WEBVTT NOTE Skyscrapers and Business Cycles, or How You Can Predict the Next Economic Crisis 1 00:00:00.000 --> 00:00:29.000 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. 2 00:00:29.000 --> 00:00:56.000 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. 3 00:00:56.000 --> 00:01:02.920 But it's going to give us some background in terms of the Austrian Theory of the Business 4 00:01:02.920 --> 00:01:11.240 Cycle, which ultimately is the foundation upon which the skyscraper model is built. 5 00:01:11.240 --> 00:01:15.000 And so I'm going to show the video, talk a little bit about the Austrian Theory of the 6 00:01:15.000 --> 00:01:20.000 Business Cycle, and then show how it applies to this model of skyscrapers and economic 7 00:01:20.000 --> 00:01:22.880 crises. 8 00:01:22.880 --> 00:01:29.880 So again, without further ado, Fear of the Boom and the Bust. 9 00:01:52.880 --> 00:02:00.880 Mike, F.A. Mike, Nick 10 00:02:18.880 --> 00:02:20.880 Buddy! 11 00:02:20.880 --> 00:02:28.880 They Listen to Party of the Fed, Roberts, Twyman, Lennon, John Maynard Keynes, Devin, Hayes 12 00:02:29.880 --> 00:02:34.880 Yeah, we're opposed. We oppose each other philosophically in the same studio 13 00:02:34.880 --> 00:02:38.880 We've been going back and forth for a century, I want to see your markets 14 00:02:38.880 --> 00:02:42.880 I want them set free, there's a boom and bust cycle and good reason to fear it 15 00:02:42.880 --> 00:02:45.880 Play more literature, no, it's the animal spirit 16 00:02:45.880 --> 00:02:48.880 John Maynard Keynes wrote the book on modern macro 17 00:02:48.880 --> 00:02:53.800 Pro, the man you need when the economy's off track Depression, recession, now your question's 18 00:02:53.800 --> 00:02:56.840 in session Have a seat and I'll school you in one simple 19 00:02:56.840 --> 00:03:01.280 lesson 1929, the big crash, we didn't bounce back 20 00:03:01.280 --> 00:03:05.200 economy's in the trash Persistent unemployment, the result of sticky 21 00:03:05.200 --> 00:03:08.600 wages Waiting for recovery, that's outrageous 22 00:03:08.600 --> 00:03:14.160 I had a real plan, any fool can understand The advice real simple, who's aggregate demand? 23 00:03:14.160 --> 00:03:19.660 CIG all together gets to Y, keep that total row and watch the economy fly 24 00:03:19.660 --> 00:03:25.160 We've been going back and forth for a century, I want to steer markets, I want them set free 25 00:03:25.160 --> 00:03:28.660 There's a boom and bust cycle, and good reason to fear it, play for interest 26 00:03:28.660 --> 00:03:33.660 No, it's the animal spirit, you see it's all about spending, hear the register cha-ching 27 00:03:33.660 --> 00:03:39.160 Circular flow, the dough is everything, so if that flow is getting low, doesn't matter the reason 28 00:03:39.160 --> 00:03:43.160 We need more government spending, now it's stimulus season, so forget about saving 29 00:03:43.160 --> 00:03:47.660 Saving, get it straight out of your head, like I said, in the long run, we're all dead. 30 00:03:47.660 --> 00:03:51.660 Savings is destruction, that's the paradox of thrift, don't keep money in your pocket, 31 00:03:51.660 --> 00:03:56.660 or that growth will never lift, because business is driven by the animal spirits, the bull 32 00:03:56.660 --> 00:04:01.160 and the bear, and there's reasons to fear it, effects on capital investment, income and 33 00:04:01.160 --> 00:04:05.160 growth, that's why the state should build a gap with stimulus, both the monetary and 34 00:04:05.160 --> 00:04:09.660 the fiscal, they're equally correct, public works dig in ditches, war has the same effect, 35 00:04:09.660 --> 00:04:15.160 Even a broken window helps the glass man, have some wealth to multiply or drive entire the economy's health 36 00:04:15.160 --> 00:04:20.660 And if the central bank's interest rate policy tanks, a liquidity trap, that new money suck in the bank 37 00:04:20.660 --> 00:04:26.660 Deficits could be the cure you've been looking for, let the spending soar, now that you know the score 38 00:04:26.660 --> 00:04:31.660 My general theory's made quite an impression, I transformed the econ profession 39 00:04:31.660 --> 00:04:37.660 You know me, modesty, still I'm taking a bow, so say it loud and say it proud, we're all Keynesians now 40 00:04:37.660 --> 00:04:43.260 We've been going back and forth for a century I want to steer markets, I want them set free 41 00:04:43.260 --> 00:04:45.900 There's a boom and bust cycle and good reason to fear it 42 00:04:45.900 --> 00:04:48.860 I've made my case, Freddy H, listen up, can you hear it? 43 00:04:48.860 --> 00:04:51.740 I'll begin in broad strokes, just like my friend Keynes 44 00:04:51.740 --> 00:04:57.420 His theory conceals the mechanics of change That simple equation, too much aggregation 45 00:04:57.420 --> 00:05:02.940 Ignores human action and motivation Yet it continues as a justification 46 00:05:02.940 --> 00:05:05.740 For bailouts, payoffs, by-polls with machinations 47 00:05:05.740 --> 00:05:11.340 You provide them with cover to sell us our free lunch Then all that we're left with is death and a bunch 48 00:05:11.340 --> 00:05:16.740 If you're living high on that cheap credit hog Don't look for a jewel from the hair of the dog 49 00:05:16.740 --> 00:05:22.340 Real savings come first if you want to invest The market coordinates time with interest 50 00:05:22.340 --> 00:05:27.940 Your focus on spending is pushing on thread In the long run, my friend, it's your theory that's dead 51 00:05:27.940 --> 00:05:33.540 So sorry there, buddy, if that sounds like invective Prepare to get schooled in my Austrian perspective 52 00:05:33.540 --> 00:05:44.540 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. 53 00:05:44.540 --> 00:05:55.540 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. 54 00:05:55.540 --> 00:06:01.540 The boom gets started with an expansion of credit The Fed sets rates low, are you starting to get it? 55 00:06:01.540 --> 00:06:06.540 That new money is confused for real, loanable funds But it's just inflation that's driving the ones 56 00:06:06.540 --> 00:06:12.540 Who invest in new projects like housing construction The boom plants the seeds for its future destruction 57 00:06:12.540 --> 00:06:17.540 The savings aren't real, consumption's up too And the grasping for resources reveals there's too few 58 00:06:17.540 --> 00:06:23.540 So the boom turns to bust as the interest rates rise For the cost of production, price signals were lies 59 00:06:23.540 --> 00:06:29.540 The boom was a binge, that's a matter of fact, now it's devalued capital that makes up a slack 60 00:06:29.540 --> 00:06:34.540 Whether it's the late 20s or 2005, booming bad investment seems like day 5 61 00:06:34.540 --> 00:06:40.540 You must save to invest, don't use the printing press, or a bust will surely follow, an economy depressed 62 00:06:40.540 --> 00:06:45.540 Your so-called stimulus will make things worse, just more of the same, more incentives perverse 63 00:06:45.540 --> 00:06:51.540 And that credit crunch ain't a liquidity trap, just a broke banking system, I'm done, that's a wrap 64 00:06:51.540 --> 00:06:57.540 We've been going back and forth for a century. I want to steer markets. I want them set free. 65 00:06:57.540 --> 00:07:03.540 There's a boom and bust cycle and good reason to fear it. Play more interest rates. No, it's the animal spirit. 66 00:07:03.540 --> 00:07:12.540 The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. 67 00:07:12.540 --> 00:07:15.540 Indeed, the world is ruled by little else. 68 00:07:15.540 --> 00:07:23.540 Practical men who believe themselves to be quite exempt from any intellectual influence are usually the slaves of some defunct economist. 69 00:07:25.540 --> 00:07:35.540 The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. 70 00:07:45.540 --> 00:07:59.140 Well, that's all of economics summed up in a six-minute video, thereabouts. 71 00:07:59.140 --> 00:08:03.860 So you basically have the Keynesians, John Maynard Keynes and the Keynesians, who say 72 00:08:03.860 --> 00:08:10.020 that the economy is inherently unstable, it's a matter of psychology, and the only thing 73 00:08:10.020 --> 00:08:40.020 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. 74 00:08:40.020 --> 00:08:49.620 The economy is, basically, you have Adam Smith's invisible hand managing both the microeconomic 75 00:08:49.620 --> 00:08:55.180 aspects of the economy as well as the macroeconomic aspects of the economy. 76 00:08:55.180 --> 00:09:01.780 The difference being, for the Austrians, the existence of a central bank and the instability 77 00:09:01.780 --> 00:09:06.500 that that creates in money, credit, investments and interest rates. 78 00:09:06.500 --> 00:09:20.500 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. 79 00:09:20.500 --> 00:09:33.500 And what Hayek says is that that interest rate setting power that it has is the actual source of the business cycle itself. 80 00:09:33.500 --> 00:09:47.500 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. 81 00:09:47.500 --> 00:09:56.500 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. 82 00:09:56.500 --> 00:10:02.500 Everybody's enjoying themselves, they're having lots of fun, investors are making great returns, 83 00:10:02.500 --> 00:10:12.500 there's more work available than there is employees, and also people are consuming a great deal. 84 00:10:12.500 --> 00:10:20.500 Luxury consumption, everybody increases their consumption as the appearance of wealth is made to them. 85 00:10:20.500 --> 00:10:43.500 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. 86 00:10:43.500 --> 00:11:13.500 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 87 00:11:13.500 --> 00:11:26.500 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. 88 00:11:26.500 --> 00:11:39.500 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. 89 00:11:39.500 --> 00:11:47.500 that the Austrians and the Keynesians have been debating this for a very long time, at least since the 1920s. 90 00:11:47.500 --> 00:12:02.500 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. 91 00:12:02.500 --> 00:12:19.500 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. 92 00:12:19.500 --> 00:12:29.500 And so they've basically been in charge in the 1920s on up to the present day. 93 00:12:29.500 --> 00:12:40.020 At one point, after the stagflation of the 1970s and early 1980s, there was a brief 94 00:12:40.020 --> 00:12:45.140 interlude where Keynesian economics was thought to be dead. 95 00:12:45.140 --> 00:12:50.620 But it has obviously reared its ugly head in a massive sort of way, and we are back 96 00:12:50.620 --> 00:12:57.340 to the point where most people would say that we're all Keynesians again, a phrase that's 97 00:12:57.340 --> 00:13:02.780 It's been repeated in the New York Times and the Wall Street Journal and other publications. 98 00:13:02.780 --> 00:13:08.340 And of course, Paul Krugman is at the New York Times writing his commentary. 99 00:13:08.340 --> 00:13:14.220 He's what you have to consider a rabid Keynesian. 100 00:13:14.220 --> 00:13:17.460 There's never enough spending. 101 00:13:17.460 --> 00:13:23.180 Despite all of the massive bailout packages and stimulus packages, Paul Krugman thinks 102 00:13:23.180 --> 00:13:38.140 And of course, Ben Bernanke, Timothy Geithner, Hank Paulson, George Bush, Barack Obama are 103 00:13:38.140 --> 00:13:43.700 basically all linked into that whole Keynesian policy apparatus. 104 00:13:43.700 --> 00:13:48.580 They've basically been following Keynesian doctrine that if you get a recession in the 105 00:13:48.580 --> 00:13:57.520 Economy, or a decrease in GDP, that you lower interest rates and that you have the government 106 00:13:57.520 --> 00:14:02.620 spend more and you have the government running deficits. And that's supposed to cure the 107 00:14:02.620 --> 00:14:14.700 economy. Well, of course, they brought interest rates down to zero. They've doubled the balance 108 00:14:14.700 --> 00:14:32.700 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. 109 00:14:32.700 --> 00:14:40.700 And things really aren't budging, things really aren't working out too well in that regard. 110 00:14:40.700 --> 00:14:45.180 The only thing you can say at this point is that they've stopped the correction process 111 00:14:45.180 --> 00:14:50.900 in the market, they've stopped the bleeding at least temporarily, but it didn't do what 112 00:14:50.900 --> 00:14:54.140 they said it was going to do. 113 00:14:54.140 --> 00:15:02.140 Paul Krugman's promises, Barack Obama's promises, George Bush's promises, Timothy 114 00:15:02.140 --> 00:15:08.020 Geithner's promises, Ben Bernanke's promises. 115 00:15:08.020 --> 00:15:11.940 At the end of this month will be one year now that the chairman of the Federal Reserve 116 00:15:11.940 --> 00:15:17.720 has been diligently telling us on about a bi-monthly basis that we are in the early 117 00:15:17.720 --> 00:15:26.360 and the early stages of an economic recovery. And not much happening there. So the KGs have 118 00:15:26.360 --> 00:15:31.360 been in control and they've been wrecking the economy fairly consistently. The Austrians, 119 00:15:31.360 --> 00:15:36.920 on the other hand, have been right about all this all along. Ludwig von Mises published 120 00:15:36.920 --> 00:15:47.400 a book in 1928 critiquing the monetary policies of central banks, specifically of Irving Fisher, 121 00:15:47.400 --> 00:16:05.400 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. 122 00:16:05.400 --> 00:16:12.840 Meanwhile, Irving Fisher, who is the godfather of modern mainstream macroeconomics, and 123 00:16:12.840 --> 00:16:19.680 the craftsman who basically put together modern mainstream economics, macroeconomics, but 124 00:16:19.680 --> 00:16:26.120 also central bank monetary policy, how that should be done. 125 00:16:26.120 --> 00:16:30.720 And on the eve of the stock market crash, he was saying that America has now established 126 00:16:30.720 --> 00:16:36.440 a New Perpetual Prosperity and that we didn't really have to worry about things and he kept 127 00:16:36.440 --> 00:16:40.680 reassuring investors in newspapers around the country that they should just keep their 128 00:16:40.680 --> 00:16:45.600 money in the stock market because things are going to be bright right around the corner, 129 00:16:45.600 --> 00:16:51.360 things are going to be restored, that this was all just a psychological blip in the economy 130 00:16:51.360 --> 00:16:56.920 and of course people who paid attention to Fisher lost about 90 percent of their money 131 00:16:56.920 --> 00:17:02.640 in the Stock Market. The same thing happened in the stagflation in the 1970s, which was 132 00:17:02.640 --> 00:17:09.640 a really pitiful economic performance in the United States from late 1969 to 1982. The 133 00:17:10.240 --> 00:17:17.240 U.S. experienced high rates of inflation, high rates of unemployment, and the Keynesians, 134 00:17:18.720 --> 00:17:25.200 right before all that started, said, we have eliminated the business cycle. We have established 135 00:17:25.200 --> 00:17:32.000 and Fisher's Form of Perpetual Prosperity, while at the same time Murray Rothbard and 136 00:17:32.000 --> 00:17:36.280 Henry Haslett, who were Austrian economists, and there were very few Austrian economists 137 00:17:36.280 --> 00:17:43.880 at the time, were writing specifically about the pending problem in the U.S. economy with 138 00:17:43.880 --> 00:17:50.560 inflation and unemployment, a dollar crisis and so forth, and it was less than two years 139 00:17:50.560 --> 00:17:54.720 later that the U.S. went off the gold standard. 140 00:17:54.720 --> 00:18:00.640 The same thing basically happened with the tech stock bubble in 1999 and the year 2000. 141 00:18:00.640 --> 00:18:05.080 The Austrians have been writing consistently, you know, like two dozen different Austrian 142 00:18:05.080 --> 00:18:12.840 economists were writing that this tech stock bubble was going to burst and hurt the economy. 143 00:18:12.840 --> 00:18:16.400 Mainstream economists were saying, no, this is different this time, we're in a new era, 144 00:18:16.400 --> 00:18:24.640 just like Irving Fisher said, and that we've eliminated these problems, we've got technology 145 00:18:24.640 --> 00:18:28.080 The real problem we need to worry about is there won't be enough work for people to do 146 00:18:28.080 --> 00:18:34.120 because all this technology is just going to make us incredibly wealthy, incredibly 147 00:18:34.120 --> 00:18:37.680 productive without any effort, so we're going to have to find something new to do because 148 00:18:37.680 --> 00:18:40.280 work just isn't going to get it anymore. 149 00:18:40.280 --> 00:18:42.560 Of course, they were wrong. 150 00:18:42.560 --> 00:18:47.160 And then, of course, this latest crisis involving the housing bubble, again, the Austrians were 151 00:18:47.160 --> 00:18:55.360 were writing as early as 2003 that the Fed was causing a bubble in the housing market. 152 00:18:55.360 --> 00:19:08.000 And that basically mainstream economists at the Fed particularly, but also the real estate 153 00:19:08.000 --> 00:19:14.480 industry and just about all financial journalists were saying that no, this is a new phenomenon 154 00:19:14.480 --> 00:19:21.240 that people never lose money in housing, that real estate prices never go down, and that 155 00:19:21.240 --> 00:19:28.960 there's really nothing to worry about. On the eve of this crisis beginning, people at 156 00:19:28.960 --> 00:19:33.840 the Federal Reserve were saying that, you know, there's really no housing bubble here 157 00:19:33.840 --> 00:19:40.480 and it doesn't really matter because we've got these new high-tech financial instruments, 158 00:19:40.480 --> 00:19:50.200 default swaps and derivatives and mortgage-backed securities, all sorts of new phenomenon that's 159 00:19:50.200 --> 00:19:55.720 made this market transparent and very liquid, so we don't really have to worry about it 160 00:19:55.720 --> 00:20:01.360 because it's all going to take care of itself, okay. Well, that didn't work out too well 161 00:20:01.360 --> 00:20:10.240 either. And the result, as we've seen, is a massive increase in unemployment. We've 162 00:20:10.240 --> 00:20:19.520 got about 15 million Americans now out of work, and millions of families have lost their 163 00:20:19.520 --> 00:20:30.680 homes. It looks like at a minimum, if no new problems emerge, and we look at the foreclosures 164 00:20:30.680 --> 00:20:59.280 The skyscraper model was something that I came across during the tech stock bubble. 165 00:20:59.280 --> 00:21:08.280 The real estate analyst was writing about the strange correlation between the building of record-setting skyscrapers and economic crises. 166 00:21:08.280 --> 00:21:14.280 He said he didn't really know why. It just seemed like an apparent phenomenon. 167 00:21:14.280 --> 00:21:27.280 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 168 00:21:27.280 --> 00:21:34.280 are from the view of Austrian theory and try to make some linkage between this correlation 169 00:21:34.280 --> 00:21:42.960 and some sort of theoretical foundation for the skyscraper index. 170 00:21:42.960 --> 00:21:51.160 The skyscraper index made correct predictions for the panic of 1907. The Singer Building 171 00:21:51.160 --> 00:21:55.920 and the Manhattan Life Building were started before the panic. 172 00:21:55.920 --> 00:22:01.600 The panic occurs and then the buildings were completed. 173 00:22:01.600 --> 00:22:07.280 The skyscraper index predicted the Great Depression with the building of 40 Wall Street, which 174 00:22:07.280 --> 00:22:14.320 is now a Trump property, Donald Trump, the Chrysler Building and the Empire State Building. 175 00:22:14.320 --> 00:22:19.800 All were started before the Great Depression and the Great Depression started in the fall 176 00:22:19.800 --> 00:22:30.800 The same is true for World Trade Building 1 and World Trade Building 2 and the Sears Tower. 177 00:22:30.800 --> 00:22:39.800 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. 178 00:22:39.800 --> 00:22:53.480 The Petronas Towers set a marginal record in Kuala Lumpur in 1997 which signaled the 179 00:22:53.480 --> 00:22:59.000 Asian Contagion when all the Asian economies melted down, Malaysia, the Philippines, Hong 180 00:22:59.000 --> 00:23:06.440 Kong, Singapore, Indonesia, Thailand and so forth. 181 00:23:06.440 --> 00:23:20.800 And then, let's see, Taipei 101 was started before, during the tech bubble. 182 00:23:20.800 --> 00:23:33.040 The tech bubble busted and then Taipei 101 was completed in the aftermath of that market 183 00:23:33.040 --> 00:23:34.040 meltdown. 184 00:23:34.040 --> 00:23:55.040 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. 185 00:23:55.040 --> 00:24:00.240 I reported it on that in August of 2007. 186 00:24:00.240 --> 00:24:07.740 The funny thing is when people are building record-setting skyscrapers, they're very secretive about their plans. 187 00:24:07.740 --> 00:24:12.740 They won't tell you how high it's going to be and things like that because they're actually competing. 188 00:24:12.740 --> 00:24:17.740 They don't want to give away their plans. 189 00:24:17.740 --> 00:24:24.820 and of course that was a very accurate signal because in August of 2007 we 190 00:24:24.820 --> 00:24:31.660 started seeing the very first signs of the bust phase of this economic crisis. 191 00:24:31.660 --> 00:24:39.140 The first sign was the mortgage retailers that had emerged during the 192 00:24:39.140 --> 00:24:45.020 bubble to make mortgages and package them up and then resell them. Those started 193 00:24:45.020 --> 00:24:50.500 going bankrupt one right after another and by the end of the year there was like 35 of 194 00:24:50.500 --> 00:24:55.260 those companies that were already bankrupt and we pretty much knew that things were not 195 00:24:55.260 --> 00:25:03.540 going to get better from there. The Fed, Treasury, the President were all still reassuring people 196 00:25:03.540 --> 00:25:12.660 not to worry, the stats were all good, aggregate demand was in good shape and the economy according 197 00:25:12.660 --> 00:25:20.460 to Hank Paulson, Ben Bernanke, was better than it ever had been before, and they continued 198 00:25:20.460 --> 00:25:28.600 to offer those kinds of advice to investors and to voters until it was more or less absolutely 199 00:25:28.600 --> 00:25:34.060 obvious to everybody that things were going nowhere. 200 00:25:34.060 --> 00:25:39.500 So that's the scenario, the evidence is really good for the skyscraper index, the theory 201 00:25:39.500 --> 00:25:46.260 The theory behind it, essentially the basic theory is that record-setting skyscrapers 202 00:25:46.260 --> 00:25:55.700 get built during periods of excessive speculation in markets, when you have a long-term period 203 00:25:55.700 --> 00:25:58.200 of excessive speculation. 204 00:25:58.200 --> 00:26:01.680 Speculation is a good thing, but it can get out of control. 205 00:26:01.680 --> 00:26:08.300 And the reason it gets out of control is because the Fed reduces interest rates below what 206 00:26:08.300 --> 00:26:16.060 What the market would be charging for all various types of loans. 207 00:26:16.060 --> 00:26:29.060 So it's adding money to the money stock, banks are lending it out, interest rates are low, 208 00:26:29.060 --> 00:26:37.220 investors are successful, in fact there's a cluster, there's a cluster of success during 209 00:26:37.220 --> 00:26:40.780 the bubble phase, everybody's making money 210 00:26:40.780 --> 00:26:43.700 it doesn't seem to matter what you do 211 00:26:43.700 --> 00:26:47.540 so for example in the tech talk bubble you had day traders 212 00:26:47.540 --> 00:26:50.100 people who had otherwise no experience 213 00:26:50.100 --> 00:26:51.500 or no knowledge 214 00:26:51.500 --> 00:26:55.300 about trading of stocks and all of a sudden they quit their job, they stay at home in their pajamas 215 00:26:55.300 --> 00:27:01.060 and they're trading stocks and they're making more money than they used to 216 00:27:01.060 --> 00:27:02.700 you hear things like that 217 00:27:02.700 --> 00:27:06.700 you know there's a problem 218 00:27:06.700 --> 00:27:10.140 and that's what happened during the housing bubble. You had people who otherwise had no 219 00:27:10.140 --> 00:27:17.340 experience in dealing with real estate, making money on real estate. Their houses were going 220 00:27:17.340 --> 00:27:27.500 up in value, they were taking second mortgages, buying Winnebago's boats, adding onto their 221 00:27:27.500 --> 00:27:37.220 House, buying luxury game day condominiums in Auburn, that was the absolute limit when 222 00:27:37.220 --> 00:27:42.980 I saw that happening. I said, how do you justify spending a quarter million dollars on a property 223 00:27:42.980 --> 00:27:51.900 that you visit maybe six weekends a year and you still have to pay utilities and all that 224 00:27:51.900 --> 00:28:00.780 and other stuff. Taxes, how do you justify that? And what people would tell me is, well, 225 00:28:00.780 --> 00:28:07.340 it may not make sense, but I can always sell it for more later. And that was the, almost 226 00:28:07.340 --> 00:28:17.860 the uniform response to my questions at that time. So, skyscrapers, you know, you saw Hayek 227 00:28:17.860 --> 00:28:23.660 with the Structure of Production. That's very important in the Austrian analysis that the 228 00:28:23.660 --> 00:28:32.660 structure of production is a very intricate fabric of connections in the economy of entrepreneurs, 229 00:28:32.660 --> 00:28:42.120 suppliers, consumers, a whole chain of production and distribution. It's very complex and messing 230 00:28:42.120 --> 00:29:12.120 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. 231 00:29:12.120 --> 00:29:32.120 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. 232 00:29:32.120 --> 00:29:43.620 Skyscraper is also a very intricate operation, and to build a new record-setting skyscraper is a very difficult, intricate process. 233 00:29:43.620 --> 00:29:56.120 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. 234 00:29:56.120 --> 00:30:19.120 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. 235 00:30:19.120 --> 00:30:25.120 You can't just do without elevators and say, okay, we're going to rent you a place on the 165th floor. 236 00:30:25.120 --> 00:30:32.120 Sorry, no elevators. You know, you just can't do that. You've got to have not only lots of elevators, 237 00:30:32.120 --> 00:30:38.120 they have to be very fast and they have to be as compact as possible. 238 00:30:38.120 --> 00:30:48.200 in the Bourges-Dubai Tower that was opened in January 4th of this year, the latest record-setting 239 00:30:48.200 --> 00:30:56.880 one, had three sets of elevators and each elevator had three cars stacked on top of 240 00:30:56.880 --> 00:31:05.740 one another and so there was a computer system that operated these things so that they would 241 00:31:05.740 --> 00:31:14.380 would show up in a pattern with a computer determined pattern so that the elevators would 242 00:31:14.380 --> 00:31:18.000 open on three different floors at one time. 243 00:31:18.000 --> 00:31:26.940 So that at any one time you had, I think, 18 elevators operating within that structure. 244 00:31:26.940 --> 00:31:29.620 But that had to be invented from scratch. 245 00:31:29.620 --> 00:31:39.420 They had to extend the structure of production in a whole new way, in all new technology. 246 00:31:39.420 --> 00:31:43.780 And it's difficult to imagine, unless you're an engineer, the problems involved with getting 247 00:31:43.780 --> 00:31:51.180 things just like drinking water up to the 180th floor. 248 00:31:51.180 --> 00:31:56.260 The cooling system, the Burj Dubai Tower, of course it's in the Middle East and it's 249 00:31:56.260 --> 00:32:04.140 It's in a very hot climate but they said that on a summer day the air conditioning system 250 00:32:04.140 --> 00:32:10.780 has the equivalent of 20 million pounds of ice. 251 00:32:10.780 --> 00:32:13.220 So it's a very big deal. 252 00:32:13.220 --> 00:32:18.020 You're having to change the whole structure of production in order to make something like 253 00:32:18.020 --> 00:32:19.020 that happen. 254 00:32:19.020 --> 00:32:23.700 It's not just stacking things, the same things over and over again. 255 00:32:23.700 --> 00:32:52.700 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. 256 00:32:52.700 --> 00:33:02.700 that for whatever reason people want more space in the particular commercial areas. 257 00:33:02.700 --> 00:33:11.700 Most of them have occurred in New York City because the demand for land is high, so people want to build higher. 258 00:33:11.700 --> 00:33:19.700 And as a result, you get these technological developments occurring that otherwise would not have occurred 259 00:33:19.700 --> 00:33:41.700 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, 260 00:33:41.700 --> 00:33:57.700 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. 261 00:33:57.700 --> 00:34:01.700 And so, you know, that's the connection. 262 00:34:01.700 --> 00:34:10.700 These, all these skyscrapers, these record-setting skyscrapers have basically all been a bust. 263 00:34:10.700 --> 00:34:40.700 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 264 00:34:40.700 --> 00:35:10.700 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. 265 00:35:10.700 --> 00:35:13.700 I'll take some questions though. Yes? 266 00:35:19.700 --> 00:35:30.700 Yes. The Woolworth building was built in 1913 and it set a new record and there was no economic crisis that developed. 267 00:35:30.700 --> 00:35:47.540 The Fed was coming online, and World War I was also coming online. The U.S. economy was 268 00:35:47.540 --> 00:35:56.860 tanking at its most precipitous decline in recorded history, was signaled by the building 269 00:35:56.860 --> 00:36:26.860 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 270 00:36:26.860 --> 00:36:56.860 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. 271 00:36:56.860 --> 00:37:26.860 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 272 00:37:26.860 --> 00:37:32.340 at the state level. A student did a paper in my American Economic History course a couple 273 00:37:32.340 --> 00:37:38.620 years ago and looked at the Alabama records of skyscrapers and every time there was a 274 00:37:38.620 --> 00:37:46.420 new record there was either coincided with a global economic crisis or coincided with 275 00:37:46.420 --> 00:37:52.820 a U.S. recession and one was associated with not a U.S. recession but a recession in the 276 00:37:52.820 --> 00:38:02.940 Alabama Economy. And so it's something that is pervasive. Actually, when the paper came 277 00:38:02.940 --> 00:38:11.900 out in 2005, you know, nobody cared at all until the phenomenon started developing in 278 00:38:11.900 --> 00:38:17.020 other countries. And so all the media calls that I got for the first two or three years 279 00:38:17.020 --> 00:38:23.900 were from foreign countries that were experiencing local skyscraper crises. 280 00:38:23.900 --> 00:38:31.020 You can also see it in things of a similar nature, like for example when big corporations 281 00:38:31.020 --> 00:38:41.580 build giant lavish headquarter buildings at a micro level, very often you find that those 282 00:38:41.580 --> 00:38:47.220 Those corporations then go right downhill in terms of their stock price. 283 00:38:47.220 --> 00:38:51.380 Naming of stadiums is another good example of that. 284 00:38:51.380 --> 00:39:00.740 Enron purchased the rights for the Houston Astros Stadium right before it collapsed and 285 00:39:00.740 --> 00:39:03.380 went out of business. 286 00:39:03.380 --> 00:39:13.140 and Citibank in New York City bought the rights to name the new New York Mets Stadium and 287 00:39:13.140 --> 00:39:17.620 then basically it went bankrupt if it wasn't for the fact that the federal government gave 288 00:39:17.620 --> 00:39:20.020 them zillions of dollars. 289 00:39:20.020 --> 00:39:24.020 So it sort of applies to some other things as well. 290 00:39:24.020 --> 00:39:47.020 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. 291 00:39:47.020 --> 00:40:03.260 Well, not exactly, no, because there's an intervention, it's a crucial intervention 292 00:40:03.260 --> 00:40:11.780 into the time and interest element in the economy, and because the Fed is bringing down interest 293 00:40:11.780 --> 00:40:22.820 rates and risk in the economy at sending false signals so that the entrepreneurs in the economy 294 00:40:22.820 --> 00:40:29.540 are facing a false signal that's given by the Fed and as a result it alters their choice 295 00:40:29.540 --> 00:40:35.820 set and it alters their ultimate decision and they end up making bad investments as 296 00:40:35.820 --> 00:40:46.180 as a result. So, it's not the true invisible hand of the marketplace at work, it's the 297 00:40:46.180 --> 00:41:00.300 altered hand, back of the hand from the Fed basically, that's setting up an inevitable 298 00:41:00.300 --> 00:41:30.300 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 299 00:41:30.300 --> 00:41:35.980 wasn't natural and so they pulled back but of course other people just step 300 00:41:35.980 --> 00:41:41.420 forward top of the line at the Fed yeah we'll take that money we'll make 301 00:41:41.420 --> 00:41:46.020 those mortgages we'll build those houses somebody eventually will be stupid 302 00:41:46.020 --> 00:41:54.460 enough to take take on the take the Fed signal 303 00:42:00.300 --> 00:42:13.300 Well, you're actually compacting all of the elements of the skyscraper itself. 304 00:42:13.300 --> 00:42:35.300 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. 305 00:42:35.300 --> 00:42:53.300 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. 306 00:42:53.300 --> 00:43:18.300 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. 307 00:43:18.300 --> 00:43:29.300 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. 308 00:43:29.300 --> 00:43:37.300 And in the paper, by the way, it's published in the quarterly journal, Austrian Economics, 2005, in the spring issue. 309 00:43:37.300 --> 00:43:43.300 I give some examples of more roundabout production. 310 00:43:43.300 --> 00:43:50.060 One of them is in the dairy industry, and this is a natural change in the structure 311 00:43:50.060 --> 00:43:51.060 of production. 312 00:43:51.060 --> 00:43:59.620 It used to be the case when I was a kid that there were local dairy farmers around my hometown. 313 00:43:59.620 --> 00:44:05.980 And those dairy farmers, you know, they would milk the cows, they would bottle the milk 314 00:44:05.980 --> 00:44:15.220 or whatever, and they would distribute it around town so that you had your own milkman. 315 00:44:15.220 --> 00:44:20.180 And so it went from the farmer to their bottling plant to the milkman who actually came to 316 00:44:20.180 --> 00:44:22.140 your back door and put it by your back door. 317 00:44:22.140 --> 00:44:27.580 I know that's hard to believe, but they did it, even in the winter. 318 00:44:27.580 --> 00:44:42.580 Yeah, milk, chocolate milk, never could get chocolate milk. Mother wouldn't let me have it. Butter, eggs, the whole nine yards. 319 00:44:42.580 --> 00:44:56.580 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, 320 00:44:56.580 --> 00:45:03.100 book, they bring the milk to central processing plants who then process the milk, package 321 00:45:03.100 --> 00:45:10.820 it up and ship it to wholesale outlets and then that is shipped to retail outlets and 322 00:45:10.820 --> 00:45:18.900 then you actually have to go to Kroger and pick it up and buy it yourself. But that direct, 323 00:45:18.900 --> 00:45:24.380 the more direct process of dairy farmer bottles his stuff and brings it to your house, that's 324 00:45:24.380 --> 00:45:30.680 That's a very direct process of production. Going to collecting the milk, bringing it 325 00:45:30.680 --> 00:45:39.840 to a central processing plant, packaging it up, selling it over a wide area through wholesalers 326 00:45:39.840 --> 00:45:46.400 and retailers, that's a more roundabout method of production. But it's also a whole heck 327 00:45:46.400 --> 00:45:53.320 of a lot more efficient. You only have to have one processing plant instead of a dozen. 328 00:45:53.320 --> 00:45:59.920 So that's an example of a more roundabout production process and that's a natural one 329 00:45:59.920 --> 00:46:03.040 that has a lot of efficiencies. 330 00:46:03.040 --> 00:46:08.840 What the Fed does to the economy in the business cycle is it fakes it out. 331 00:46:08.840 --> 00:46:15.400 It says to producers, you need to try to do something more roundabout given that you've 332 00:46:15.400 --> 00:46:23.260 got all this access to funds and then before it's completed, before that process is all 333 00:46:23.260 --> 00:46:25.080 depreciated 334 00:46:25.080 --> 00:46:27.480 the crisis hits and we find out that that 335 00:46:27.480 --> 00:46:33.380 was a stupid idea 336 00:46:33.380 --> 00:46:40.380 like building luxury game economy names 337 00:46:53.260 --> 00:46:56.260 How do you think the results would be? 338 00:47:23.260 --> 00:47:41.260 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. 339 00:47:41.260 --> 00:47:55.260 And so that's what we were seeing, and before the big response, there was a cleaning up process that started to get underway. 340 00:47:55.260 --> 00:48:24.260 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. 341 00:48:24.260 --> 00:48:41.260 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. 342 00:48:41.260 --> 00:48:56.260 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. 343 00:48:56.260 --> 00:49:05.260 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. 344 00:49:05.260 --> 00:49:28.260 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. 345 00:49:28.260 --> 00:49:58.260 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. 346 00:49:58.260 --> 00:50:03.140 And they certainly were created during the boom. And I don't think, you know, like for 347 00:50:03.140 --> 00:50:11.220 example, the governor of the Fed, Randy Kroszner, was saying how all these new products were 348 00:50:11.220 --> 00:50:16.580 creating transparency and liquidity in the market. Basically what he was talking about 349 00:50:16.580 --> 00:50:21.660 is that people who were making loans were no longer keeping them and being responsible 350 00:50:21.660 --> 00:50:28.180 for them. They were getting rid of, they were sloughing off this risk. Well, I think people 351 00:50:28.180 --> 00:50:35.100 People make smarter loans when they keep them on their own books. 352 00:50:35.100 --> 00:50:40.980 That's what every banker has always told me, and I have no reason to disagree, but Governor 353 00:50:40.980 --> 00:50:43.980 Dr. Krosner, felt we were in a new era. 354 00:50:43.980 --> 00:50:44.980 Yes? 355 00:50:44.980 --> 00:50:47.980 The Austrian has controlled the economy, the business cycle shouldn't be as severe, 356 00:50:47.980 --> 00:50:58.980 would there ever really be a boom, or would they try to keep the industry constant? 357 00:50:58.980 --> 00:50:59.980 No. 358 00:50:59.980 --> 00:51:08.980 When you ask a question, if the Austrians were in control, yeah, what would an Austrian 359 00:51:08.980 --> 00:51:36.980 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. 360 00:51:36.980 --> 00:51:55.980 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. 361 00:51:55.980 --> 00:52:05.980 So we would let the market determine rates, the open market committee would not be involved in the federal funds market at all. 362 00:52:05.980 --> 00:52:16.860 that would happen day one and of course what we would like is a market-based money very often 363 00:52:16.860 --> 00:52:22.380 Austrians advocate the gold standard because that's the market-based money that we were taken off of 364 00:52:22.380 --> 00:52:31.980 in 1971 and gradually we have been taken off of that so we'd like to go back to a market-based 365 00:52:31.980 --> 00:52:38.780 monetary system which in most of history has been silver coins essentially and where gold 366 00:52:38.780 --> 00:52:48.860 is used for very large purchases and for settlements of international balance of payments and then 367 00:52:48.860 --> 00:52:57.420 we would have the price species flow mechanism to regulate the flow of gold and silver from 368 00:52:57.420 --> 00:53:00.060 from one country to another. 369 00:53:00.060 --> 00:53:09.940 And so those are the two main things on the Austrian agendas in terms of setting up monetary 370 00:53:09.940 --> 00:53:16.060 policy so as to prevent inflation and the business cycle. 371 00:53:16.060 --> 00:53:22.780 And then most Austrians would also like to have a return to a common law tradition whereby 372 00:53:22.780 --> 00:53:29.780 All demand deposits in banks have to be held in reserve. So that if your checking account 373 00:53:30.940 --> 00:53:37.460 and my checking account, your debit card, the money that you think is on it is actually 374 00:53:37.460 --> 00:53:44.460 all at the bank. And so all of that would be held on reserve so that the banks wouldn't 375 00:53:44.780 --> 00:53:51.780 have any flexibility in terms of expanding the money supply. They couldn't take our 376 00:53:52.780 --> 00:54:01.420 are demand deposits, lend them out as new loans, which is basically, 100% reserve banking 377 00:54:01.420 --> 00:54:07.220 is basically the law of warehousing, they're warehousing your money for you. 378 00:54:07.220 --> 00:54:14.420 And then all time deposits, all bonds that the bank sells, all certificates of deposit, 379 00:54:14.420 --> 00:54:18.980 the banks could lend all of that stuff out, like you'd lend out your money market mutual 380 00:54:18.980 --> 00:54:35.980 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. 381 00:54:35.980 --> 00:54:36.980 Yes? 382 00:54:36.980 --> 00:54:46.980 If the banks have the 100% reserve, who takes it over like loaning out money? 383 00:54:46.980 --> 00:54:55.140 Yeah, you could have lenders that don't take demand deposits, but you could also have banks 384 00:54:55.140 --> 00:55:02.620 that take demand deposits, but also have their own money. If they sell stock, they get money. 385 00:55:02.620 --> 00:55:10.660 If they sell bonds, they get money. If they sell a certificate of deposit, they have money. 386 00:55:10.660 --> 00:55:15.800 So all of that money that comes into the bank, plus their own personal money, they could 387 00:55:15.800 --> 00:55:40.800 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. 388 00:55:40.800 --> 00:55:51.520 And right now, basically, the effective reserve requirements in the system are almost non-existent. 389 00:55:51.520 --> 00:55:59.960 Before this crisis happened, Federal Reserve publications indicated that the effective 390 00:55:59.960 --> 00:56:09.120 reserve requirement was about the same as the bank's demand for cash balances, in the 391 00:56:09.120 --> 00:56:20.120 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, 392 00:56:20.120 --> 00:56:30.120 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. 393 00:56:30.120 --> 00:56:33.120 At least that's what I read. So it's very little. 394 00:56:39.120 --> 00:56:44.820 Q. Do you think we have higher unemployment rate now? 395 00:56:44.820 --> 00:56:51.960 A. No , by now I think the unemployment rate would be lower than it 396 00:56:51.960 --> 00:56:58.760 actually is because remember that the, the mail investments were revealing 397 00:56:58.760 --> 00:57:08.660 themselves in September of 2007. And so all of the, all these other things 398 00:57:08.660 --> 00:57:19.540 would have been worked out more than a year ago, basically. And so I would expect the 399 00:57:19.540 --> 00:57:25.500 employment rate, which is basically stalled at the current level, to be lower than it 400 00:57:25.500 --> 00:57:36.780 is right now. I think housing prices would be lower as well at this point in time. Right 401 00:57:36.780 --> 00:57:42.520 Right now a lot of the cleaning up process in the housing market has been stopped by 402 00:57:42.520 --> 00:57:50.320 changes in the rules. Banks no longer have to reveal their bad assets. And it seems like 403 00:57:50.320 --> 00:57:55.740 it's an agreement where they don't have to reveal their bad assets as long as they don't 404 00:57:55.740 --> 00:58:00.540 force too many people out of their houses all at once. So there's a remediation I think 405 00:58:00.540 --> 00:58:10.580 is called, where they're giving people time, not much hope, but a little time. 406 00:58:10.580 --> 00:58:14.620 Speaking of time, if we call it right here, then I won't have to answer the question about 407 00:58:14.620 --> 00:58:15.620 what's going to happen next. 408 00:58:15.620 --> 00:58:24.620 I was actually going to ask maybe something related to that, but what do you think, in 409 00:58:24.620 --> 00:58:30.620 In particular, with the U.S. economy, what do you think is going to be the straw that breaks the camel's back? 410 00:58:30.620 --> 00:58:36.620 Because, like you said, we've been going on this, following the Keynesian theory for a hundred years now, 411 00:58:36.620 --> 00:58:43.620 and despite the bus cycle, the economy is still around, it hasn't completely dissolved yet. 412 00:58:54.620 --> 00:59:06.220 Status. Right now, central banks around the world use the U.S. dollar and government securities 413 00:59:06.220 --> 00:59:12.700 as their reserves in a large part. I mean, some other currencies are held, some other 414 00:59:12.700 --> 00:59:18.860 bonds are held, but basically the U.S. dollar is the dominant world reserve currency. If 415 00:59:18.860 --> 00:59:32.860 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. 416 00:59:32.860 --> 00:59:58.860 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., 417 00:59:58.860 --> 01:00:03.860 and was basically one of the reasons why we had to bail out Fannie Mae and Freddie Mac. 418 01:00:03.860 --> 01:00:09.860 If they couldn't pay China, China was going to go bananas. 419 01:00:09.860 --> 01:00:13.860 And that's another thing that would have been great to get rid of, is Fannie Mae and Freddie Mac. 420 01:00:13.860 --> 01:00:17.860 We've been arguing, Austrians have been arguing, ever since I can first remember it, 421 01:00:17.860 --> 01:00:25.860 that those were unnatural government entities that everybody loves, you know, 422 01:00:25.860 --> 01:00:30.260 You know, we make home mortgages and stuff. 423 01:00:30.260 --> 01:00:35.420 But those are unnatural, dangerous, public-private partnerships are the most dangerous form of 424 01:00:35.420 --> 01:00:37.420 social organization. 425 01:00:37.420 --> 01:00:41.040 And Fannie Mae and Freddie Mac proved it. 426 01:00:41.040 --> 01:00:47.020 So that's another group of entities that would have been gone and would have been a good 427 01:00:47.020 --> 01:00:49.120 thing for the U.S. economy going forward. 428 01:00:49.120 --> 01:00:54.020 Because home ownership, you know, is a thing of the past. 429 01:00:54.020 --> 01:01:00.060 The future is not for people on the cutting edge, it's not going to be home ownership, 430 01:01:00.060 --> 01:01:06.340 it's going to be moving your career on a regular basis and not just from one neighborhood in 431 01:01:06.340 --> 01:01:11.380 Atlanta to another but from maybe city to city, country to country, continent to continent 432 01:01:11.380 --> 01:01:15.260 and people are going to have to be much more flexible as we go forward in the future so 433 01:01:15.260 --> 01:01:21.180 the importance of home ownership I think is way overrated and that's going to come, you 434 01:01:21.180 --> 01:01:40.180 What are your thoughts on the financial reform bill that's passing through the Senate? 435 01:01:40.180 --> 01:02:07.180 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. 436 01:02:07.180 --> 01:02:37.180 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 437 01:02:37.180 --> 01:02:52.540 The financial regulation has already way behind all the plans that I've seen, for example, 438 01:02:52.540 --> 01:02:57.140 give more power to the Fed. 439 01:02:57.140 --> 01:03:00.380 The idea that we need more regulation, you might have remembered from my introduction, 440 01:03:00.380 --> 01:03:06.380 I was the assistant superintendent of banking in Alabama, nobody in their right mind would 441 01:03:06.380 --> 01:03:36.380 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. 442 01:03:36.380 --> 01:03:41.380 There were 11 different regulators and not a one picked up on the problem. 443 01:03:41.380 --> 01:03:49.380 It was just a single guy, financial reporter or something, delved into the company and said, 444 01:03:49.380 --> 01:03:52.380 this doesn't make any sense. 445 01:03:52.380 --> 01:03:58.380 The regulators never caught anything. They didn't catch Bernie Madoff. 446 01:03:58.380 --> 01:04:04.860 despite investigating them and you know all sorts of things they just missed 447 01:04:04.860 --> 01:04:09.460 they miss it every time the only thing that regulators can do is basically cover 448 01:04:09.460 --> 01:04:16.700 up stuff from happening as far as I know I mean except for the banking department 449 01:04:16.700 --> 01:04:26.140 state of Alabama those are really good guys top-notch okay thank you very much 450 01:04:28.380 --> 01:04:30.380 Thank you very much.