The topic tonight is going to be skyscrapers and business cycles. And it's based on a paper that I did, which was published in 2005, in which I present a model which shows that a new record-breaking skyscraper in terms of its ultimate height is a signal for an economic crisis.
And then I show the history of that and the theory behind that and well it turned out that it actually did predict this economic crisis and I'm going to get into that in a little bit but before I do so I'm going to start off by playing this Hayek vs. Keynes video which I'm sure some of you have seen at least for no particular reason I just like to play the video.
But it's going to give us some background in terms of the Austrian Theory of the Business
Cycle, which ultimately is the foundation upon which the skyscraper model is built.
And so I'm going to show the video, talk a little bit about the Austrian Theory of the
Business Cycle, and then show how it applies to this model of skyscrapers and economic
crises.
So again, without further ado, Fear of the Boom and the Bust.
Mike, F.A. Mike, Nick
Buddy!
They Listen to Party of the Fed, Roberts, Twyman, Lennon, John Maynard Keynes, Devin, Hayes
Yeah, we're opposed. We oppose each other philosophically in the same studio
We've been going back and forth for a century, I want to see your markets
I want them set free, there's a boom and bust cycle and good reason to fear it
Play more literature, no, it's the animal spirit
John Maynard Keynes wrote the book on modern macro
Pro, the man you need when the economy's off track Depression, recession, now your question's
in session Have a seat and I'll school you in one simple
lesson 1929, the big crash, we didn't bounce back
economy's in the trash Persistent unemployment, the result of sticky
wages Waiting for recovery, that's outrageous
I had a real plan, any fool can understand The advice real simple, who's aggregate demand?
CIG all together gets to Y, keep that total row and watch the economy fly
We've been going back and forth for a century, I want to steer markets, I want them set free
There's a boom and bust cycle, and good reason to fear it, play for interest
No, it's the animal spirit, you see it's all about spending, hear the register cha-ching
Circular flow, the dough is everything, so if that flow is getting low, doesn't matter the reason
We need more government spending, now it's stimulus season, so forget about saving
Saving, get it straight out of your head, like I said, in the long run, we're all dead.
Savings is destruction, that's the paradox of thrift, don't keep money in your pocket,
or that growth will never lift, because business is driven by the animal spirits, the bull
and the bear, and there's reasons to fear it, effects on capital investment, income and
growth, that's why the state should build a gap with stimulus, both the monetary and
the fiscal, they're equally correct, public works dig in ditches, war has the same effect,
Even a broken window helps the glass man, have some wealth to multiply or drive entire the economy's health
And if the central bank's interest rate policy tanks, a liquidity trap, that new money suck in the bank
Deficits could be the cure you've been looking for, let the spending soar, now that you know the score
My general theory's made quite an impression, I transformed the econ profession
You know me, modesty, still I'm taking a bow, so say it loud and say it proud, we're all Keynesians now
We've been going back and forth for a century I want to steer markets, I want them set free
There's a boom and bust cycle and good reason to fear it
I've made my case, Freddy H, listen up, can you hear it?
I'll begin in broad strokes, just like my friend Keynes
His theory conceals the mechanics of change That simple equation, too much aggregation
Ignores human action and motivation Yet it continues as a justification
For bailouts, payoffs, by-polls with machinations
You provide them with cover to sell us our free lunch Then all that we're left with is death and a bunch
If you're living high on that cheap credit hog Don't look for a jewel from the hair of the dog
Real savings come first if you want to invest The market coordinates time with interest
Your focus on spending is pushing on thread In the long run, my friend, it's your theory that's dead
So sorry there, buddy, if that sounds like invective Prepare to get schooled in my Austrian perspective
We've been going back and forth for a century. I want to steer markets, I want them set free. There's a boom and bust cycle, and good reason to fear it. Play more interest rates. No, it's the animal spirit.
The place you should study isn't the bust, it's the boom that should make you feel leery. That's the thrust of my theory. The capital structure is key. Malinvestments wreck the economy.
The boom gets started with an expansion of credit The Fed sets rates low, are you starting to get it?
That new money is confused for real, loanable funds But it's just inflation that's driving the ones
Who invest in new projects like housing construction The boom plants the seeds for its future destruction
The savings aren't real, consumption's up too And the grasping for resources reveals there's too few
So the boom turns to bust as the interest rates rise For the cost of production, price signals were lies
The boom was a binge, that's a matter of fact, now it's devalued capital that makes up a slack
Whether it's the late 20s or 2005, booming bad investment seems like day 5
You must save to invest, don't use the printing press, or a bust will surely follow, an economy depressed
Your so-called stimulus will make things worse, just more of the same, more incentives perverse
And that credit crunch ain't a liquidity trap, just a broke banking system, I'm done, that's a wrap
We've been going back and forth for a century. I want to steer markets. I want them set free.
There's a boom and bust cycle and good reason to fear it. Play more interest rates. No, it's the animal spirit.
The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood.
Indeed, the world is ruled by little else.
Practical men who believe themselves to be quite exempt from any intellectual influence are usually the slaves of some defunct economist.
The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.
Well, that's all of economics summed up in a six-minute video, thereabouts.
So you basically have the Keynesians, John Maynard Keynes and the Keynesians, who say
that the economy is inherently unstable, it's a matter of psychology, and the only thing
The thing the government has to do is basically pour in more aggregate demand through public work, spending, printing presses, and so forth, and the Austrians have more of an economic view of the business cycle in the sense that there is a real economic cause to the cycle itself and that under normal market conditions the economy would be stable.
The economy is, basically, you have Adam Smith's invisible hand managing both the microeconomic
aspects of the economy as well as the macroeconomic aspects of the economy.
The difference being, for the Austrians, the existence of a central bank and the instability
that that creates in money, credit, investments and interest rates.
As you all know, the Federal Reserve is the governmental bureaucracy that is in charge of setting interest rates, at least short-term interest rates in the economy.
And what Hayek says is that that interest rate setting power that it has is the actual source of the business cycle itself.
And most importantly, I think it's important to point out, and the video does a good job of this, is that the bust or the crisis that you're living through today, for example, is the result or is caused by the boom itself.
And so Austrians look at the boom phase of the economy when the Fed is keeping down interest rates as the problem part of the business cycle.
Everybody's enjoying themselves, they're having lots of fun, investors are making great returns,
there's more work available than there is employees, and also people are consuming a great deal.
Luxury consumption, everybody increases their consumption as the appearance of wealth is made to them.
So that's where the Austrians find the problem part of the business cycle is the part where everybody else thinks is just great and you know, party with Keynes basically, party at the Fed, let the good times roll and so that's a very significant difference in business cycle approaches to the business cycle.
The Keynesians basically have a non-economic view of the business cycle that it's all a matter of psychology, and their cure, their cure-all basically is more spending, that the government should spend more, as you noted in the video, anything will go, there are wars, catastrophes, breaking windows, anything to increase spending in the economy. The Keynesians think we'll revive psychology, and if we pour enough new aggregate
demand into the C plus Y plus G equation will get back to full employment. Of course, you've got full employment with producing goods and services of much lower value.
So, there is a big difference there. And of course, one of the refrains in the song is that we've been going back and forth for a century.
that the Austrians and the Keynesians have been debating this for a very long time, at least since the 1920s.
The interesting thing and the frustrating thing for me is, of course, that the Keynesians have basically been in control of policy ever since the Great Depression.
Ever since Herbert Hoover, the American national government has basically been following fairly consistently a Keynesian outlook on the economy, that the government is responsible for restoring and maintaining full employment.
And so they've basically been in charge in the 1920s on up to the present day.
At one point, after the stagflation of the 1970s and early 1980s, there was a brief
interlude where Keynesian economics was thought to be dead.
But it has obviously reared its ugly head in a massive sort of way, and we are back
to the point where most people would say that we're all Keynesians again, a phrase that's
It's been repeated in the New York Times and the Wall Street Journal and other publications.
And of course, Paul Krugman is at the New York Times writing his commentary.
He's what you have to consider a rabid Keynesian.
There's never enough spending.
Despite all of the massive bailout packages and stimulus packages, Paul Krugman thinks
And of course, Ben Bernanke, Timothy Geithner, Hank Paulson, George Bush, Barack Obama are
basically all linked into that whole Keynesian policy apparatus.
They've basically been following Keynesian doctrine that if you get a recession in the
Economy, or a decrease in GDP, that you lower interest rates and that you have the government
spend more and you have the government running deficits. And that's supposed to cure the
economy. Well, of course, they brought interest rates down to zero. They've doubled the balance
The Federal Reserve, they've increased government spending by an enormous amount, created vast increases of liabilities for the federal government, and of course created one of the largest deficits by far in our nation's history.
And things really aren't budging, things really aren't working out too well in that regard.
The only thing you can say at this point is that they've stopped the correction process
in the market, they've stopped the bleeding at least temporarily, but it didn't do what
they said it was going to do.
Paul Krugman's promises, Barack Obama's promises, George Bush's promises, Timothy
Geithner's promises, Ben Bernanke's promises.
At the end of this month will be one year now that the chairman of the Federal Reserve
has been diligently telling us on about a bi-monthly basis that we are in the early
and the early stages of an economic recovery. And not much happening there. So the KGs have
been in control and they've been wrecking the economy fairly consistently. The Austrians,
on the other hand, have been right about all this all along. Ludwig von Mises published
a book in 1928 critiquing the monetary policies of central banks, specifically of Irving Fisher,
Erwin Fischer predicted a great crash in the economy. His student, F. A. Hayek, who's in this video, well, that isn't F. A. Hayek. That's his character. He predicted that the American stock market and economy would crash in 1929. They were both very right about that.
Meanwhile, Irving Fisher, who is the godfather of modern mainstream macroeconomics, and
the craftsman who basically put together modern mainstream economics, macroeconomics, but
also central bank monetary policy, how that should be done.
And on the eve of the stock market crash, he was saying that America has now established
a New Perpetual Prosperity and that we didn't really have to worry about things and he kept
reassuring investors in newspapers around the country that they should just keep their
money in the stock market because things are going to be bright right around the corner,
things are going to be restored, that this was all just a psychological blip in the economy
and of course people who paid attention to Fisher lost about 90 percent of their money
in the Stock Market. The same thing happened in the stagflation in the 1970s, which was
a really pitiful economic performance in the United States from late 1969 to 1982. The
U.S. experienced high rates of inflation, high rates of unemployment, and the Keynesians,
right before all that started, said, we have eliminated the business cycle. We have established
and Fisher's Form of Perpetual Prosperity, while at the same time Murray Rothbard and
Henry Haslett, who were Austrian economists, and there were very few Austrian economists
at the time, were writing specifically about the pending problem in the U.S. economy with
inflation and unemployment, a dollar crisis and so forth, and it was less than two years
later that the U.S. went off the gold standard.
The same thing basically happened with the tech stock bubble in 1999 and the year 2000.
The Austrians have been writing consistently, you know, like two dozen different Austrian
economists were writing that this tech stock bubble was going to burst and hurt the economy.
Mainstream economists were saying, no, this is different this time, we're in a new era,
just like Irving Fisher said, and that we've eliminated these problems, we've got technology
The real problem we need to worry about is there won't be enough work for people to do
because all this technology is just going to make us incredibly wealthy, incredibly
productive without any effort, so we're going to have to find something new to do because
work just isn't going to get it anymore.
Of course, they were wrong.
And then, of course, this latest crisis involving the housing bubble, again, the Austrians were
were writing as early as 2003 that the Fed was causing a bubble in the housing market.
And that basically mainstream economists at the Fed particularly, but also the real estate
industry and just about all financial journalists were saying that no, this is a new phenomenon
that people never lose money in housing, that real estate prices never go down, and that
there's really nothing to worry about. On the eve of this crisis beginning, people at
the Federal Reserve were saying that, you know, there's really no housing bubble here
and it doesn't really matter because we've got these new high-tech financial instruments,
default swaps and derivatives and mortgage-backed securities, all sorts of new phenomenon that's
made this market transparent and very liquid, so we don't really have to worry about it
because it's all going to take care of itself, okay. Well, that didn't work out too well
either. And the result, as we've seen, is a massive increase in unemployment. We've
got about 15 million Americans now out of work, and millions of families have lost their
homes. It looks like at a minimum, if no new problems emerge, and we look at the foreclosures
The skyscraper model was something that I came across during the tech stock bubble.
The real estate analyst was writing about the strange correlation between the building of record-setting skyscrapers and economic crises.
He said he didn't really know why. It just seemed like an apparent phenomenon.
And so I put that aside. In 2003, I was on a little sabbatical and decided to look at it again and look at it deeper from the eyes of an Austrian economist
are from the view of Austrian theory and try to make some linkage between this correlation
and some sort of theoretical foundation for the skyscraper index.
The skyscraper index made correct predictions for the panic of 1907. The Singer Building
and the Manhattan Life Building were started before the panic.
The panic occurs and then the buildings were completed.
The skyscraper index predicted the Great Depression with the building of 40 Wall Street, which
is now a Trump property, Donald Trump, the Chrysler Building and the Empire State Building.
All were started before the Great Depression and the Great Depression started in the fall
The same is true for World Trade Building 1 and World Trade Building 2 and the Sears Tower.
All were started before the onset of the stagflation of the 1970s and all were finished as we moved into the stagflation of the 1970s.
The Petronas Towers set a marginal record in Kuala Lumpur in 1997 which signaled the
Asian Contagion when all the Asian economies melted down, Malaysia, the Philippines, Hong
Kong, Singapore, Indonesia, Thailand and so forth.
And then, let's see, Taipei 101 was started before, during the tech bubble.
The tech bubble busted and then Taipei 101 was completed in the aftermath of that market
meltdown.
And then the most recent signal was given in Dubai, in the United Arab Emirates, in 2007, the Dubai Tower, the Burj Dubai Tower, exceeded the height of Taipei 101 in July of 2007.
I reported it on that in August of 2007.
The funny thing is when people are building record-setting skyscrapers, they're very secretive about their plans.
They won't tell you how high it's going to be and things like that because they're actually competing.
They don't want to give away their plans.
and of course that was a very accurate signal because in August of 2007 we
started seeing the very first signs of the bust phase of this economic crisis.
The first sign was the mortgage retailers that had emerged during the
bubble to make mortgages and package them up and then resell them. Those started
going bankrupt one right after another and by the end of the year there was like 35 of
those companies that were already bankrupt and we pretty much knew that things were not
going to get better from there. The Fed, Treasury, the President were all still reassuring people
not to worry, the stats were all good, aggregate demand was in good shape and the economy according
to Hank Paulson, Ben Bernanke, was better than it ever had been before, and they continued
to offer those kinds of advice to investors and to voters until it was more or less absolutely
obvious to everybody that things were going nowhere.
So that's the scenario, the evidence is really good for the skyscraper index, the theory
The theory behind it, essentially the basic theory is that record-setting skyscrapers
get built during periods of excessive speculation in markets, when you have a long-term period
of excessive speculation.
Speculation is a good thing, but it can get out of control.
And the reason it gets out of control is because the Fed reduces interest rates below what
What the market would be charging for all various types of loans.
So it's adding money to the money stock, banks are lending it out, interest rates are low,
investors are successful, in fact there's a cluster, there's a cluster of success during
the bubble phase, everybody's making money
it doesn't seem to matter what you do
so for example in the tech talk bubble you had day traders
people who had otherwise no experience
or no knowledge
about trading of stocks and all of a sudden they quit their job, they stay at home in their pajamas
and they're trading stocks and they're making more money than they used to
you hear things like that
you know there's a problem
and that's what happened during the housing bubble. You had people who otherwise had no
experience in dealing with real estate, making money on real estate. Their houses were going
up in value, they were taking second mortgages, buying Winnebago's boats, adding onto their
House, buying luxury game day condominiums in Auburn, that was the absolute limit when
I saw that happening. I said, how do you justify spending a quarter million dollars on a property
that you visit maybe six weekends a year and you still have to pay utilities and all that
and other stuff. Taxes, how do you justify that? And what people would tell me is, well,
it may not make sense, but I can always sell it for more later. And that was the, almost
the uniform response to my questions at that time. So, skyscrapers, you know, you saw Hayek
with the Structure of Production. That's very important in the Austrian analysis that the
structure of production is a very intricate fabric of connections in the economy of entrepreneurs,
suppliers, consumers, a whole chain of production and distribution. It's very complex and messing
What we see is in this period of excessive speculation of easy credit, and it's not just easy credit in terms of low interest rates, but the Fed was actually also, if problems appeared in the past, the Fed would come into the rescue in bailout markets, bailout foreign companies, bailout long-term capital management scenarios, so that the Fed would come into the rescue.
The Fed basically took the risk out of the market. They felt, people felt that if anything did go wrong, the Fed would just come in to the rescue, so I really don't have to worry about this. The Fed's going to bail us out, which is in part true, but that just leads people to take on more risk.
Skyscraper is also a very intricate operation, and to build a new record-setting skyscraper is a very difficult, intricate process.
The higher you build something, if you want to set a new record, you basically have to go out and reinvent all of the technology involved in the building of a skyscraper.
Every aspect of it, from air conditioning and heating, to electricity, to plumbing, to elevators especially, if you look at stories about new record setting skyscrapers, the elevators are a big deal because they take up room on every floor.
You can't just do without elevators and say, okay, we're going to rent you a place on the 165th floor.
Sorry, no elevators. You know, you just can't do that. You've got to have not only lots of elevators,
they have to be very fast and they have to be as compact as possible.
in the Bourges-Dubai Tower that was opened in January 4th of this year, the latest record-setting
one, had three sets of elevators and each elevator had three cars stacked on top of
one another and so there was a computer system that operated these things so that they would
would show up in a pattern with a computer determined pattern so that the elevators would
open on three different floors at one time.
So that at any one time you had, I think, 18 elevators operating within that structure.
But that had to be invented from scratch.
They had to extend the structure of production in a whole new way, in all new technology.
And it's difficult to imagine, unless you're an engineer, the problems involved with getting
things just like drinking water up to the 180th floor.
The cooling system, the Burj Dubai Tower, of course it's in the Middle East and it's
It's in a very hot climate but they said that on a summer day the air conditioning system
has the equivalent of 20 million pounds of ice.
So it's a very big deal.
You're having to change the whole structure of production in order to make something like
that happen.
It's not just stacking things, the same things over and over again.
So that's the kind of thing that tips us off, that new record-setting skyscrapers, you have this period of easy credit, you have this period of extensive, excessive speculation, and then you have these changes in the structure of production that are related to these skyscrapers.
that for whatever reason people want more space in the particular commercial areas.
Most of them have occurred in New York City because the demand for land is high, so people want to build higher.
And as a result, you get these technological developments occurring that otherwise would not have occurred
and so you've, in a sense, stretched out the structure of production in an unnatural way, and when that happens, what we're seeing ultimately happen is male investments, or bad investments,
M-A-L Investments, not M-A-L-E Investments, although I can say that all of them were made by M-A-L-E people.
And so, you know, that's the connection.
These, all these skyscrapers, these record-setting skyscrapers have basically all been a bust.
The Empire State Building, for example, was never profitable. They probably want to tear it down if they could, and even if they were, even if some of them were profitable, they ultimately ended up dragging tenants away from other structures, making them malinvestments, and so the skyscraper, this record setting skyscraper has been a signal item of a malinvestment, but it's a signal that there's
systematic male investments going throughout the economy. So in Dubai's case, it's the Dubai Tower, but in Auburn's case, it's the luxury game day condominiums. But the same type of phenomenon has basically been occurring throughout the United States and throughout many other countries around the world, and as a result, we're witnessing a global economic crisis. And with that, that's a wrap.
I'll take some questions though. Yes?
Yes. The Woolworth building was built in 1913 and it set a new record and there was no economic crisis that developed.
The Fed was coming online, and World War I was also coming online. The U.S. economy was
tanking at its most precipitous decline in recorded history, was signaled by the building
This is the beginning of the record-setting date of the Woolworth building, but the fact that World War I was started, and there was a new tremendous demand for American production, particularly agricultural production, steel, and munitions, things like that, that sort of brought the U.S. economy
came out very quickly from what otherwise was looking like it was going to be a very severe recession in the U.S. economy and of course if you don't get the severe recession and you only have like six months of a very precipitous drop, historians never get around to naming it anything and so it's basically fallen out of economic discussions of the business cycle.
So I don't really consider that a mistake by the skyscraper index and I've also gone back in the 19th century in America and looked at the earlier skyscrapers, buildings that none of us have ever heard of before and there were also economic crises associated with those, very steep declines in economic output and we've also seen this phenomenon
at the state level. A student did a paper in my American Economic History course a couple
years ago and looked at the Alabama records of skyscrapers and every time there was a
new record there was either coincided with a global economic crisis or coincided with
a U.S. recession and one was associated with not a U.S. recession but a recession in the
Alabama Economy. And so it's something that is pervasive. Actually, when the paper came
out in 2005, you know, nobody cared at all until the phenomenon started developing in
other countries. And so all the media calls that I got for the first two or three years
were from foreign countries that were experiencing local skyscraper crises.
You can also see it in things of a similar nature, like for example when big corporations
build giant lavish headquarter buildings at a micro level, very often you find that those
Those corporations then go right downhill in terms of their stock price.
Naming of stadiums is another good example of that.
Enron purchased the rights for the Houston Astros Stadium right before it collapsed and
went out of business.
and Citibank in New York City bought the rights to name the new New York Mets Stadium and
then basically it went bankrupt if it wasn't for the fact that the federal government gave
them zillions of dollars.
So it sort of applies to some other things as well.
I was just wondering, you talked about the Austrian relying on the physical hand, isn't that like building a skyscraper in the stadiums and convenience, by the way I get much of it from the stadiums.
Well, not exactly, no, because there's an intervention, it's a crucial intervention
into the time and interest element in the economy, and because the Fed is bringing down interest
rates and risk in the economy at sending false signals so that the entrepreneurs in the economy
are facing a false signal that's given by the Fed and as a result it alters their choice
set and it alters their ultimate decision and they end up making bad investments as
as a result. So, it's not the true invisible hand of the marketplace at work, it's the
altered hand, back of the hand from the Fed basically, that's setting up an inevitable
The problem for somebody, for example, I knew this was coming and so I did things a little differently and there's a lot of old farts in like the home construction business and things like that, they knew something was up and so they pulled out but in the same way with bankers, some of the bankers knew early on just like I did that something was amiss, that things were in their business
wasn't natural and so they pulled back but of course other people just step
forward top of the line at the Fed yeah we'll take that money we'll make
those mortgages we'll build those houses somebody eventually will be stupid
enough to take take on the take the Fed signal
Well, you're actually compacting all of the elements of the skyscraper itself.
to save space. So the electricity, the water, the air, the elevators, the computer lines, all of that, you have to try to squeeze that down as much as possible so that you can rent more square feet of space on every floor.
But in order to do that, you have to develop new technology. Every aspect of that construction, the exterior coating, the glass, that all has to be new technology to be able to get up that much higher.
That new technology means that you're actually making the structure of production more round about because you've created new technology and so you have the sort of leading edge technology companies and then all of the suppliers in the distribution chain that goes into producing that one element for that new record-setting skyscraper.
You're squeezing the space constraints in the building by adding new technology and that new technology makes the whole structure of production more roundabout.
And in the paper, by the way, it's published in the quarterly journal, Austrian Economics, 2005, in the spring issue.
I give some examples of more roundabout production.
One of them is in the dairy industry, and this is a natural change in the structure
of production.
It used to be the case when I was a kid that there were local dairy farmers around my hometown.
And those dairy farmers, you know, they would milk the cows, they would bottle the milk
or whatever, and they would distribute it around town so that you had your own milkman.
And so it went from the farmer to their bottling plant to the milkman who actually came to
your back door and put it by your back door.
I know that's hard to believe, but they did it, even in the winter.
Yeah, milk, chocolate milk, never could get chocolate milk. Mother wouldn't let me have it. Butter, eggs, the whole nine yards.
And then the structure of production has been changed so that you still have lots of little dairy farmers, but they sell to larger conglomerates who send trucks to take the milk,
book, they bring the milk to central processing plants who then process the milk, package
it up and ship it to wholesale outlets and then that is shipped to retail outlets and
then you actually have to go to Kroger and pick it up and buy it yourself. But that direct,
the more direct process of dairy farmer bottles his stuff and brings it to your house, that's
That's a very direct process of production. Going to collecting the milk, bringing it
to a central processing plant, packaging it up, selling it over a wide area through wholesalers
and retailers, that's a more roundabout method of production. But it's also a whole heck
of a lot more efficient. You only have to have one processing plant instead of a dozen.
So that's an example of a more roundabout production process and that's a natural one
that has a lot of efficiencies.
What the Fed does to the economy in the business cycle is it fakes it out.
It says to producers, you need to try to do something more roundabout given that you've
got all this access to funds and then before it's completed, before that process is all
depreciated
the crisis hits and we find out that that
was a stupid idea
like building luxury game economy names
How do you think the results would be?
All of these malinvestments were collapsing, which is what we want to see. We want to see the malinvestments collapse and basically go back into the market and find a market price, probably at a much lower level.
And so that's what we were seeing, and before the big response, there was a cleaning up process that started to get underway.
And then the Fed came in with massive, unprecedented action, of course, bailouts from the Treasury and by the Fed as well, to prevent this process, this correction taking place, to take the mail investments and throw them onto the market and let them find a price.
And of course, we're still having trouble with that. There's still a lot of stuff that the Fed has on its books, or the Treasury even some, and it's much better to allow the marketplace to try to clean this up.
Basically, I think almost the entire process would have been completed by now, or possibly even earlier, that if we had just allowed everything to crash.
Of course, now this would have brought down a lot of things with it. It would have brought down the big New York City banks.
It would have brought down the derivatives market, would have brought down the credit swap, credit default swap market, which was, there was intervention in there as well, and so there would have been a lot of pain, and a lot of things would have gone bankrupt.
A lot of people would be losing their homes. And that's mostly all to the good. I mean, there's a lot of things that are in the economy that I personally don't think, you know, just guessing, of what is versus what should be. There's a lot of crazy financial stuff in there that, you know, I think we can probably do perfectly without. There were artificial creations that were created by the boom.
And they certainly were created during the boom. And I don't think, you know, like for
example, the governor of the Fed, Randy Kroszner, was saying how all these new products were
creating transparency and liquidity in the market. Basically what he was talking about
is that people who were making loans were no longer keeping them and being responsible
for them. They were getting rid of, they were sloughing off this risk. Well, I think people
People make smarter loans when they keep them on their own books.
That's what every banker has always told me, and I have no reason to disagree, but Governor
Dr. Krosner, felt we were in a new era.
Yes?
The Austrian has controlled the economy, the business cycle shouldn't be as severe,
would there ever really be a boom, or would they try to keep the industry constant?
No.
When you ask a question, if the Austrians were in control, yeah, what would an Austrian
Probably mess everything up, turn to the dark side, ruin everything. Well, in general, we would like the market to be determining interest rates, not the Fed, not any private or public bureaucracy. We don't think that they should be controlling the interest rates.
That is the most important sensitive price in the economy and it's really a guiding tool towards economic prosperity and when we regulate it or put a price control on it, it's a very dangerous thing.
So we would let the market determine rates, the open market committee would not be involved in the federal funds market at all.
that would happen day one and of course what we would like is a market-based money very often
Austrians advocate the gold standard because that's the market-based money that we were taken off of
in 1971 and gradually we have been taken off of that so we'd like to go back to a market-based
monetary system which in most of history has been silver coins essentially and where gold
is used for very large purchases and for settlements of international balance of payments and then
we would have the price species flow mechanism to regulate the flow of gold and silver from
from one country to another.
And so those are the two main things on the Austrian agendas in terms of setting up monetary
policy so as to prevent inflation and the business cycle.
And then most Austrians would also like to have a return to a common law tradition whereby
All demand deposits in banks have to be held in reserve. So that if your checking account
and my checking account, your debit card, the money that you think is on it is actually
all at the bank. And so all of that would be held on reserve so that the banks wouldn't
have any flexibility in terms of expanding the money supply. They couldn't take our
are demand deposits, lend them out as new loans, which is basically, 100% reserve banking
is basically the law of warehousing, they're warehousing your money for you.
And then all time deposits, all bonds that the bank sells, all certificates of deposit,
the banks could lend all of that stuff out, like you'd lend out your money market mutual
and the Federal Fund Account. It's just demand deposits that you can spend today have to be at the bank and that takes out some of that remaining flexibility that has been problematic in the past.
Yes?
If the banks have the 100% reserve, who takes it over like loaning out money?
Yeah, you could have lenders that don't take demand deposits, but you could also have banks
that take demand deposits, but also have their own money. If they sell stock, they get money.
If they sell bonds, they get money. If they sell a certificate of deposit, they have money.
So all of that money that comes into the bank, plus their own personal money, they could
I would use all of that to make loans, so that most of the bank's money would be in that category, money from stock, money from bonds, certificates of deposit, money market mutual accounts, all of that would be available for loans, it would just be our demand deposits, stuff that we might use today that would have to be held on reserve.
And right now, basically, the effective reserve requirements in the system are almost non-existent.
Before this crisis happened, Federal Reserve publications indicated that the effective
reserve requirement was about the same as the bank's demand for cash balances, in the
in the sense that the money that the banks wanted to have on hand in order to give change to Walmart or one dollar bills or whatever,
the amount of money that they wanted to have on hand to be able to make transactions was about the same as the effective reserve requirement.
At least that's what I read. So it's very little.
Q. Do you think we have higher unemployment rate now?
A. No , by now I think the unemployment rate would be lower than it
actually is because remember that the, the mail investments were revealing
themselves in September of 2007. And so all of the, all these other things
would have been worked out more than a year ago, basically. And so I would expect the
employment rate, which is basically stalled at the current level, to be lower than it
is right now. I think housing prices would be lower as well at this point in time. Right
Right now a lot of the cleaning up process in the housing market has been stopped by
changes in the rules. Banks no longer have to reveal their bad assets. And it seems like
it's an agreement where they don't have to reveal their bad assets as long as they don't
force too many people out of their houses all at once. So there's a remediation I think
is called, where they're giving people time, not much hope, but a little time.
Speaking of time, if we call it right here, then I won't have to answer the question about
what's going to happen next.
I was actually going to ask maybe something related to that, but what do you think, in
In particular, with the U.S. economy, what do you think is going to be the straw that breaks the camel's back?
Because, like you said, we've been going on this, following the Keynesian theory for a hundred years now,
and despite the bus cycle, the economy is still around, it hasn't completely dissolved yet.
Status. Right now, central banks around the world use the U.S. dollar and government securities
as their reserves in a large part. I mean, some other currencies are held, some other
bonds are held, but basically the U.S. dollar is the dominant world reserve currency. If
If we were to lose that, if central banks were to say, we don't trust the dollar versus other, yeah, which, of course, the euro is stinking up the place right now, too.
So, the only thing that is keeping us afloat is the relative inabilities of some of these other, you know, the British Pound, the Euro, but, you know, eventually China, which has a couple trillion dollars of reserves from the U.S.,
and was basically one of the reasons why we had to bail out Fannie Mae and Freddie Mac.
If they couldn't pay China, China was going to go bananas.
And that's another thing that would have been great to get rid of, is Fannie Mae and Freddie Mac.
We've been arguing, Austrians have been arguing, ever since I can first remember it,
that those were unnatural government entities that everybody loves, you know,
You know, we make home mortgages and stuff.
But those are unnatural, dangerous, public-private partnerships are the most dangerous form of
social organization.
And Fannie Mae and Freddie Mac proved it.
So that's another group of entities that would have been gone and would have been a good
thing for the U.S. economy going forward.
Because home ownership, you know, is a thing of the past.
The future is not for people on the cutting edge, it's not going to be home ownership,
it's going to be moving your career on a regular basis and not just from one neighborhood in
Atlanta to another but from maybe city to city, country to country, continent to continent
and people are going to have to be much more flexible as we go forward in the future so
the importance of home ownership I think is way overrated and that's going to come, you
What are your thoughts on the financial reform bill that's passing through the Senate?
No, no. Healthcare is past. One of the next things is financial reform. No chance that it's going to be any good basically. These are the same guys who were telling us that everything was just absolutely fine.
and then the next moment they're saying we made a mistake if you don't give us two trillion dollars the world is going to come to an end and now they're saying oh we understand how to fix things and this is our plan I wouldn't have any good expectations and it's already way way behind schedule of course just like the decline in the unemployment rate we were promised I think it would be
The financial regulation has already way behind all the plans that I've seen, for example,
give more power to the Fed.
The idea that we need more regulation, you might have remembered from my introduction,
I was the assistant superintendent of banking in Alabama, nobody in their right mind would
There's tons of regulation for financial firms. They're regulated at so many different levels in so many different ways, and the regulators miss it every single time. Enron's another good example. Oh, unregulated capitalism gone rampant. Enron had 11 different regulators. I'm not talking about people, I'm talking about regulators, like the SEC. They had 11 different regulators.
There were 11 different regulators and not a one picked up on the problem.
It was just a single guy, financial reporter or something, delved into the company and said,
this doesn't make any sense.
The regulators never caught anything. They didn't catch Bernie Madoff.
despite investigating them and you know all sorts of things they just missed
they miss it every time the only thing that regulators can do is basically cover
up stuff from happening as far as I know I mean except for the banking department
state of Alabama those are really good guys top-notch okay thank you very much
Thank you very much.