, is slowing appreciably. 194 00:19:46.780 --> 00:19:54.780 And then after noting that inflation was low and profit expectations were high, Greenspan concluded that he believed that this was, quote, 195 00:19:54.780 --> 00:20:00.780 Scarcely an Indication of Eminent Economic Weakness 196 00:20:00.780 --> 00:20:09.780 When Greenspan discusses concrete problems in the economy, he is always quick out to point out that these problems are never caused by the Federal Reserve. 197 00:20:09.780 --> 00:20:23.780 And he's always willing to help, but Congress must get busy clearing up problems like the abysmal low savings rate in America, the budget deficit, and the looming crisis in Social Security. 198 00:20:23.780 --> 00:20:47.780 He conveniently fails to mention that it is his low interest rate policy that discouraged savings in the first place, and that his willingness to launder government debt encouraged both budget deficits and increased spending, and that he personally blew the opportunity to reform Social Security in the 1980s when the problem wasn't as bad. 199 00:20:47.780 --> 00:20:52.780 Let us now look at the Fed pronouncements regarding the recent housing bubble. 200 00:20:52.780 --> 00:21:07.780 Two economists from the Federal Reserve researched the existence of a speculative bubble in the U.S. housing market and they found that a housing bubble could have a severe impact on the U.S. economy if it existed and if it were to burst. 201 00:21:07.780 --> 00:21:12.780 But ultimately they concluded that such fears were unfounded. 202 00:21:12.780 --> 00:21:15.780 Quoting from their 2004 paper, 203 00:21:15.780 --> 00:21:26.780 Our main conclusion is that the most widely cited evidence of a bubble is not persuasive because it fails to account for developments in the housing market over the past decade. 204 00:21:26.780 --> 00:21:37.780 In particular, significant declines in nominal mortgage interest rates and demographic forces have supported housing demand, home construction and home values during this period. 205 00:21:37.780 --> 00:21:38.780 period. 206 00:21:38.780 --> 00:21:45.240 Furthermore, they found, quote, no basis for concern for any severe drop in housing prices. 207 00:21:45.240 --> 00:21:49.700 In the past, when the U.S. went into recession or had experienced periods of high nominal 208 00:21:49.700 --> 00:21:55.060 interest rate, these government economists found that any price declines have been moderate 209 00:21:55.060 --> 00:21:59.580 and that significant declines only happen regionally so that it would have no devastating 210 00:21:59.580 --> 00:22:03.460 effects on the national economy. 211 00:22:03.460 --> 00:22:08.220 Not surprisingly, this was essentially the view of Alan Greenspan and his replacement, 212 00:22:08.220 --> 00:22:09.700 Ben Bernanke. 213 00:22:09.700 --> 00:22:15.000 In particular, Greenspan was aware of the possibility of a housing bubble, but he offered 214 00:22:15.000 --> 00:22:20.740 many reasons to suggest that it did not exist and that if one did exist, it would not be 215 00:22:20.740 --> 00:22:22.580 a major problem. 216 00:22:22.580 --> 00:22:28.060 Now the chairman is very difficult to interpret and sometimes is so incomprehensible as to 217 00:22:28.060 --> 00:22:33.220 be misleading, but on this topic of the housing bubble, he was pretty clear and direct. 218 00:22:33.220 --> 00:22:37.120 And I think worth quoting at length, quote, 219 00:22:37.120 --> 00:22:41.880 The ongoing strength in the housing market has raised concerns about the possible emergence 220 00:22:41.880 --> 00:22:47.380 of a bubble in home prices. However, the analogy often made to the building and bursting of 221 00:22:47.380 --> 00:22:52.600 a stock price bubble is imperfect. First, unlike the stock market, sales in the real 222 00:22:52.600 --> 00:22:59.020 estate market incur substantial transactions cost, and when most homes are sold, the seller 223 00:22:59.020 --> 00:23:00.560 must physically move out. 224 00:23:02.780 --> 00:23:05.280 Doing so often entails significant financial 225 00:23:05.280 --> 00:23:08.560 and emotional cost and is an obvious impediment 226 00:23:08.560 --> 00:23:12.800 to stimulate a bubble through speculative trading in houses. 227 00:23:12.800 --> 00:23:16.260 Thus, while stock market turnover is more than 100%, 228 00:23:16.260 --> 00:23:19.880 turnover of homeownership is less than 10%. 229 00:23:19.880 --> 00:23:24.020 Scarcely tender for speculative conflagration. 230 00:23:25.140 --> 00:23:26.120 Whatever that is. 231 00:23:26.120 --> 00:23:33.120 Second, arbitrage opportunities are much more limited in housing markets than in security markets. 232 00:23:33.120 --> 00:23:38.120 A home in Portland, Oregon is not a close substitute for a home in Portland, Maine. 233 00:23:38.120 --> 00:23:44.120 And the national housing market is better understood as a collection of small, local housing markets. 234 00:23:44.120 --> 00:23:51.120 Even if a bubble were to develop in a local market, it would not necessarily have implications for the nation as a whole. 235 00:23:51.120 --> 00:23:59.280 As the bubble was reaching its peak in 2005, Greenspan did admit that there was quote some 236 00:23:59.280 --> 00:24:05.520 apparent froth in some local housing markets, but overall he found that conditions in the 237 00:24:05.520 --> 00:24:10.280 housing market were actually encouraging. 238 00:24:10.280 --> 00:24:15.320 Then amazingly in his first speech after leaving office, Greenspan said that quote the extraordinary 239 00:24:15.320 --> 00:24:20.880 boom in the housing market is over and there is no danger that home prices would ever decrease, 240 00:24:20.880 --> 00:24:27.440 ." Of course, he was dead wrong on all these crucial points. The truth is that if he had 241 00:24:27.440 --> 00:24:32.960 recognized or admitted the housing bubble early on and changed course, the housing bubble 242 00:24:32.960 --> 00:24:38.000 could have largely been avoided as well as most of the economic hardships that people 243 00:24:38.000 --> 00:24:44.800 are currently experiencing and in the future. The new Fed Chairman, Ben Bernanke, admitted 244 00:24:44.800 --> 00:24:52.760 in 2006 that there was a possibility of a slower growth in home prices. This was at 245 00:24:52.760 --> 00:25:00.440 a time where home prices were increasing faster than they ever had in the history of the country. 246 00:25:00.440 --> 00:25:04.780 So he admitted that there was slower growth possible. But Confully declared that if this 247 00:25:04.780 --> 00:25:09.560 did happen he would just lower interest rates. Bernanke also believed that the mortgage market 248 00:25:09.560 --> 00:25:15.980 was more stable than in the past. He noted in particular that, quote, our examiners tell 249 00:25:15.980 --> 00:25:22.180 us that lending standards are generally sound and are not comparable to standards that contributed 250 00:25:22.180 --> 00:25:28.640 to the broad problems in the banking industry two decades ago. In particular, real estate 251 00:25:28.640 --> 00:25:34.600 appraisal practices have improved. This is remarkable. Just as the bubble was at its 252 00:25:34.600 --> 00:25:49.600 and all the highly risky mortgages were being created. Bernanke reports that he had investigated lending practices in the real estate market and found no signs for concern. 253 00:25:49.600 --> 00:25:56.600 This is precisely when monetary pumping at the Fed was hatching all sorts of mortgage scams. 254 00:25:56.600 --> 00:26:01.600 The general lesson here is to not listen to the deceptive testimony of the Fed. 255 00:26:01.600 --> 00:26:06.320 they have a monopoly on monetary research and use it to create a spin 256 00:26:06.320 --> 00:26:12.720 where the Federal Reserve can cure all economic ills and creates no problems of its own. 257 00:26:15.600 --> 00:26:20.320 In addition to the Federal Reserve there was almost a complete denial that a problem existed 258 00:26:20.320 --> 00:26:26.720 in the housing market. It was very common to hear things like home prices never go down 259 00:26:26.720 --> 00:26:37.720 or that real estate always holds its value or that the market for homes in my city is different because of X, Y or Z. 260 00:26:37.720 --> 00:26:47.720 The Vice President and Chief Economist of the National Association of Realtors, David Lara, could always be counted on spinning any bad news. 261 00:26:47.720 --> 00:26:54.640 News. As late as March 16, 2007, he reported, quote, while you should expect some continued 262 00:26:54.640 --> 00:27:00.780 volatility in mortgage markets over the next months, rest assured that the National Association 263 00:27:00.780 --> 00:27:06.900 of Realtors is working diligently to propose and pursue appropriate solutions so future 264 00:27:06.900 --> 00:27:14.380 home buyers can finance their homes with safe, fair and affordable mortgages. Lara left the 265 00:27:14.380 --> 00:27:20.600 Association less than a month later, and recently published a book entitled, All Real 266 00:27:20.600 --> 00:27:27.180 Estate is Local, which appears to be an attempt to excuse his cheerleading for the housing 267 00:27:27.180 --> 00:27:33.140 bubble, just like Greenspan's new book, The Age of Turbulence, is an attempt to whitewash 268 00:27:33.140 --> 00:27:40.140 his own record. Few economists noticed, or admitted, or published anything was wrong 269 00:27:40.140 --> 00:27:44.540 in the real estate market or did so only after it was too late. 270 00:27:44.540 --> 00:27:49.380 You know, after you see three or four shows, different shows on TV about house flipping, 271 00:27:49.380 --> 00:27:55.120 you might think that maybe something was wrong there, but basically the entire economics 272 00:27:55.120 --> 00:27:58.140 profession did not see it coming. 273 00:27:58.140 --> 00:28:02.940 The economist who did identify the housing bubble and issue warnings came from the Austrian 274 00:28:02.940 --> 00:28:04.140 School. 275 00:28:04.140 --> 00:28:09.620 Among the Austrians who identified the housing bubble was economist Frank Shostak, who identified 276 00:28:09.620 --> 00:28:22.100 He calculated that the median home price was already 73% above trend, and warned again 277 00:28:22.100 --> 00:28:29.020 in 2004 that, quote, there is a strong likelihood that the U.S. housing market bubble has already 278 00:28:29.020 --> 00:28:32.100 reached dangerous dimensions. 279 00:28:32.100 --> 00:28:38.460 Also from the Austrian camp was Christopher Meyer, who warned of the housing bubble problem 280 00:28:38.460 --> 00:28:46.300 resulting from Federal Reserve policy, and in early 2004, I pointed out the ongoing housing 281 00:28:46.300 --> 00:28:53.620 bubble to investors, quote, signs of a new era in housing are everywhere. 282 00:28:53.620 --> 00:28:58.420 Housing construction is taking place at record rates, new records for real estate prices 283 00:28:58.420 --> 00:29:04.180 are being set across the country, especially on the coast, booming house prices and record 284 00:29:04.180 --> 00:29:10.560 Low Interest rates are allowing homeowners to refinance their mortgages, extract equity 285 00:29:10.560 --> 00:29:15.380 to increase their spending, and lower their monthly payment. 286 00:29:15.380 --> 00:29:20.180 As one loan officer explained to me, it's almost too good to be true. 287 00:29:20.180 --> 00:29:24.000 Well, in fact, it was too good to be true. 288 00:29:24.000 --> 00:29:30.180 When you hear people talk about new eras, or that this time things are different, or 289 00:29:30.180 --> 00:29:45.180 Declaring a new era in real estate simply ignores the historical fact that we've had regular cycles in real estate markets throughout our history. 290 00:29:45.180 --> 00:29:57.180 Finally, in the spirit of what goes up must come down, Austrians fully recognize the nonsense of this new era thinking and realize that bubbles necessarily result in busts of some sort. 291 00:29:57.180 --> 00:30:03.180 Just as they are alert to the formation of bubbles, so as they are forward looking to the subsequent bust. 292 00:30:03.180 --> 00:30:13.180 With the stock market a leading indicator in the economy, it is therefore natural to look at the home building stocks for clues to the unwinding of the bubble. 293 00:30:13.180 --> 00:30:20.180 The Philadelphia Housing Sector Index peaked in January 29, 2005. 294 00:30:20.180 --> 00:30:33.180 On August 8th, I published an article on this index that clearly indicated that this is a sign that the housing bubble may have sprung its first leak. 295 00:30:33.180 --> 00:30:37.180 Since that time, the index has lost about half its value. 296 00:30:37.180 --> 00:30:52.180 In the fall of 2005, there was still plenty of talk about home prices never going down, and still plenty of time to sell your real estate investments at a hefty profit. 297 00:30:52.180 --> 00:30:58.580 Profit. These correct predictions led John Desard, the senior economics columnist for 298 00:30:58.580 --> 00:31:05.420 the Financial Times in London, to conclude that quote, the best research on real estate 299 00:31:05.420 --> 00:31:13.360 is being published in Auburn, Alabama at the Ludwig von Mises Institute. Now let's take 300 00:31:13.360 --> 00:31:20.260 a look at the signs of what some of the Austrians were looking at and what the mainstream apparently 301 00:31:20.260 --> 00:31:25.300 didn't see as a problem. In the wake of the Nasdaq's dark market crash and the 302 00:31:25.300 --> 00:31:31.500 terrorist attacks in 2001, the Greenspan Fed reduced the federal funds rate from 303 00:31:31.500 --> 00:31:39.700 6.5% down to 1% and left them there till June of 2004. At this low rate, interest 304 00:31:39.700 --> 00:31:45.900 rates were actually negative when price inflation is taken into account. And then 305 00:31:45.900 --> 00:31:51.220 And when banks have access to reserves from the Fed at these low rates, they can offer 306 00:31:51.220 --> 00:31:57.420 customers lower rates on loans. During the housing bubble, interest rates on 30-year 307 00:31:57.420 --> 00:32:07.140 conventional mortgages were at their lowest level ever during the post-gold standard era. 308 00:32:07.140 --> 00:32:12.720 The amount of real estate loans at commercial banks first exceeded $1 trillion in November 309 00:32:12.720 --> 00:32:21.720 of 1994. Then in fairly quick succession, they exceeded $2 trillion in November of 2002 310 00:32:21.720 --> 00:32:34.320 and $3 trillion in May of 2006. In 2007, they ran into a brick wall at $3.4 trillion. 311 00:32:34.320 --> 00:32:39.800 The increase in the money supply necessary to hold rates down at those levels forced 312 00:32:39.800 --> 00:32:47.260 The Federal Reserve to expand the money supply by more than 10% per year during the bubble. 313 00:32:47.260 --> 00:32:56.140 In terms of the number of houses built, in 2006 a new record was set with more than 1.8 314 00:32:56.140 --> 00:32:58.780 million new homes started. 315 00:32:58.780 --> 00:33:04.380 That is now currently at a rate of less than a million and it's continuing to fall like 316 00:33:04.380 --> 00:33:16.380 Like a rock. Like a rock. Dropping a rock. Not like a rock. Although that would fit too, I suppose. 317 00:33:16.380 --> 00:33:29.380 During the bubble, home prices increased by 45%, which is 1.25 times larger than the increase in consumer prices. 318 00:33:29.380 --> 00:33:35.820 So, all of the indications, all of the measures that you would look at in terms of the housing market, 319 00:33:35.820 --> 00:33:40.500 if you looked at any of them, or if you looked at all of them, you would find them all beeping red, 320 00:33:40.500 --> 00:33:45.380 that these are very unusual conditions. 321 00:33:45.380 --> 00:33:50.300 Now, were the Austrians just lucky with the housing bubble? 322 00:33:50.300 --> 00:33:55.220 Was it just happenstance that several Austrians published on this subject, 323 00:33:55.220 --> 00:34:02.500 and of course it was common discussion amongst Austrians, particularly on blogs. 324 00:34:02.500 --> 00:34:06.540 I went back to check the historical record and found a consistent pattern between the 325 00:34:06.540 --> 00:34:09.340 Austrians and the mainstream economists. 326 00:34:09.340 --> 00:34:15.700 The Austrians called every major turn in the business cycle in 20th century America, while 327 00:34:15.700 --> 00:34:20.700 mainstream and Wall Street economists almost always missed the boat. 328 00:34:20.700 --> 00:34:25.660 In fact, instead of issuing cautions, mainstream economists were usually serving as the head 329 00:34:25.660 --> 00:34:31.080 cheerleaders of the boom, particularly right before the bust. 330 00:34:31.080 --> 00:34:35.940 With the tech stock bubble of the late 1990s, I found academic economists were completely 331 00:34:35.940 --> 00:34:39.460 at a loss of even understanding bubbles. 332 00:34:39.460 --> 00:34:44.180 Likewise, central bankers from around the world and government forecasters were completely 333 00:34:44.180 --> 00:34:45.940 ignorant of the bubble. 334 00:34:45.940 --> 00:34:49.660 And when we turn to Wall Street, we find basically the same thing. 335 00:34:49.660 --> 00:34:58.540 The forecasters tracked by the Wall Street Journal were actually fairly cautious as the tech stocks were growing bananas. 336 00:34:58.540 --> 00:35:04.060 But then they got incredibly bullish right before the Nasdaq market crashed. 337 00:35:04.060 --> 00:35:12.940 If we look at some of the books published at the very height of the bubble, we find James Glassman and Kevin Hassett's book, Dow 36,000, 338 00:35:12.940 --> 00:35:19.300 which basically was predicting that the Dow Jones was going to triple in value. 339 00:35:19.300 --> 00:35:25.140 Their favorite stock pick, by the way, is still down one-third in nominal terms seven years later. 340 00:35:25.140 --> 00:35:37.620 We also had David Elias's book, Dow 40,000, and then not to be outdone, Ralph Akampura's book, Dow 100,000. 341 00:35:37.620 --> 00:35:45.780 I found 12 different Austrian economists who published articles in the late 1990s identifying the bubble and its cause, 342 00:35:45.780 --> 00:35:48.980 and among them was Hans Sennholz. 343 00:35:48.980 --> 00:35:56.860 The Japanese stock market bubble of the 1980s also had mainstream economists completely confused. 344 00:35:56.860 --> 00:36:02.460 Most economists and commentators were complaining that Japan was taking over the world economy 345 00:36:02.460 --> 00:36:10.680 by using government management of the economy to dominate, and if we didn't start copying the Japanese, that we would be buried. 346 00:36:10.680 --> 00:36:27.880 Writing at the peak of the bubble, Laura DeAndrea Tyson, President Clinton's Chairman of the Council of Economic Advisers, was nearly hysterical that Japan was surpassing the U.S. and that we needed to have the government more involved in managing the economy. 347 00:36:27.880 --> 00:36:44.780 I haven't found any Austrian who predicted the Japanese bubble in print, although it was a common topic of conversation, but we did provide an explanation in the aftermath, most notably by Professor Jeffrey Herbiner of Grove City College. 348 00:36:44.780 --> 00:36:56.540 If we go back to the stagflation of the 1970s, your parents might be able to tell you something about that, when we had both high unemployment and high price inflation, we find a similar scene. 349 00:36:56.540 --> 00:37:07.540 Professor Arthur Oaken, who was then chairman of the President's Council of Economic Advisors, published a book, unfortunately, during the same month that the economy slipped into recession. 350 00:37:07.540 --> 00:37:17.540 He declared that the business cycle was dead in his book, and he ridiculed those like the Austrian who believed the old fiscal religion about business cycles. 351 00:37:17.540 --> 00:37:26.540 Oaken believed that Keynesian-style scientific management of the economy had created another new era. 352 00:37:26.540 --> 00:37:34.540 Quote, the activist strategy was the key that unlocked the door to sustained expansion of the 1960s. 353 00:37:34.540 --> 00:37:39.540 Unfortunately for Oaken and the economy, the unemployment rate would more than double 354 00:37:39.540 --> 00:37:45.540 and would stay above the historical average for the next two decades. 355 00:37:45.540 --> 00:37:49.540 The rate of inflation for consumers would more than triple. 356 00:37:49.540 --> 00:37:55.540 Things grew so bad so fast that the Bretton Woods monetary system broke down. 357 00:37:55.540 --> 00:38:00.540 Richard Nixon took the U.S. off of the gold standard in 1971 358 00:38:00.540 --> 00:38:06.540 and imposed nationwide comprehensive wage and price controls. 359 00:38:06.540 --> 00:38:09.540 Like the dot-com bubble of the 1990s, 360 00:38:09.540 --> 00:38:17.540 The high-tech companies of the 1960s would lose 80 to 90 percent of their value. 361 00:38:17.540 --> 00:38:28.540 Austrian economists Murray Rothbard and Henry Hazlitt confidently called the bubble and the impending bust in 1969 in print at the very top of the market. 362 00:38:28.540 --> 00:38:31.540 Now let's go all the way back to the Great Depression. 363 00:38:31.540 --> 00:38:38.540 Mainstream economists today saw no bubble in the stock market and no reason for concern. 364 00:38:38.540 --> 00:38:46.540 Business press, industrialists, government bureaucrats and political leaders saw nothing to fear in the roaring 20s. 365 00:38:46.540 --> 00:38:57.540 They were highly optimistic at the peak and continued to be optimistic even after the stock market crashed and the economy went into recession and then depression. 366 00:38:57.540 --> 00:39:02.540 One political party official complained in late 1930, 367 00:39:02.540 --> 00:39:15.540 Quote, persons high in the party circles are beginning to believe that there is some concerted effort on foot to utilize the stock market as a method of discrediting the administration. 368 00:39:15.540 --> 00:39:25.540 Every time an administration official gives out an optimistic statement about business condition, the market immediately drops. 369 00:39:25.540 --> 00:39:31.280 As I detailed in my paper for the 50th anniversary conference, the leading mainstream economist 370 00:39:31.280 --> 00:39:38.520 of the day was Irving Fisher and he basically invented modern mainstream macroeconomics 371 00:39:38.520 --> 00:39:41.520 as well as central bank policy guidelines. 372 00:39:41.520 --> 00:39:47.440 He was the lead cheerleader of the boom in the late 1920s for the stock market and in 373 00:39:47.440 --> 00:39:52.120 particular the scientific management of the economy. 374 00:39:52.120 --> 00:39:56.760 Fisher was completely blindsided by the Great Depression. 375 00:39:56.760 --> 00:40:03.320 He wrote on the eve of the stock market crash that in America it was now the case that, 376 00:40:03.320 --> 00:40:08.960 quote, stocks have reached a permanently high plateau of prosperity. 377 00:40:08.960 --> 00:40:14.840 And he continued to be, continued to be bullish and to recommend stocks month after month 378 00:40:14.840 --> 00:40:17.320 after the crash had occurred. 379 00:40:17.320 --> 00:40:23.000 In the process, he lost his own considerable fortune, his wife's family fortune, and a 380 00:40:23.000 --> 00:40:27.800 considerable portion of the endowment of the university until they finally had to kick 381 00:40:27.800 --> 00:40:30.720 him off the committee. 382 00:40:30.720 --> 00:40:36.200 On the other hand, the great Ludwig von Mises clearly saw the problems in Fisher's system 383 00:40:36.200 --> 00:40:41.240 and wrote an entire book-length critique of Fisher and his system that was published in 384 00:40:41.240 --> 00:40:49.800 1928 that describes the flaws of Fisher and warned that the bust was inevitable if Fisher's 385 00:40:49.800 --> 00:40:57.600 policy guidelines were continued. Mises students such as F. A. Hayek similarly warned of a 386 00:40:57.600 --> 00:41:03.600 crash. So I think the historical record here between the Austrians and the mainstream are 387 00:41:03.600 --> 00:41:10.200 very clear. All of the major turns in the economy were predicted by the Austrians. None 388 00:41:10.200 --> 00:41:16.040 One of those major turns were predicted by mainstream economists or even Wall Street economists 389 00:41:16.040 --> 00:41:20.300 and as a matter of fact, the government economists and the mainstream economists were cheerleading 390 00:41:20.300 --> 00:41:30.400 on those economies as the crash or crisis came about. 391 00:41:30.400 --> 00:41:34.700 Looking at current economic statistics, one would be puzzled as to the direction of the 392 00:41:34.700 --> 00:41:35.700 economy. 393 00:41:35.700 --> 00:41:41.700 On the one hand, the stock market, indeed stock markets around the world, are near all-time highs. 394 00:41:41.700 --> 00:41:46.700 Unemployment is low and the consumer price index is at relatively low levels. 395 00:41:46.700 --> 00:41:51.700 China, Russia, India and other countries are doing extremely well. 396 00:41:51.700 --> 00:41:55.700 Statistically, things look almost too good to be true. 397 00:41:55.700 --> 00:41:59.700 On the other hand, the dollar is at an all-time low. 398 00:41:59.700 --> 00:42:06.180 The price of gold went over $800 an ounce today for the first time in 27 years, and 399 00:42:06.180 --> 00:42:09.820 oil is over $90 a barrel. 400 00:42:09.820 --> 00:42:14.740 In debtedness in terms of the national debt, consumer debt, mortgage debt, the personal 401 00:42:14.740 --> 00:42:20.420 savings rate, and the future liabilities of the federal government are all at unsustainable 402 00:42:20.420 --> 00:42:21.420 levels. 403 00:42:21.420 --> 00:42:25.260 But looking at all the statistical facts, one would really not be able to develop a 404 00:42:25.260 --> 00:42:32.260 A clear indication about the future direction of the economy. However, if we look for signs 405 00:42:32.260 --> 00:42:39.700 of economic imbalances, we do find the makings of an economic crisis. First and foremost 406 00:42:39.700 --> 00:42:46.660 is the housing bubble, which is now in a freefall downward in terms of building permits, building 407 00:42:46.660 --> 00:42:54.300 starts, housing starts, foreclosures, bankruptcies, as well as the number of houses being sold. 408 00:42:54.300 --> 00:43:04.300 The housing prices, despite all those predictions by the Fed, are actually declining. 409 00:43:04.300 --> 00:43:08.600 The real estate bubbles typically do not crash, like stock markets. 410 00:43:08.600 --> 00:43:15.540 The Japanese real estate market, for example, declined for 15 years after the bust. 411 00:43:15.540 --> 00:43:20.960 The housing market is related to the mortgage market, which has seen dozens of firms go 412 00:43:20.960 --> 00:43:23.420 out of business already. 413 00:43:23.420 --> 00:43:29.260 This market is where the subprime mortgage problem took place. 414 00:43:29.260 --> 00:43:36.200 Subprime mortgages, along with a variety of new mortgage products, including interest 415 00:43:36.200 --> 00:43:43.080 only loans, adjustable rate mortgages with teaser rates, and no-doc loans where customers 416 00:43:43.080 --> 00:43:48.080 don't have to document their income, they just have to tell the bank what their income 417 00:43:48.080 --> 00:43:49.080 is. 418 00:43:49.080 --> 00:43:54.080 Our products represent an economy-wide reduction in lending standards. 419 00:43:54.080 --> 00:44:03.080 Just like the Enron fiasco where banks were pushing loans on an unworthy and poorly documented consumer, 420 00:44:03.080 --> 00:44:13.080 a reduction in lending standards is the natural result of Federal Reserve inflation and a classic indicator of future economic crisis. 421 00:44:13.080 --> 00:44:16.080 How will our crisis unwind itself? 422 00:44:16.080 --> 00:44:37.080 Well, this is a question that we cannot answer with scientific certainty. Economic theory is not capable of predicting either the magnitude or the timing of a crisis, because first, it is not equipped to do so, and second, much of that is going to rest with the future actions of individuals and government policy. 423 00:44:37.080 --> 00:44:45.080 We do, however, in recent days, have seen one indicator based on the interest rate cuts by the Federal Reserve. 424 00:44:45.080 --> 00:45:00.080 These cuts by the Fed were encouraged by the high finance industry, the big New York City banks, the hedge funds, and none other than Secretary of the Treasury, Henry Paulson, who is the past CEO of Goldman Sachs. 425 00:45:00.080 --> 00:45:11.080 I believe that the cuts were not made to help mortgage payers, but the mortgage holders, and that any future bailouts will be similarly motivated. 426 00:45:11.080 --> 00:45:23.080 Now I say this not to necessarily impugn their reputations, but to indicate that there are well-placed special interest groups who will seek and probably receive future bailouts. 427 00:45:23.080 --> 00:45:32.080 This then gives us an indication that the bailouts associated with the housing bubble will lengthen the unwinding of the crisis. 428 00:45:32.080 --> 00:45:40.080 Bailouts do not serve to solve a crisis, they only make them longer and ultimately more painful. 429 00:45:40.080 --> 00:45:49.080 Bailouts are also a subsidy to bad investments, hazardous entrepreneurs and unproductive activities. 430 00:45:49.080 --> 00:45:56.080 They are attacks on sound investments, stable entrepreneurs, and productive activities. 431 00:45:56.080 --> 00:46:03.080 They necessarily make the crisis worse in an economic sense, even if they appear to be politically popular. 432 00:46:03.080 --> 00:46:08.080 We already see signs the U.S. economy is contracting and probably headed for recession. 433 00:46:08.080 --> 00:46:14.080 Foreclosure rates, bankruptcy rates, and delinquency rates are all rising, 434 00:46:14.080 --> 00:46:23.080 and there are hundreds of billions of dollars of mortgages that are set to reset their rate over the next two years. 435 00:46:23.080 --> 00:46:28.080 All those teaser rates are basically going to go up to market rates. 436 00:46:28.080 --> 00:46:33.080 In addition to housing, the domestic automobile industry is in contraction. 437 00:46:33.080 --> 00:46:35.080 The state of Michigan is in recession. 438 00:46:35.080 --> 00:46:39.080 And so while the unemployment rate is low, it is rising. 439 00:46:39.080 --> 00:46:55.080 The economy is currently benefiting from a surge in non-residential construction as businesses, churches, universities and other institutions try to make up for the backlog that developed during the housing bubble. 440 00:46:55.080 --> 00:47:03.080 There has also been a surge in exports due to the falling dollar. Neither of these surges is over, but no one expects them to be permanent. 441 00:47:03.080 --> 00:47:13.080 The imbalances indicate that the possibility of a recession in 2008 is much larger than currently anticipated by market forecasters. 442 00:47:13.080 --> 00:47:21.080 And if you stripped out government spending and properly accounted for inflation, we would probably already be in a recession. 443 00:47:21.080 --> 00:47:32.080 In addition, there are plenty of political hotspots, as you know, which could ignite at any moment and bring down markets around the world, including the bubbles that exist in China and Russia. 444 00:47:32.080 --> 00:47:45.080 One indicator that I work with has already signaled a major economic crisis in 2008 and along with a real estate bubble in the US and elsewhere could make for a very painful and drawn out affair. 445 00:47:45.080 --> 00:47:52.080 However, there are policies which could in part mitigate much of the economic pain for the crisis. 446 00:47:52.080 --> 00:48:00.080 In addition, crises usually can present opportunities for policy reform. 447 00:48:00.080 --> 00:48:07.080 We would start by allowing markets to set interest rates rather than the Federal Reserve. 448 00:48:07.080 --> 00:48:11.320 Next, government spending would have to be greatly reduced, both to eliminate the budget 449 00:48:11.320 --> 00:48:14.520 deficit and to allow tax cuts. 450 00:48:14.520 --> 00:48:19.680 With the budget deficit eliminated, the trade deficit would move towards a balance and stabilize 451 00:48:19.680 --> 00:48:21.640 the value of the dollar. 452 00:48:21.640 --> 00:48:27.000 Third, rather than providing bailouts, the government should allow liquidation to take 453 00:48:27.000 --> 00:48:28.000 place. 454 00:48:28.000 --> 00:48:43.000 Fourth, by moving to a sound monetary system where you have a gold standard and 100% reserves on checkable deposits would restore stability in money and banking and prevent future economic bubbles. 455 00:48:43.000 --> 00:48:49.000 Yes, the pain would remain, but it would not be as bad as other policy alternatives. 456 00:48:49.000 --> 00:48:55.900 The names of the holders of mortgages and collateralized debt obligations would simply change. 457 00:48:55.900 --> 00:48:58.800 Homeowners would become renters. 458 00:48:58.800 --> 00:49:06.700 Employees in the finance and construction industry would have to move to other industries like manufacturing, service and infrastructure. 459 00:49:06.700 --> 00:49:13.600 All of this is going to happen anyways, but the Austrian approach would make it much quicker and less painful. 460 00:49:13.600 --> 00:49:17.500 The Austrian approach might seem like it's pie in the sky. 461 00:49:17.500 --> 00:49:23.500 After all, in this battle, Austrians are outnumbered by mainstream economists by more than 100 to 1. 462 00:49:23.500 --> 00:49:31.260 We are like David to their Goliath. But like David, we have a slingshot or a secret weapon, 463 00:49:31.260 --> 00:49:36.700 and that we have some scientific truth to back up our case and our remedies. 464 00:49:36.700 --> 00:49:41.500 And we also have a track record that I presented tonight of knowing and anticipating 465 00:49:41.500 --> 00:49:47.100 what many people consider of utmost importance, anticipating the business cycle. 466 00:49:47.500 --> 00:49:50.660 and we have a remedy for the business cycle. 467 00:49:50.660 --> 00:49:53.780 Meanwhile, the mainstream has a terrible record 468 00:49:53.780 --> 00:49:56.420 and questionable motivations. 469 00:49:56.420 --> 00:49:58.940 I believe we have a grand opportunity 470 00:49:58.940 --> 00:50:02.260 to place this nation back on its original foundations 471 00:50:02.260 --> 00:50:05.500 of peace, property and natural rights 472 00:50:05.500 --> 00:50:08.300 and to once again be a shining example 473 00:50:08.300 --> 00:50:11.700 for other nations that they may follow our lead. 474 00:50:11.700 --> 00:50:14.580 In the late 19th and early 20th century, 475 00:50:14.580 --> 00:50:21.100 Austrians dominated the debates over economic policy, a position we lost during the Great 476 00:50:21.100 --> 00:50:26.460 Depression and the rise of fascism. But I believe that in the early 20th century that 477 00:50:26.460 --> 00:50:32.260 we can once again retake that position of leading economics and economic policy around 478 00:50:32.260 --> 00:50:49.620 World. Thank you very much. Any questions? Yes. 479 00:50:49.620 --> 00:50:57.620 What do you think about the time and economic policy of the President of the United States, Ron Paul, to advocate time on the road? 480 00:51:19.620 --> 00:51:49.620 The Theory of Money and Credit The Theory of Money and Credit The Theory of Money and Credit 481 00:51:49.620 --> 00:52:19.620 brought Austrian economics out into the mainstream for the first time in a very long time basically and that is really driving his campaign is really driving a lot of renewed interest in Austrian economics and I can tell you working at the Ludwig von Mises Institute you can just feel the increased volume of interest based on the traffic on our websites, the number of phone calls we get and things like that. 482 00:52:19.620 --> 00:52:29.620 and things like that, he's a tremendous drive for reform and I think that he's really helped to spread the word about Austrian economics and what good it can do for all of us. 483 00:52:35.620 --> 00:52:36.620 Yes? 484 00:52:36.620 --> 00:53:00.620 What do you think of the Austrian economics? Do you ever think that they will overcome and something like that would be destroyed or social security would be removed? These are big economic issues that are deeply rooted in too large America for the past 15 years. How would a big thing like that happen? 485 00:53:06.620 --> 00:53:13.340 and prominent financial press, including The Wall Street Journal, The Financial Times of 486 00:53:13.340 --> 00:53:20.340 London, The Economist Magazine, Investor's Business Daily, the list goes on, Barron's. 487 00:53:20.340 --> 00:53:27.980 I mean, so we're being found out to have the right answers and these guys never report 488 00:53:27.980 --> 00:53:34.180 on the entire mainstream economics unless you're just a bond fund manager or something 489 00:54:04.180 --> 00:54:13.480 to solve long-standing problems and people know that Social Security is a problem. 490 00:54:13.480 --> 00:54:17.860 And more and more people realize that inflation is a problem. 491 00:54:17.860 --> 00:54:21.840 They're certainly gonna realize the housing bubble is a problem. 492 00:54:21.840 --> 00:54:26.740 And that the Federal Reserve and other institutions are not really telling the truth. 493 00:54:26.740 --> 00:54:31.940 And when people find out that they've been had and somebody's not telling the truth, 494 00:54:31.940 --> 00:54:54.940 Do you think that open integration is a more open integration policy than the integration of drug additives as a counter-competitive act, given by the use of travel? 495 00:55:01.940 --> 00:55:04.040 because it was sort of tangential. 496 00:55:04.040 --> 00:55:08.360 Much of the illegal immigration from Mexico 497 00:55:08.360 --> 00:55:12.040 has occurred precisely because of the housing bubble. 498 00:55:12.040 --> 00:55:13.700 There are four major categories 499 00:55:13.700 --> 00:55:18.520 in which illegal Mexican immigrants work. 500 00:55:18.520 --> 00:55:21.060 Three of those are directly related to housing. 501 00:55:22.060 --> 00:55:25.780 The big run-up in all that illegal immigration flow 502 00:55:25.780 --> 00:55:30.200 I see as basically being directly related 503 00:55:30.200 --> 00:55:41.200 to the housing bubble because the Mexican immigrants worked in housing, construction, road building, new landscaping, and a variety of other related industries. 504 00:55:41.200 --> 00:55:45.200 And I've just checked the figures before I came up here to Grove City. 505 00:55:45.200 --> 00:55:52.200 The Central Bank of Mexico keeps a statistic on how much money is being sent from the U.S. back into Mexico. 506 00:55:52.200 --> 00:55:56.200 It's called remittances as these people send money back to their family. 507 00:55:56.200 --> 00:56:03.100 You might see this at the grocery store where they wire money back to Mexico. 508 00:56:03.100 --> 00:56:08.520 Those remittances have increased dramatically during the housing bubble and they have, over 509 00:56:08.520 --> 00:56:13.800 the last six months, leveled off and actually we're starting to see negative numbers for 510 00:56:13.800 --> 00:56:14.800 the first time. 511 00:56:14.800 --> 00:56:20.680 So my guess is that illegal immigration from Mexico has not only on net stopped but may 512 00:56:20.680 --> 00:56:23.720 may actually be reversing itself. 513 00:56:23.720 --> 00:56:33.320 Not to the point that Lou Dobbs is going to be off his blood pressure medicine, but there 514 00:56:33.320 --> 00:56:34.720 is a sign. 515 00:56:34.720 --> 00:56:35.840 These things can be explained. 516 00:56:35.840 --> 00:56:41.080 Lou Dobbs doesn't want it explained, but that's the explanation for the problem of illegal 517 00:56:41.080 --> 00:56:44.080 immigration from Mexico. 518 00:56:44.080 --> 00:56:47.600 Okay, thank you very much. 519 00:56:50.680 --> 00:56:52.680 Thank you very much.