WEBVTT NOTE The Great Deformation 1 00:00:00.000 --> 00:00:10.720 Well, good morning, and Lew, I want to thank you for buying so many books. 2 00:00:10.720 --> 00:00:17.680 You are now my number two salesman, right behind Paul Krugman. 3 00:00:17.680 --> 00:00:22.160 I think you intended to help, I'm quite sure that he didn't. 4 00:00:22.160 --> 00:00:29.400 Anyway, I do appreciate everybody's coming out this morning to hear about this, but I 5 00:00:29.400 --> 00:00:35.160 And I don't want to step on my own book, but I do want to give a slight warning that if 6 00:00:35.160 --> 00:00:40.480 you're listening to the audible book while you're driving, be careful. 7 00:00:40.480 --> 00:00:48.320 It has generated several cases of road rage already, so just keep that in mind. 8 00:00:48.320 --> 00:00:54.400 I've actually been on the road now, so to speak, on the book tour for six weeks and 9 00:00:54.400 --> 00:01:00.000 And I've been very much looking forward to this morning because so far the book has been 10 00:01:00.000 --> 00:01:05.120 denounced by the left and the right and Republicans and Democrats and Keynesians and monitors 11 00:01:05.120 --> 00:01:10.600 and supply-siders and Wall Street and K Street and the military industrial complex and the 12 00:01:10.600 --> 00:01:14.720 neocons and the social cons and the just cons. 13 00:01:14.720 --> 00:01:20.560 And for all of you who haven't focused on all of those, the just cons are about everybody 14 00:01:20.560 --> 00:01:27.240 and the other categories are taken into account. 15 00:01:27.240 --> 00:01:34.020 But I know there are some people who don't buy all those theories, all those ideologies 16 00:01:34.020 --> 00:01:40.240 and I think a few of you are here today and I'm very appreciative of the fact that you 17 00:01:40.240 --> 00:01:41.240 came out. 18 00:01:41.240 --> 00:01:46.560 Now, I think it's fair enough that there have been so many brickbats thrown at my book from 19 00:01:46.560 --> 00:01:52.680 from so many points on the political compass, because I do describe what has evolved over 20 00:01:52.680 --> 00:01:53.680 decades. 21 00:01:53.680 --> 00:02:00.760 This is kind of a revision of history as ending up in a crony capitalist dystopia, in which 22 00:02:00.760 --> 00:02:08.080 capitalism is being eroded and undermined and basically disabled, and in which political 23 00:02:08.080 --> 00:02:13.120 democracy no longer really functions in any viable sense. 24 00:02:13.120 --> 00:02:19.480 more or less a money-driven crony interest group, history-driven system. 25 00:02:19.480 --> 00:02:26.040 So I can understand why there were so many negative reactions, but I do think when Professor 26 00:02:26.040 --> 00:02:33.040 Paul Krugman responded to my book, he went over the top a little bit. 27 00:02:33.040 --> 00:02:40.840 As you know, he is the self-annointed and self-appointed tribune of all matters correct, 28 00:02:40.840 --> 00:02:43.840 and all correctness in economic matters. 29 00:02:43.840 --> 00:02:46.840 But when he said that my book was the raving 30 00:02:46.840 --> 00:02:48.840 of a cranky old man, 31 00:02:48.840 --> 00:02:51.840 I thought that that was really a little too much. 32 00:02:51.840 --> 00:02:54.840 It even aroused my 85-year-old mother, 33 00:02:54.840 --> 00:02:58.840 who, upon reading his blog, 34 00:02:58.840 --> 00:03:01.840 which was entitled Cranky Old Man, 35 00:03:01.840 --> 00:03:03.840 she shot back an email saying, 36 00:03:03.840 --> 00:03:05.840 doesn't he know? 37 00:03:05.840 --> 00:03:08.840 Actually, you were a cranky young man, too. 38 00:03:08.840 --> 00:03:16.400 You apparently never got over it. But apparently there are a lot of cranky people in America 39 00:03:16.400 --> 00:03:20.860 because the day that his blog appeared, which was about the second or third day after the 40 00:03:20.860 --> 00:03:26.700 book was released, it shot right up to the top of the list. I was amazed. Right up the 41 00:03:26.700 --> 00:03:32.600 Amazon list and there were only a couple of things that stopped it. Two diet books and 42 00:03:32.600 --> 00:03:39.000 Something called The Walking Dead, which I understand is some kind of horror novel. 43 00:03:39.000 --> 00:03:44.900 But I was very pleased that he was so willing to help because the very first week when the 44 00:03:44.900 --> 00:03:51.000 book came out, it ended up number four on the New York Times bestseller list. 45 00:03:51.000 --> 00:03:58.520 Now I'm not saying that to boast or to give any benefit to the New York Times. 46 00:03:58.520 --> 00:04:03.280 As a matter of fact, the bad side of this is they're still debating whether it was number 47 00:04:03.280 --> 00:04:07.920 four in the fiction or the non-fiction category. 48 00:04:07.920 --> 00:04:12.440 They haven't yet decided and that debate may go on for a while. 49 00:04:12.440 --> 00:04:18.480 But speaking of fiction, that's really what the fundamental purpose of the book was and 50 00:04:18.480 --> 00:04:26.000 that is to kind of debunk and expose all the status myths and errors and nostrums and ideologies 51 00:04:26.000 --> 00:04:31.940 which drive governance in America today and in our entire system. 52 00:04:31.940 --> 00:04:38.660 And naturally, it took me a lot of space to do that because there was so much to correct. 53 00:04:38.660 --> 00:04:44.720 And as I got deep into it, I had to go farther back in history in order to unravel all of 54 00:04:44.720 --> 00:04:47.100 this and get to the bottom. 55 00:04:47.100 --> 00:04:52.180 So what I would like to do today is maybe, rather than drag you through the whole book 56 00:04:52.180 --> 00:04:55.520 because that would take more time than we have. 57 00:04:55.520 --> 00:05:02.020 Just kick off a few of the key kind of themes or propositions 58 00:05:02.020 --> 00:05:04.980 that I developed in the book, and then I really 59 00:05:04.980 --> 00:05:07.540 would, before we have to get to the book signing and all 60 00:05:07.540 --> 00:05:12.980 of that, like to take questions and get some kind of dialogue 61 00:05:12.980 --> 00:05:15.380 going here this morning. 62 00:05:15.380 --> 00:05:19.420 I started with what I call the Blackberry Panic 63 00:05:19.420 --> 00:05:21.700 because the reason I actually wrote the book 64 00:05:21.700 --> 00:05:30.300 was in September 2008, I was so outraged when I saw a Republican administration panic, enact 65 00:05:30.300 --> 00:05:37.060 against the wishes of most of even the Republican members of the House and Senate, TARP, support 66 00:05:37.060 --> 00:05:46.740 the Federal Reserve as it got out all of its monetary fire hoses and essentially flood 67 00:05:46.740 --> 00:05:53.140 Wall Street with massive amounts of money, the bailouts of AIG and all of the Wall Street 68 00:05:53.140 --> 00:05:56.100 firms and the banks and GM and so forth. 69 00:05:56.100 --> 00:06:01.980 I thought that that was really a Rubicon and that either everything we believe about free 70 00:06:01.980 --> 00:06:08.500 markets and fiscal rectitude and all the rest of it is wrong or the facts that they were 71 00:06:08.500 --> 00:06:11.500 Adducing are Wrong. 72 00:06:11.500 --> 00:06:18.580 And so what I've tried to do in the book is lay out and tick off one by one the arguments 73 00:06:18.580 --> 00:06:25.060 that were made and then the answers that I think are pretty persuasive that suggest all 74 00:06:25.060 --> 00:06:30.940 of this was unnecessary and it started us down a path which will be very difficult to 75 00:06:30.940 --> 00:06:32.940 reverse. 76 00:06:32.940 --> 00:06:40.220 Now, the biggest event in that period, as you remember, is the AIG bailout. 77 00:06:40.220 --> 00:06:47.540 And what I try to show in the book is that the $180 billion that went to AIG was really 78 00:06:47.540 --> 00:06:49.420 not necessary. 79 00:06:49.420 --> 00:06:54.340 That the problem was in the holding company that had written the so-called credit default 80 00:06:54.340 --> 00:06:56.220 swap insurance. 81 00:06:56.220 --> 00:07:01.180 The holding company was actually based in London for that matter. 82 00:07:01.180 --> 00:07:08.900 It had no liquidity and as a result, had AIG been forced to go into bankruptcy, the credit 83 00:07:08.900 --> 00:07:14.760 default swaps at the holding company would have been total losses. 84 00:07:14.760 --> 00:07:20.260 The banks who bought that insurance would have suffered the loss, but if you look at 85 00:07:20.260 --> 00:07:26.780 the numbers I've laid out, you will see that it was basically absorbable by the banking 86 00:07:26.780 --> 00:07:27.900 system. 87 00:07:27.900 --> 00:07:35.500 There were 20 large banks, including a lot of big European banks like Barclays and Sachsen, 88 00:07:35.500 --> 00:07:42.300 Deutsche Bank, as well as the big US banks, that had bought the credit default swaps. 89 00:07:42.300 --> 00:07:47.300 But between them, they had $20 trillion worth of balance sheet. 90 00:07:47.300 --> 00:07:52.780 And if you look at the loss exposure on the credit default swaps, it's in the range of 91 00:07:52.780 --> 00:07:54.380 $60 billion. 92 00:07:54.380 --> 00:08:00.640 And so therefore we're talking about less than 1% of the balance sheet of the huge global 93 00:08:00.640 --> 00:08:08.900 banks that had bought the CDS in order to basically arbitrage the banking regulations. 94 00:08:08.900 --> 00:08:15.420 And by that I mean they were buying all kinds of CDOs and sub-securitized subprime debt 95 00:08:15.420 --> 00:08:21.980 and so forth, but when you bought the CDS, which was triple A, you were able to magically 96 00:08:21.980 --> 00:08:48.980 can really transform your toxic assets, your high yielding CDOs, CDOs squared and all the rest of it into AAA credits, therefore you didn't have to put any post under the Basel regulations, any equity on your balance sheet, you could harvest the nice income that was yielded by these securities and get essentially an infinite rate of return. 97 00:08:48.980 --> 00:08:53.980 So, it was a good game, but it was a bad bet, because the insurance was no good. 98 00:08:53.980 --> 00:08:58.820 It was written by a holding company that didn't have liquidity. 99 00:08:58.820 --> 00:09:02.220 The holding company, AIG, was massive. 100 00:09:02.220 --> 00:09:06.660 On its consolidated balance sheet, it had hundreds of billions of equity. 101 00:09:06.660 --> 00:09:12.020 But the thing was, that equity was buried in all the insurance subsidiaries. 102 00:09:12.020 --> 00:09:15.760 And that's the part that was never made clear to the public. 103 00:09:15.760 --> 00:09:20.720 And so the case was made over and over that we have millions of people who are going to 104 00:09:20.720 --> 00:09:26.080 lose their retirement annuities or we have tens of millions of people that are going 105 00:09:26.080 --> 00:09:30.000 to lose their property and casualty coverage and so forth. 106 00:09:30.000 --> 00:09:35.480 But the truth was all of that insurance was written by the subsidiaries which were legally 107 00:09:35.480 --> 00:09:42.540 separate entities, almost all of them protected by state insurance commissions that had capital 108 00:09:42.540 --> 00:09:48.100 standards that had dividend stoppers, meaning you couldn't take the cash out, you couldn't 109 00:09:48.100 --> 00:09:56.220 take the equity out in order to meet margin calls or other payoffs for the CDS upstairs. 110 00:09:56.220 --> 00:10:03.500 So therefore, AIG was not a contagious economic disease that was going to pollute the entire 111 00:10:03.500 --> 00:10:11.680 financial system of the world and take everything down in some kind of financial black hole. 112 00:10:11.680 --> 00:10:17.360 As a matter of fact, if they had put AIG into bankruptcy, and I think this one is important 113 00:10:17.360 --> 00:10:22.960 because it then started the ball rolling, had they put AIG into bankruptcy, all of the 114 00:10:22.960 --> 00:10:29.800 insurance subsidiaries would have been seized or protected by their capital standards and 115 00:10:29.800 --> 00:10:34.840 their regulatory commissions at the state level for good or ill, they're there. 116 00:10:34.840 --> 00:10:39.820 And the idea that somehow this whole thing was going to unwind, that hundreds of billions 117 00:11:09.820 --> 00:11:16.780 World, AIG up until then was considered the gold standard of the financial system and 118 00:11:16.780 --> 00:11:23.620 therefore to see that AIG was suddenly without warning in an almost in the equivalent of 119 00:11:23.620 --> 00:11:31.540 a nanosecond a few days suddenly on the verge of collapse and insolvency was a shock to 120 00:11:31.540 --> 00:11:39.580 the system and therefore it opened everyone's mind so to speak, particularly in Washington 121 00:11:39.580 --> 00:11:55.180 to the idea that everything is falling apart. We've been hit by some comment from deep space that has polluted our entire financial system with organisms, so to speak, that are dangerous and we can't understand. 122 00:11:55.180 --> 00:12:04.340 And so therefore, the dominoes fell one after another once the AIG bailout was established as the predicate. 123 00:12:04.340 --> 00:12:10.340 Pretty soon they were saying things and people were believing things that weren't even remotely true. 124 00:12:10.340 --> 00:12:15.340 The next thing that happened after AIG, the shock, the utter shock of AIG, 125 00:12:15.340 --> 00:12:23.340 was the argument was made that the money funds were also unwinding and going into a great collapse. 126 00:12:23.340 --> 00:12:31.340 Now what I lay out in my book is that at that time there were 3.8 trillion of money funds outstanding, 127 00:12:31.340 --> 00:12:36.500 Funding, so that's a big number and had there been some kind of huge run on the money market 128 00:12:36.500 --> 00:12:41.840 funds, that could have been a catastrophic problem, I'll admit to that. 129 00:12:41.840 --> 00:12:47.500 But when you looked at the numbers, what it showed is that half of that huge, huge number, 130 00:12:47.500 --> 00:12:56.120 the 3.8 trillion, half of it consisted of so-called government funds that had no commercial 131 00:12:56.120 --> 00:13:03.800 paper that had no other risky paper in those funds, so that when the Lehman failure occurred 132 00:13:03.800 --> 00:13:09.520 and one of the big money funds broke the buck, I think some of you remember that, that had 133 00:13:09.520 --> 00:13:13.480 nothing to do with half of that whole industry. 134 00:13:13.480 --> 00:13:19.420 There was no Lehman paper or any other toxic paper or any other risky commercial paper 135 00:13:19.420 --> 00:13:27.140 and so forth in the 1.8 trillion government fund part of it. 136 00:13:27.140 --> 00:13:30.220 Now here's the part that they didn't tell you. 137 00:13:30.220 --> 00:13:40.260 The other 1.8 trillion was basically in funds that held government paper, bank paper, and 138 00:13:40.260 --> 00:13:45.420 a small amount of commercial paper, including Lehman. 139 00:13:45.420 --> 00:13:53.580 And what happened during the crisis is that the prime funds, this is the other $1.8 trillion, 140 00:13:53.580 --> 00:14:00.660 had a drain quickly of about $400 billion, but what they didn't tell you was that almost 141 00:14:00.660 --> 00:14:06.620 all of that drain out of the prime funds, which occurred because people wondered, well 142 00:14:06.620 --> 00:14:12.060 if there's leaving paper in here, what else is in here? 143 00:14:12.060 --> 00:14:19.580 Most all of it went across the street in the same money market fund families to the government 144 00:14:19.580 --> 00:14:20.580 only funds. 145 00:14:20.580 --> 00:14:27.260 In other words, people hit the send button and move massive amounts of money, $400 billion 146 00:14:27.260 --> 00:14:30.380 roughly, to government only funds. 147 00:14:30.380 --> 00:14:32.420 It didn't go into a black hole. 148 00:14:32.420 --> 00:14:36.420 It wasn't a classic run on the market. 149 00:14:36.420 --> 00:14:39.140 It wasn't going to take anything down. 150 00:14:39.140 --> 00:14:44.660 It was a rational adjustment when investors realized that what they had been told all 151 00:14:44.660 --> 00:14:50.020 these years about prime funds, that they were money good, 100 cents on the dollar, was a 152 00:14:50.020 --> 00:14:54.220 marketing exaggeration that wasn't true. 153 00:14:54.220 --> 00:14:59.100 So therefore, if you remember at the time, we had all of this notion that this great 154 00:14:59.100 --> 00:15:07.380 $3.8 trillion industry was coming unraveled, it was going to stimulate a contagion that 155 00:15:07.380 --> 00:15:12.300 to get the entire financial system basically wasn't true. 156 00:15:12.300 --> 00:15:19.760 They waived the $400 billion number at congressmen who were lined up like sheep in these meetings 157 00:15:19.760 --> 00:15:25.740 in order to get the votes on TARP and to get the sanction for what the Fed was doing. 158 00:15:25.740 --> 00:15:32.040 But in the end of the day, less than $60 billion of that $3.8 trillion actually left the money 159 00:15:32.040 --> 00:15:33.040 fund industry. 160 00:15:33.040 --> 00:15:39.280 It just moved from column A to column B, and even the 60 billion that left mainly went 161 00:15:39.280 --> 00:15:43.680 into Treasury paper and into bank CDs. 162 00:15:43.680 --> 00:15:49.440 So again, that was the second big event, and the whole scary story told at the time was 163 00:15:49.440 --> 00:15:55.000 that as the money market funds unraveled, the commercial paper industry would collapse. 164 00:15:55.000 --> 00:16:01.800 Pretty soon, payrolls couldn't be met, ATMs would go dark, all the rest of that. 165 00:16:01.800 --> 00:16:09.700 Now, the third thing they said at the time was that the banking system on Main Street 166 00:16:09.700 --> 00:16:11.240 would be the next to fall. 167 00:16:11.240 --> 00:16:16.800 In other words, we were going to have runs on the entire banking system. 168 00:16:16.800 --> 00:16:21.600 And my argument, which I lay out pretty well, I think, in the book, is that the runs were 169 00:16:21.600 --> 00:16:27.360 entirely in the canyons of Wall Street, in the wholesale funding markets, and by that 170 00:16:27.360 --> 00:16:31.360 I mean the repo market, the unsecured commercial paper. 171 00:16:31.360 --> 00:16:38.680 The last gambling houses standing were basically Goldman, Morgan Stanley because by then Lehman 172 00:16:38.680 --> 00:16:46.760 was gone, Bear Stearns was gone, Bank of America was picking up Merrill Lynch and so forth. 173 00:16:46.760 --> 00:16:52.440 And so the point was made or the argument was made that this was going to spread in 174 00:16:52.440 --> 00:16:57.440 and some kind of crescendo to the entire Main Street banking system. 175 00:16:57.440 --> 00:17:00.080 Well, again, you have to look at the facts. 176 00:17:00.080 --> 00:17:03.920 And when I did the analysis and went through all the facts, 177 00:17:03.920 --> 00:17:06.840 what I found was that at that moment in time, 178 00:17:06.840 --> 00:17:10.960 that week of September 15, 2008, the banking system 179 00:17:10.960 --> 00:17:14.280 had something like $12 trillion of assets. 180 00:17:14.280 --> 00:17:17.280 But if you sort it through class by class, 181 00:17:17.280 --> 00:17:21.080 you find out that less than $100 billion 182 00:17:21.080 --> 00:17:35.080 of Securitized Mortgages, the so-called toxic paper, CDOs, CDOs squared, mortgage-backed securities of one type or another, was in the Main Street banking system. 183 00:17:35.080 --> 00:17:47.080 Most of that paper was actually on the balance sheet of Wall Street banks or in hedge funds or had been distributed out to institutional investors around the world. 184 00:17:47.080 --> 00:17:53.280 And so again, the idea that we were going to have huge retail runs on the banking system 185 00:17:53.280 --> 00:17:54.760 just doesn't hold up. 186 00:17:54.760 --> 00:18:01.060 The facts aren't there and as I try to lay it out, it wouldn't have happened. 187 00:18:01.060 --> 00:18:08.940 So overall, a huge mistake I think was made and that was kind of a Rubicon in terms of 188 00:18:08.940 --> 00:18:15.000 where we're going with a banking, a Federal Reserve system that's totally out of control, 189 00:18:15.000 --> 00:18:21.200 and the fiscal situation that really is getting more desperate by the day, with the rules 190 00:18:21.200 --> 00:18:25.320 of free markets more or less set aside. 191 00:18:25.320 --> 00:18:35.440 All of it, I think, turned in a very bad direction in those moments or weeks during the Blackberry 192 00:18:35.440 --> 00:18:36.440 panic. 193 00:18:36.440 --> 00:18:41.960 Now, Bernanke did say at the time, and this is what I think put the fear into the whole 194 00:18:41.960 --> 00:18:47.960 The Great Depression 2.0 195 00:19:11.960 --> 00:19:18.960 The economy was structured differently and would not have plunged into a downward spiral that couldn't be stopped. 196 00:19:18.960 --> 00:19:29.960 90% of personal income was coming from transfer payments or government salaries or the private service industry in the United States. 197 00:19:29.960 --> 00:19:36.960 That was not going to plunge into a huge process of inventory liquidation because, as a matter of fact, 198 00:19:36.960 --> 00:19:42.120 In fact, the facts show that in the first nine months it went in the opposite direction. 199 00:19:42.120 --> 00:19:45.800 Transfer payments went up enormously, automatically. 200 00:19:45.800 --> 00:19:49.200 Government salaries obviously were not cut. 201 00:19:49.200 --> 00:19:55.040 The layoffs were significant in the private service industry, but it didn't collapse like 202 00:19:55.040 --> 00:20:04.280 manufacturing and tradable goods and industrial economy does when you have a huge decline 203 00:20:04.280 --> 00:20:06.040 like we had in 1930. 204 00:20:06.040 --> 00:20:11.880 So I have some facts in the book, again, which compare what happened in the early 30s with 205 00:20:11.880 --> 00:20:15.320 what happened in 2008, and it's rather startling. 206 00:20:15.320 --> 00:20:22.760 In the early 30s, we were a massive predator export power, a huge industrial manufacturing 207 00:20:22.760 --> 00:20:30.360 economy, so that when the post-29 collapse came, the economy had inventories, massive 208 00:20:30.360 --> 00:20:37.400 Inventories, which you have in manufacturing, equal to about 35% of GDP. 209 00:20:37.400 --> 00:20:42.640 Inventories were liquidated over the next three years to the tune of about 50% of the 210 00:20:42.640 --> 00:20:48.960 starting point, and therefore there was a massive hunk taken out of the economy, about 211 00:20:48.960 --> 00:20:56.560 17% of GDP, as a result of the industrial export economy, and ag economy at that time, 212 00:20:56.560 --> 00:21:03.040 which is also a big exporter liquidating in response to the collapse that occurred worldwide 213 00:21:03.040 --> 00:21:07.520 not just as a result of 1929. 214 00:21:07.520 --> 00:21:13.740 And so that started a process in which everything declined dramatically. 215 00:21:13.740 --> 00:21:21.200 Personal consumption spending back then in the 30-32 timeframe dropped by 20% as a result 216 00:21:21.200 --> 00:21:26.400 of Wages Collapsing and Activity Collapsing in the Industrial Economy. 217 00:21:26.400 --> 00:21:31.800 Well, you can go through all of it and you compare to what happened in 2008 and you can 218 00:21:31.800 --> 00:21:34.760 see that it was totally a false alarm. 219 00:21:34.760 --> 00:21:41.600 In 2008, obviously, the Hoovervilles that happened 80 years ago were in China. 220 00:21:41.600 --> 00:21:43.000 They weren't here. 221 00:21:43.000 --> 00:21:48.000 The great export power and industrial system of the world was in China, not the United 222 00:21:48.000 --> 00:21:49.000 States. 223 00:21:49.000 --> 00:21:58.040 So, when our economy went into adjustment after the Lehman crisis, inventory liquidation amounted 224 00:21:58.040 --> 00:22:04.560 to 2% of GDP, not 17%, a huge difference. 225 00:22:04.560 --> 00:22:09.840 The decline in personal consumption spending in real terms in the first nine months was 226 00:22:09.840 --> 00:22:14.440 about 2%, not 20%, and you can go through all the different numbers which are laid out 227 00:22:14.440 --> 00:22:15.440 in my book. 228 00:22:15.440 --> 00:22:22.160 And the point is, Bernanke was looking in a rear-view mirror at what happened in 1930-32, 229 00:22:22.160 --> 00:22:28.120 assumed inappropriately that it was going to happen this time, and then pulled out all 230 00:22:28.120 --> 00:22:35.480 the stops, spread the panic as the great scholar of the Great Depression all around Washington. 231 00:22:35.480 --> 00:22:42.720 He was given credit, unfortunately, for being a scholar of the Great Depression. 232 00:22:42.720 --> 00:22:52.720 and, in fact, I tried to lay out in the book that he wasn't, he's simply Xerox, Milton Friedman's erroneous theory of how it all came about. 233 00:22:52.720 --> 00:23:00.720 And so, again, when you overlay that onto the panic that was going on in the canyons of Wall Street, 234 00:23:00.720 --> 00:23:11.720 Great Depression 2.0 lurking around the corner, the meltdown that was going on in Wall Street that would have burned itself out on its own, in my view, 235 00:23:11.720 --> 00:23:17.640 In my view, spreading to the rest of the economy and the main street banking system and so forth, 236 00:23:17.640 --> 00:23:25.040 you got a scenario that was totally inaccurate in terms of what the facts of life were. 237 00:23:25.040 --> 00:23:31.640 But it lives with us indefinitely because people still believe that somehow the system 238 00:23:31.640 --> 00:23:40.640 is so exposed to systemic risk, to these outbreaks of contagion that we no longer can observe 239 00:23:40.640 --> 00:23:48.320 in the old rules, the old rules about free markets and the right to succeed or fail, 240 00:23:48.320 --> 00:23:54.080 and that losses need to be absorbed privately as well as gains. 241 00:23:54.080 --> 00:24:01.360 The idea that we ought to basically pay our bills in this country fiscally has been lost 242 00:24:01.360 --> 00:24:09.440 as well because the job of the government has now become to prop up the entire financial 243 00:24:09.440 --> 00:24:18.000 System because of these systemic weaknesses and so forth that allegedly were revealed in 244 00:24:18.000 --> 00:24:20.680 the Blackberry Panic of 2008. 245 00:24:20.680 --> 00:24:27.640 So I spent a fair amount of time on that in the book and I wanted to talk about it as 246 00:24:27.640 --> 00:24:38.120 kind of an opening way to get at the book today because I think that's where everything 247 00:24:38.120 --> 00:24:40.800 went in the wrong direction. 248 00:24:40.800 --> 00:24:49.200 And we now have a process going on in Washington where both parties have become reconciled 249 00:24:49.200 --> 00:24:57.640 to the necessity of all this, and therefore I think we no longer have any kind of honest 250 00:24:57.640 --> 00:25:01.220 competition of ideas left in the system. 251 00:25:01.220 --> 00:25:07.200 What we have is crony capitalism, what we have is some kind of temporizing process. 252 00:25:07.200 --> 00:25:13.140 If you look at the solution that came out of that whole crisis, Dodd-Frank, you realize 253 00:25:13.140 --> 00:25:17.720 that that's an exercise in pure regulatory petty-foggery. 254 00:25:17.720 --> 00:25:20.800 It is not going to change anything. 255 00:25:20.800 --> 00:25:26.720 It'll keep the lawyers and the accountants and the consultants busy for years to come. 256 00:25:26.720 --> 00:25:31.200 But it doesn't address what went wrong at the central bank. 257 00:25:31.200 --> 00:25:38.380 It doesn't address what really happened in the Blackberry Panic of 2008. 258 00:25:38.380 --> 00:25:43.300 So those are a few thoughts that I wanted to launch here this morning. 259 00:25:43.300 --> 00:25:49.980 There's a lot more obviously in the book, but why don't I stop at that and try to respond 260 00:25:49.980 --> 00:25:55.560 to questions that may relate to what I've just said or anything else that goes back 261 00:25:55.560 --> 00:25:56.560 to the 1930s. 262 00:25:57.560 --> 00:26:13.560 Mr. Stockman, I have a daughter following your footsteps who is an aide to a congressman. 263 00:26:13.560 --> 00:26:21.560 She said to me the other day, she said, daddy, the law is only there until you need it. 264 00:26:21.560 --> 00:26:30.560 How do you think the evisceration of the rule of law needs to be bankruptcy and GM, etc., how does that play out going forward? 265 00:26:51.560 --> 00:26:59.240 Diplome, that GM couldn't have gone into bankruptcy the normal way is so much urban myth, urban 266 00:26:59.240 --> 00:27:00.480 legend. 267 00:27:00.480 --> 00:27:05.600 And I point out in the book that in the quarter that they filed, you know, their 10Q, the 268 00:27:05.600 --> 00:27:13.680 quarter before the bailout in the fall of 2008, GM had $150 billion worth of assets 269 00:27:13.680 --> 00:27:15.280 on their balance sheet. 270 00:27:15.280 --> 00:27:21.380 Now some of them were worth less than a hundred cents on the dollar, but in that were massively 271 00:27:51.380 --> 00:27:55.100 to the Pension Benefit Guarantee Corporation. 272 00:27:55.100 --> 00:27:58.520 There was $50 billion worth of bank loans in debt. 273 00:27:58.520 --> 00:28:00.780 They would have gone to the back of the line. 274 00:28:00.780 --> 00:28:05.780 There was $30 or $40 billion worth of unfunded medical, 275 00:28:05.820 --> 00:28:07.960 a retiree medical benefits. 276 00:28:07.960 --> 00:28:10.260 They would have gone to the back of the line. 277 00:28:10.260 --> 00:28:12.580 So the point that I try to lay out in the book 278 00:28:12.580 --> 00:28:17.420 is the argument that GM couldn't get a dip loan 279 00:28:17.420 --> 00:28:21.020 that would be secured by all of those assets 280 00:28:21.020 --> 00:28:23.420 was really incredible. 281 00:28:23.420 --> 00:28:26.140 It wasn't true, and yet it was the excuse 282 00:28:26.140 --> 00:28:33.300 that, frankly, Paulson made to bail out GM in December 2008. 283 00:28:33.300 --> 00:28:36.380 Now, as a result of that, essentially what happened 284 00:28:36.380 --> 00:28:40.180 is we turned a big industry in the United States 285 00:28:40.180 --> 00:28:43.380 into a political food fight as to where 286 00:28:43.380 --> 00:28:45.300 the automotive production is going 287 00:28:45.300 --> 00:28:50.420 to occur, either south of the Mason-Dixon line or north. 288 00:28:50.420 --> 00:28:54.200 In other words, there wasn't going to be a shortage of cars. 289 00:28:54.200 --> 00:28:57.120 There was enormous excess capacity, 290 00:28:57.120 --> 00:29:00.380 particularly in the transplant auto assembly plants 291 00:29:00.380 --> 00:29:04.460 in Alabama and Tennessee and Kentucky and Mississippi 292 00:29:04.460 --> 00:29:09.340 and South Dakota and South Carolina, Georgia and so forth. 293 00:29:09.340 --> 00:29:14.340 The issue was, were those cars demanded by the economy 294 00:29:14.860 --> 00:29:17.420 once the economies settled down, 295 00:29:17.420 --> 00:29:23.540 Were they going to be produced in these new efficient transplant operations, where the 296 00:29:23.540 --> 00:29:31.140 weighted average cost, fully loaded cost, I should say, of employees was about $60,000 297 00:29:31.140 --> 00:29:32.140 a year? 298 00:29:32.140 --> 00:29:39.220 Or were they going to be made in the broken-down, run-down UAW undermined plants in Ohio, Michigan 299 00:29:39.220 --> 00:29:43.140 and Wisconsin that paid $100,000 a year? 300 00:29:43.140 --> 00:29:44.140 That's all it was about. 301 00:29:44.140 --> 00:29:48.220 And if you go through all the facts, and I've laid them out pretty well, I think, in the 302 00:29:48.220 --> 00:29:55.980 book, essentially what the bailout did was move 40,000 jobs from the transplant auto 303 00:29:55.980 --> 00:30:02.900 belt in the south, and also which happened to be red states in the electoral college, 304 00:30:02.900 --> 00:30:11.940 and move them to the blue states and the auto plants that were rescued in Ohio, Michigan, 305 00:30:11.940 --> 00:30:15.620 in Michigan and a few other places in the Rust Belt. 306 00:30:15.620 --> 00:30:21.160 Now that's what happened, and when you have the power of government, when you have the 307 00:30:21.160 --> 00:30:32.900 power of the state being used to move jobs in this manner for no justifiable reason except 308 00:30:32.900 --> 00:30:41.540 who has the most political clout, and in this case from right to work states to union states, 309 00:30:41.540 --> 00:30:46.980 It's just another indication of how far we've drifted from a workable system. 310 00:30:46.980 --> 00:30:54.340 Now what I worry is that since they were able to overcome the bankruptcy predicate, and 311 00:30:54.340 --> 00:30:59.980 that's what should have happened to GM and Chrysler, in that crisis, where are we going 312 00:30:59.980 --> 00:31:03.900 to be when you have the next crisis and the next crisis and the next crisis? 313 00:31:03.900 --> 00:31:06.120 The precedents are all there. 314 00:31:06.120 --> 00:31:12.640 And what happens is they will argue that it's so big, and the consequences are so great, 315 00:31:12.640 --> 00:31:19.560 that we have to basically throw out the rule of law and implement instead kind of discretionary 316 00:31:19.560 --> 00:31:26.640 seat of the pants, subjectively driven use of political power, and that's exactly what 317 00:31:26.640 --> 00:31:28.880 happened in the auto bailout. 318 00:31:28.880 --> 00:31:33.280 Even though the Wall Street bailout I think was horrible, it shouldn't have happened. 319 00:31:33.280 --> 00:31:36.920 Those firms that would have gone down could have been reorganized, they'd probably be 320 00:31:36.920 --> 00:31:40.200 a lot more prudent operators today. 321 00:31:40.200 --> 00:31:46.080 But I think the GM case was even worse because it has left the myth, which gets repeated 322 00:31:46.080 --> 00:31:51.680 over and over and you heard it in the last campaign, that the automobile industry was 323 00:31:51.680 --> 00:32:02.780 saved, that a million jobs were on the line heading for some kind of economic black hole, 324 00:32:02.780 --> 00:32:11.020 and that government broke the rules but it was necessary in a desperate circumstance to 325 00:32:11.020 --> 00:32:16.260 deal with what would have been otherwise an Armageddon scenario. 326 00:32:16.260 --> 00:32:21.540 Now that is really what the received wisdom is today, that's what the current incumbent 327 00:32:21.540 --> 00:32:29.880 of the White House was saying on the campaign trail in 2012 and none of it is remotely true. 328 00:32:29.880 --> 00:32:34.680 The auto industry wasn't going to collapse. It's a question of where the production was 329 00:32:34.680 --> 00:32:44.560 going to occur. And yet today, we have now revived and reestablished a bailout predicate 330 00:32:44.560 --> 00:32:51.200 and interventionist predicate that is far more powerful than anything that existed even 331 00:32:51.200 --> 00:32:59.280 in the 1990s or the 1980s or 1970s when we did some of the earlier smaller bailouts. 332 00:32:59.280 --> 00:33:07.280 So again that's why I call our system crony capitalism because it is based on arbitrary 333 00:33:07.280 --> 00:33:16.040 discretionary and panic use of state power to alter outcomes that do not allow the market 334 00:33:16.040 --> 00:33:24.520 to work and as a result you get enormous moral hazard obviously and you get an economic system 335 00:33:24.520 --> 00:33:29.120 that becomes less and less productive and flexible over time. 336 00:33:29.120 --> 00:33:30.120 over here. 337 00:33:59.120 --> 00:34:08.120 Isn't it possible, as Robert Manuel said, never let a good crisis go to waste, that that was their goal to begin with? 338 00:34:29.120 --> 00:34:59.120 The Theory of Money and Credit 339 00:34:59.120 --> 00:35:05.640 and what makes capitalism work, why you need free market pricing in the financial markets 340 00:35:05.640 --> 00:35:11.400 and in all other markets for that matter, and why you can't just constantly throw the 341 00:35:11.400 --> 00:35:18.480 state its treasury and the taxpayers in the breach if you expect to have a solvent and 342 00:35:18.480 --> 00:35:21.880 viable and sustainable system over time. 343 00:35:21.880 --> 00:35:32.480 So I think basically the opportunism of our political system caught up with us in 2008, 344 00:35:32.480 --> 00:35:38.040 and unfortunately it was the conservative party that failed in the largest sense of 345 00:35:38.040 --> 00:35:43.760 the word because they were supposed to be the guardian of fiscal rectitude. 346 00:35:43.760 --> 00:35:51.560 The Republicans in a competitive democracy like we have, have the job of hard labor on 347 00:35:51.560 --> 00:35:57.360 on the oars of fiscal rectitude and telling the public sometimes there's going to be 348 00:35:57.360 --> 00:36:05.080 pain, sometimes there's going to be dislocation, sometimes we have to say no, we can't manage 349 00:36:05.080 --> 00:36:10.240 daily economic life through the instruments and agencies of the state. 350 00:36:10.240 --> 00:36:15.520 Now that's what the Republican Party was required to do in 2008. 351 00:36:15.520 --> 00:36:22.100 They didn't do that because by then they had appointed Greenspan and after that Bernanke. 352 00:36:22.100 --> 00:36:30.560 They had put basically Keynesian money, you know, money bankers, central bankers in charge 353 00:36:30.560 --> 00:36:32.220 of our economy. 354 00:36:32.220 --> 00:36:38.240 They had bought the myth that the Fed somehow was making all of this prosperity possible 355 00:36:38.240 --> 00:36:44.080 through its deft maneuvering in the financial markets and management of interest rates and 356 00:36:44.080 --> 00:36:45.080 so forth. 357 00:36:45.080 --> 00:36:50.180 and the whole thing was a gigantic error that created serial bubbles and when the 358 00:36:50.180 --> 00:36:56.160 great bubble finally broke in 2007 and 2008 they couldn't recognize how they 359 00:36:56.160 --> 00:37:01.540 had gotten to that point and you had a Wall Street guy sitting on the third 360 00:37:01.540 --> 00:37:09.660 floor of the Treasury who basically panicked. I've said that actually if you 361 00:37:09.660 --> 00:37:16.220 To look at it, it appears that the reason we had the bailouts and TARP and all of that 362 00:37:16.220 --> 00:37:20.860 madness is the occupiers were in control. 363 00:37:20.860 --> 00:37:25.780 But the occupiers that I'm talking about were the people occupying the third floor of the 364 00:37:25.780 --> 00:37:33.980 Treasury, who mostly came from Goldman Sachs, who did not have a large view of public policy 365 00:37:33.980 --> 00:37:39.640 but simply a narrow, short-run view, looking at their blackberries of where the stock price 366 00:37:39.640 --> 00:37:46.920 of Goldman or the S&P 500 index or the Russell 2000 or any of the other ones that were trending 367 00:37:46.920 --> 00:37:48.840 down at the moment. 368 00:37:48.840 --> 00:37:56.840 And it is a powerful lesson because I am now convinced that Washington basically is driven 369 00:37:56.840 --> 00:37:58.040 by the stock market. 370 00:37:58.040 --> 00:38:07.160 They will not do anything by way of reimposing sound policy or reestablishing fiscal rectitude 371 00:38:07.160 --> 00:38:14.560 or changing the mandate of the Fed because there will be such a vicious sell-off in all 372 00:38:14.560 --> 00:38:20.600 of these artificially inflated markets so fast that it will scare them into retreat 373 00:38:20.600 --> 00:38:24.440 even if they wanted to do something different. 374 00:38:24.440 --> 00:38:27.880 That's clearly what the lesson of the second TARP vote is. 375 00:38:27.880 --> 00:38:32.800 The first time they voted it down, as you remember, in the House, the market dropped 376 00:38:32.800 --> 00:38:37.120 600 points that day, and it wasn't even that day. 377 00:38:37.120 --> 00:38:41.320 The market was dropping as you watch the time 378 00:38:41.320 --> 00:38:44.180 on the voting clock tick off. 379 00:38:44.180 --> 00:38:47.520 And so therefore, we now have essentially 380 00:38:47.520 --> 00:38:50.840 a governance process that is driven 381 00:38:50.840 --> 00:38:55.840 by fast money traders and trading robots on Wall Street. 382 00:38:56.040 --> 00:38:58.860 And if you think that's a rational system, 383 00:38:58.860 --> 00:39:02.760 if you think that's survivable and viable 384 00:39:02.760 --> 00:39:10.160 and Stable, then you're dreaming about something that couldn't be true in the real world. 385 00:39:10.160 --> 00:39:11.600 But that's where we are. 386 00:39:11.600 --> 00:39:20.120 The whole system has now become hostage to the gambling halls that have been created 387 00:39:20.120 --> 00:39:28.440 by the Fed and the puts and the easy money and the manipulation of the yield curve and 388 00:39:28.440 --> 00:39:29.440 so forth. 389 00:39:29.440 --> 00:39:36.440 and the syndrome of deformations that stem from a rogue central bank. 390 00:39:36.440 --> 00:39:37.440 Over here. 391 00:39:37.440 --> 00:39:49.440 Can you speak more to your concept of how the policies of the Federal Reserve are going to result in a subsidy to the wealth transfer to Wall Street Bank? 392 00:39:49.440 --> 00:39:50.440 Yeah, yeah. 393 00:39:50.440 --> 00:39:57.440 The question was about the Federal Reserve and what we call interest repression or financial repression. 394 00:39:57.440 --> 00:40:03.520 Obviously, we know that the Fed has not repealed the law of supply and demand, and we know 395 00:40:03.520 --> 00:40:09.600 that the Fed is now buying six, seven, eight billion of securities, mostly government treasury 396 00:40:09.600 --> 00:40:16.360 paper but some mortgage-backed securities every day, that that is fundamentally distorting 397 00:40:16.360 --> 00:40:21.400 pricing and undermining price discovery in the financial markets. 398 00:40:21.400 --> 00:40:26.040 And so therefore, none of the interest rates that you see or the price of money are real 399 00:40:26.040 --> 00:40:33.160 Free Market Prices. They're essentially rigged, administered prices set by the Fed as a result 400 00:40:33.160 --> 00:40:40.880 of the huge presence in the market every day absorbing this enormous amount of paper. It 401 00:40:40.880 --> 00:40:46.600 would not be remotely the case in my judgment today that you would have a five-year interest 402 00:40:46.600 --> 00:40:53.000 rate on the, I mean an interest rate on the five-year treasury at 80 basis points or that 403 00:40:53.000 --> 00:40:58.680 And even the 10-year, which is trading at about 1.95 today, would be remotely there. 404 00:40:58.680 --> 00:41:04.240 That isn't a market price, that is a pegged, rigged price set by the Fed because of the 405 00:41:04.240 --> 00:41:10.960 enormous purchase they're making, something like half of all the flow in the middle part 406 00:41:10.960 --> 00:41:13.720 of the yield curve. 407 00:41:13.720 --> 00:41:19.000 So therefore, if you start with the fact that the Fed has put the overnight rate at zero, 408 00:41:19.000 --> 00:41:25.160 the Funds Rate, put it there or established it there in December 2008 and has promised 409 00:41:25.160 --> 00:41:32.920 to keep it there until mid-2015 and that is then heavily intervening along the rest of 410 00:41:32.920 --> 00:41:34.480 the yield curve. 411 00:41:34.480 --> 00:41:41.400 You have basically a pricing system in the government market and in related fixed income 412 00:41:41.400 --> 00:41:49.280 in the markets that reflect the intentions and the purposes of the Fed and not the result 413 00:41:49.280 --> 00:41:50.280 of the market. 414 00:41:50.280 --> 00:41:57.240 Now, one of those things is to drive the yield on about eight billion or eight trillion worth 415 00:41:57.240 --> 00:42:02.640 of deposits in the United States, bank deposits, down to close to zero. 416 00:42:02.640 --> 00:42:09.520 On a six-month CD today, I guess it's something like 40 basis points or maybe not even that. 417 00:42:09.520 --> 00:42:14.720 And as a result of that, I believe the Fed policy, this financial repression, the rigging 418 00:42:14.720 --> 00:42:20.920 of the yield curve and all interest rates that I've talked about, causes the depositors 419 00:42:20.920 --> 00:42:27.160 of America, the savers of America to be deprived of two to three hundred basis points worth 420 00:42:27.160 --> 00:42:32.640 the normal interest that would come in a market where prices or interest rates were being 421 00:42:32.640 --> 00:42:39.280 set by supply and demand for savings and borrowing in the free market. 422 00:42:39.280 --> 00:42:46.400 Now if you do the math on that, you will see that that adds up to about a 300 to 400 billion 423 00:42:46.400 --> 00:42:54.640 dollar transfer from depositors and savers in the banking system to the banks. 424 00:42:54.640 --> 00:42:57.800 And this is basically how the banks have gotten well. 425 00:42:57.800 --> 00:43:03.160 All of that then gets booked as net income and retained earnings and their balance sheets 426 00:43:03.160 --> 00:43:04.520 get better. 427 00:43:04.520 --> 00:43:10.940 But it's all come out of the hides of savers in America and depositors that would never 428 00:43:10.940 --> 00:43:13.080 happen on the free market. 429 00:43:13.080 --> 00:43:17.960 And so the simple way to look at it, I think, is to ask yourself, if you put... 430 00:43:17.960 --> 00:43:19.960 That's really a fiscal transfer. 431 00:43:19.960 --> 00:43:21.520 That's not monetary policy. 432 00:43:21.520 --> 00:43:22.520 That's a fiscal transfer. 433 00:43:22.520 --> 00:43:28.080 And if you put that up to a vote in the Congress, it wouldn't even get to the floor. 434 00:43:28.080 --> 00:43:35.800 I mean it would be laughed out of the committee rooms because there's no way that the public 435 00:43:35.800 --> 00:43:42.240 in America would condone transferring three to four hundred billion a year from savers 436 00:43:42.240 --> 00:43:48.120 who want to keep liquid, who want to only put money in safe accounts and don't want 437 00:43:48.120 --> 00:43:53.840 to speculate in the stock market or buy a junk bond fund or the rest of it. 438 00:43:53.840 --> 00:43:56.800 That wouldn't have a chance of approval. 439 00:43:56.800 --> 00:44:04.120 And yet, the 12 members of the Fed Open Market Committee, what I call the Monetary Politburo 440 00:44:04.120 --> 00:44:09.980 of the United States, basically has decided that in its wisdom, it is going to make the 441 00:44:09.980 --> 00:44:18.240 economy work better, grow faster, become more prosperous by driving you as a depositor out 442 00:44:18.240 --> 00:44:22.000 the risk curve, as they say, to use their clinical terms. 443 00:44:22.000 --> 00:44:25.720 But what they're really saying is, we want you to take another dive. 444 00:44:25.720 --> 00:44:31.320 I've already had three market crashes since the turn of the century, but we want you back 445 00:44:31.320 --> 00:44:38.560 into the risk assets, the Russell 2000 high-yield bond fund or something, because that will 446 00:44:38.560 --> 00:44:42.920 ignite a wealth effect, and as soon as we can get everybody thinking they're wealthier, 447 00:44:42.920 --> 00:44:46.600 then they'll spend more money and the economy will start working better. 448 00:44:46.600 --> 00:44:50.200 I mean, it is a terrible doctrine. 449 00:44:50.200 --> 00:44:58.040 It is a terrible abuse of power that the Fed is undertaking and at the heart of it is this 450 00:44:58.040 --> 00:45:07.400 huge transfer that goes to your question of wealth arbitrarily from the deposit and savings 451 00:45:07.400 --> 00:45:17.520 classes of America to the banking system and it is only a small part to be truthful of the 452 00:45:17.520 --> 00:45:23.880 and the deformations that come from the rogue central bank that we have operating in this 453 00:45:23.880 --> 00:45:27.240 country today and, frankly, around the world. 454 00:45:27.240 --> 00:45:31.040 They're all doing the same thing, copying the same policies. 455 00:45:31.040 --> 00:45:49.040 This is more of a big picture question. At this point, it seems abundantly clear that national sovereignty, in fact, seems to substitute the interests of the international bank. 456 00:45:49.040 --> 00:45:55.040 And nowhere does this manifest itself more clearly than what's going on in the EU. 457 00:45:55.040 --> 00:46:05.040 with its desperate attempt to sustain a broken monetary system revolving around the euro to the detriment of began sovereign interests. 458 00:46:05.040 --> 00:46:12.040 I guess, the power revenue just identified here in the United States as the place during TARC, 459 00:46:12.040 --> 00:46:22.040 shoots you stupidly identified, smacks at the same coercion, whereby the goal is to have the elected government take a backseat in the monetary interest. 460 00:46:22.040 --> 00:46:30.040 Here's my question. Do you think it's possible that this was a manufactured financial meltdown? 461 00:46:30.040 --> 00:46:40.040 It was an attempt by sponsors of visionaries of the New World Order, high up in the decision-making chain, 462 00:46:40.040 --> 00:46:47.040 to facilitate the eventual creation of a single-world currency into one-world government? 463 00:46:47.040 --> 00:47:10.040 I don't expect a conspiracy theory, but one really has to start to wonder what between what's happening in the ECB, the Federal Reserve, the Bank of Japan, the Bank of England, I mean, it really is down to the point where our world is controlled by monetary interests and no longer collective government and sovereign interests. Is this something that is being done deliberately? 464 00:47:17.040 --> 00:47:24.360 or there is a conspiracy. I would rather think stupidity is contagious and as we 465 00:47:24.360 --> 00:47:27.920 look at all the central banks of the world they're all doing the same thing. 466 00:47:27.920 --> 00:47:32.920 The Bank of England is a disgrace. I mean this is where allegedly sound central 467 00:47:32.920 --> 00:47:37.680 banking started and for a while it did follow the rules. There was a gold 468 00:47:37.680 --> 00:47:42.180 standard. It did work for 200 years but now when you look at the rate that 469 00:47:42.180 --> 00:47:46.380 they're expanding their balance sheet in the doctrine they're following, it's the 470 00:47:46.380 --> 00:48:06.380 The Stooges, the Stooges could be lawguys being directed to be lawguys. 471 00:48:46.380 --> 00:48:56.380 in France and in the southern tier, most of those banks are only there because they're only still solvent because of sovereign support. 472 00:48:56.380 --> 00:49:03.380 The governments are running out of balance sheet, running out of capacity to borrow in honest capital markets, 473 00:49:03.380 --> 00:49:08.380 and so everything is being pushed into the venue of central banks. 474 00:49:08.380 --> 00:49:22.380 So we have a world economy, roughly 70 or 80 trillion of total GDP, as they measure today, being run by eight or nine central banks who are in a race to the bottom, all doing the same thing. 475 00:49:22.380 --> 00:49:32.380 I would say the people's printing press of China, as I call their central bank, has created money even more rapidly over 10 or 15 years than the Fed has, 476 00:49:32.380 --> 00:49:42.380 pegging their currency to keep their mercantilist export model working and in the process buying dollars in order to keep their currency pegged 477 00:49:42.380 --> 00:49:57.380 and taking in to their vaults massive amounts of treasury paper and government or mortgage backed security paper in the process. 478 00:49:57.380 --> 00:50:03.220 So, you can see that in the numbers, which are quite startling. 479 00:50:03.220 --> 00:50:09.320 By the year 2000, before this really got bad, I mean, Greenspan led the charge and pretty 480 00:50:09.320 --> 00:50:12.860 soon everybody was in line. 481 00:50:12.860 --> 00:50:18.180 But in the year 2000, all of the central banks of the world had combined footings of about 482 00:50:18.180 --> 00:50:22.540 $2 trillion, combined balance sheets. 483 00:50:22.540 --> 00:50:29.340 Today it is $15 trillion and it's growing by $2.5 trillion a year. 484 00:50:29.340 --> 00:50:34.620 If you look at the quantitative easing of Japan, the United States, the Bank of England, 485 00:50:34.620 --> 00:50:41.680 the ECB and the growth of the balance sheet in China, that's what's going on. 486 00:50:41.680 --> 00:50:48.400 So there is no honest pricing left anywhere in the world, money, fast money, hot money 487 00:50:48.400 --> 00:50:55.060 Money is flowing back and forth chasing currencies, chasing trades, chasing momentum until it 488 00:50:55.060 --> 00:50:57.720 stops and then it moves in another direction. 489 00:50:57.720 --> 00:51:05.080 This is a very dangerous, unstable system and I don't think it was created by a conspiracy 490 00:51:05.080 --> 00:51:06.880 because that could be exposed. 491 00:51:06.880 --> 00:51:11.200 I think it was created by stupidity and that's hard to uproot. 492 00:51:11.200 --> 00:51:12.200 That's the problem. 493 00:51:12.200 --> 00:51:23.200 Meditating, possibility, regret, chaos, being taken advantage of by ire, or good everyone. 494 00:51:23.200 --> 00:51:39.200 Give a book to spoke about the future of paper currencies, dollar, euro, and British pound. Is there a chance that we revert to a gold standard or maybe a bitcoin as a new monetary system? 495 00:51:42.200 --> 00:51:47.880 Uncharted Waters, if you would have asked people in 1995, do you think the central banks 496 00:51:47.880 --> 00:51:53.960 of the world could be in this fantastic race to the bottom, this massive daily balance 497 00:51:53.960 --> 00:52:01.880 sheet expansion, you know, vacuuming up most of the sovereign debt and a lot of related. 498 00:52:01.880 --> 00:52:06.640 If you would have asked people in 1995, is this likely, I don't think one out of a hundred 499 00:52:06.640 --> 00:52:10.680 people would have, I mean experts, would have thought it possible. 500 00:52:10.680 --> 00:52:18.600 So today we're there. There is no precedent. You can talk about your other country hyperinflations 501 00:52:18.600 --> 00:52:24.120 in history, but what happened in Argentina, you know, or what happened in Zimbabwe, or 502 00:52:24.120 --> 00:52:33.000 what happened in Weimar Republic, Germany, is such a small, limited, historically contained 503 00:52:33.000 --> 00:52:39.660 episode that it really doesn't tell us a lot about what happens when there are nine 504 00:52:39.660 --> 00:52:47.900 Out-of-control central banks in this fantastic money printing spree and balance sheet expansion 505 00:52:47.900 --> 00:52:49.460 that's underway. 506 00:52:49.460 --> 00:52:54.860 So as a result of that, I don't know where the system is going, whether it's going to 507 00:52:54.860 --> 00:52:58.620 bitcoins or gold or who knows what. 508 00:52:58.620 --> 00:53:04.100 I just don't think this system is sustainable much longer. 509 00:53:04.100 --> 00:53:15.020 This is really now in the late stages of a highly dangerous and unstable process, and 510 00:53:15.020 --> 00:53:24.260 there is going to be some kind of major monetary collapse disorder breakdown that will require, 511 00:53:24.260 --> 00:53:33.100 if we're not going to go back to the caves, will require a major reconstitution of the 512 00:53:33.100 --> 00:53:37.740 and the financial system and the banking systems of the world. 513 00:53:37.740 --> 00:53:41.980 How that gets done, I don't think any of us have a clue. 514 00:53:41.980 --> 00:53:47.940 We might have ideas of what should be done and maybe this is a chance to restore sound 515 00:53:47.940 --> 00:53:54.380 money and go back to a gold standard or go back to very narrow, limited purpose central 516 00:53:54.380 --> 00:53:55.740 banks. 517 00:53:55.740 --> 00:54:02.480 But when you have a collapse of the magnitude that is indicated by the momentum underway, 518 00:54:02.480 --> 00:54:06.440 I think it's very hard to predict how it comes out. 519 00:54:06.440 --> 00:54:09.320 Now people say, well, what should we do here? 520 00:54:09.320 --> 00:54:15.860 One of the simple ideas that I keep proposing, as I've gone around on this, is why don't 521 00:54:15.860 --> 00:54:22.160 we at least go back to the central bank that Carter Glass had in mind in 1914 when the 522 00:54:22.160 --> 00:54:24.360 Fed was created. 523 00:54:24.360 --> 00:54:27.140 And basically that was a banker's bank. 524 00:54:27.140 --> 00:54:30.440 It only operated through a discount window. 525 00:54:30.440 --> 00:54:33.120 In other words, there was no open market committee. 526 00:54:33.120 --> 00:54:40.120 It was not legal for the original Federal Reserve to even buy or own government securities. 527 00:54:40.120 --> 00:54:47.360 It couldn't target anything, not M1, not M2, not the unemployment rate or the inflation 528 00:54:47.360 --> 00:54:52.840 rate or the number of housing starts, or the Russell 2000, which is what Bernanke wants 529 00:54:52.840 --> 00:54:58.240 to target, or the number of jobs created per month, which is what Evans, one of the other 530 00:54:58.240 --> 00:55:05.280 Central Bank Governors Wants to Target. There was no targeting of anything. GDP and economic 531 00:55:05.280 --> 00:55:11.160 expansion occurred on the free market and the outcome was what it was. That's what people 532 00:55:11.160 --> 00:55:18.080 believed before 1920. And the role of the central bank was simply to take collateral 533 00:55:18.080 --> 00:55:24.680 based on commercial paper that represented real economic activity, inventory or receivables 534 00:55:24.680 --> 00:55:33.720 in the Process Collection and loan against that at a discount or a penalty rate to banks 535 00:55:33.720 --> 00:55:40.780 that wanted to liquefy some of their collateral in order to meet depositor demands. 536 00:55:40.780 --> 00:55:49.880 Now that kind of expansion or contraction of reserves in the banking system would be driven 537 00:55:49.880 --> 00:55:56.200 would be driven by the banking system, would be driven by real business activity and not 538 00:55:56.200 --> 00:56:03.000 by a pilot bureau of planners sitting in the Eccles building saying we think we need to 539 00:56:03.000 --> 00:56:11.520 notch up GDP growth from 3.1% to 3.3% next quarter or boost the housing starts from a 540 00:56:11.520 --> 00:56:13.800 million to a million to... 541 00:56:13.800 --> 00:56:19.700 None of this would have occurred, none of this targeting and therefore central planning 542 00:56:19.700 --> 00:56:28.080 of the GDP and all of its elements would have occurred under the idea of the glass bank, 543 00:56:28.080 --> 00:56:31.880 the banker's bank, the discount window philosophy. 544 00:56:31.880 --> 00:56:37.280 The discount window would have been driven by free market interest rates. 545 00:56:37.280 --> 00:56:42.920 So if there was a lot of speculation and borrowing going on in the market, interest rates would 546 00:56:42.920 --> 00:56:55.920 The Discount Window would offer liquidity to banks, but at this rising market rate, it could even be double digits, and add a penalty above that only on good collateral. 547 00:56:55.920 --> 00:57:08.920 That was a version of the central bank, if you're going to have one, that would have avoided this massive disaster that we're in today. 548 00:57:08.920 --> 00:57:14.720 Now, the reason I bring it up is simply if you want something practical, if you want 549 00:57:14.720 --> 00:57:23.040 some way to back off this enormous disaster that we're drifting into now, at least reviving 550 00:57:23.040 --> 00:57:32.400 the idea of what the original banker's bank model was like might be a starting point for 551 00:57:32.400 --> 00:57:43.160 with a debate because it would illuminate, it would expose the fact that today we basically 552 00:57:43.160 --> 00:57:51.240 have a central bank running the economy through the crude tools of the interest rate management, 553 00:57:51.240 --> 00:57:55.840 yield curve management, the various puts and all the other things that they're doing. 554 00:57:55.840 --> 00:57:56.840 Okay, thank you.