WEBVTT NOTE Current Market Conditions: 14 Oct. 2008 1 00:00:00.000 --> 00:00:26.000 This is Jeffrey Tucker with the Mises Org podcast. It's my great pleasure today to interview Jesus Huerta de Soto. He is the author of many books, most recently and in the Mises store, Money, Bank Credit and Economic Cycles. 2 00:00:26.000 --> 00:00:35.000 This book, many reviewers have regarded as being the most important book on money and banking since Mises' Theory of Money and Credit. 3 00:00:35.000 --> 00:00:47.000 It's been translated into many languages and it's about to go into a second printing because the book has been in enormous demand over the last several weeks as you could probably imagine. 4 00:00:47.000 --> 00:00:51.000 So I have Dr. De Soto on the phone from Madrid. 5 00:00:51.000 --> 00:00:58.000 What kind of responses have you been getting to recent events in light of your book? 6 00:00:58.000 --> 00:01:15.000 Well, a lot of colleagues and friends are telling me that I've been in a way vindicated with the last developments in the financial and economic environment. 7 00:01:15.000 --> 00:01:20.000 I don't think that these last events are a vindication. 8 00:01:20.000 --> 00:01:37.000 I answer then that it's better to say that this is an almost perfect illustration of all the analytical arguments that I develop in my book. 9 00:01:37.000 --> 00:01:52.000 Yes, it's not something that you expected to happen at this precise time. You wrote the book to be a book to apply to all times and all places. 10 00:01:52.000 --> 00:01:56.000 Sorry, can you repeat that please, because sometimes I cannot hear you. 11 00:01:56.000 --> 00:02:05.000 You wrote the book to apply to all times and all places, not just this one time, but I suppose you had an expectation that something like this was coming. 12 00:02:05.000 --> 00:02:22.000 Yes, of course. The book develops economic theory. Economic theory has an analytical value, no matter what the place and the historical time you are in. 13 00:02:22.000 --> 00:02:45.000 What happens is that with this analytical tool you are able to interpret the historical developments in a way that other economists cannot do because the analytical tools they are using are not correct from the theoretical point of view. 14 00:02:45.000 --> 00:02:54.520 So in my book, what I developed is a theory of in which way credit expansion affects the 15 00:02:54.520 --> 00:03:03.920 real capital structure of the economy, using generalized malinvestment, error of investment 16 00:03:03.920 --> 00:03:11.440 by entrepreneurs, and in which way this error at the end is covered by the markets and economic 17 00:03:11.440 --> 00:03:13.760 recession comes. 18 00:03:13.760 --> 00:03:23.040 So it is an explanation of precisely what happened in the last years of the so-called 19 00:03:23.040 --> 00:03:29.680 irrational exuberance or the bubble and the financial crisis we are experiencing right 20 00:03:29.680 --> 00:03:30.680 now. 21 00:03:30.680 --> 00:03:34.640 When do you date the beginning of the bubble? 22 00:03:34.640 --> 00:03:46.320 Well, this is an interesting question because I personally think that the last recession 23 00:03:46.320 --> 00:03:55.320 of 2001 was not allowed to develop. 24 00:03:55.320 --> 00:03:58.120 What I mean is that it was firstly closed. 25 00:03:58.120 --> 00:04:05.480 For several reasons, among them the attack to the World Trade Center, Alan Griespan very 26 00:04:05.480 --> 00:04:14.560 soon reacted, injecting huge doses of additional great expansion, so that the economy was not 27 00:04:14.560 --> 00:04:19.600 allowed to restructure itself as it needed. 28 00:04:19.600 --> 00:04:29.240 So on the old bubble, a new bubble was superimposed up to now. 29 00:04:29.240 --> 00:04:40.280 So we could say that in a way the trade expansion began from 1992 onwards mainly, with this 30 00:04:40.280 --> 00:04:52.280 A small recession of 2001, but soon you know the central bank and the Federal Reserve reacted. 31 00:04:52.280 --> 00:05:00.880 Central banks worldwide reacted, injecting new additional amounts of credit expansion. 32 00:05:00.880 --> 00:05:09.480 So furthering away the true recession with the cost of making it worse, and it seems 33 00:05:09.480 --> 00:05:24.440 So you expect that if the central bankers succeed in postponing a correction, a substantial 34 00:05:24.440 --> 00:05:31.240 correction, that we could see yet another round of a bubble and yet another crash in 35 00:05:31.240 --> 00:05:32.240 the future? 36 00:05:32.240 --> 00:05:54.240 Well, I don't think so. In fact, I see three different scenarios. The first one would be the one you just mentioned, that they now react so dramatically that they are able to create again a bubble. 37 00:05:54.240 --> 00:06:00.080 I don't think this scenario is something that is going to happen. 38 00:06:00.080 --> 00:06:05.180 I think that the reaction of the governments and central banks now at most, they will be 39 00:06:05.180 --> 00:06:12.320 able to avoid the fall of the financial system, but not to create any bubble. 40 00:06:12.320 --> 00:06:18.880 The second scenario is the scenario of Japan the last 10 years, is that government interventions 41 00:06:18.880 --> 00:06:27.880 and Central Bank Interventions just avoid the free market restructuring. 42 00:06:27.880 --> 00:06:33.280 So the economy is kept indefinitely in a recession. 43 00:06:33.280 --> 00:06:40.960 The third scenario is that even if we do not have the short-term financial crisis, the 44 00:06:40.960 --> 00:06:52.880 begins to try to discover where the errors of investment were committed and try to restructure 45 00:06:52.880 --> 00:06:55.280 the real economy. 46 00:06:55.280 --> 00:07:04.680 So I think this scenario is the most probable and I expect a worldwide economic recession 47 00:07:04.680 --> 00:07:10.320 at least for the next one year, one year and a half or two years. 48 00:07:10.320 --> 00:07:13.560 In Japan, it lasted something like 10 years. 49 00:07:13.560 --> 00:07:16.400 Yes, more or less, yeah. 50 00:07:16.400 --> 00:07:23.360 The Japanese economy is a very rigid one, for several reasons, cultural and others. 51 00:07:23.360 --> 00:07:29.040 It is not allowed, you know, people being fired and companies being restructured. 52 00:07:29.040 --> 00:07:36.920 So everybody kept, in theory, at least their artificial jobs, and the economy was not allowed 53 00:07:36.920 --> 00:07:38.520 to restructure. 54 00:07:38.520 --> 00:07:53.520 Part of the restructuring would be higher unemployment and lower productivity? 55 00:07:53.520 --> 00:08:00.960 Higher unemployment, of course, because what happened in the years of the bubble is that 56 00:08:00.960 --> 00:08:12.600 It was so cheap that many entrepreneurs began new investments that are maturing in the future, 57 00:08:12.600 --> 00:08:20.280 that is in the longer future, as if the real savings of the economy were increased when 58 00:08:20.280 --> 00:08:23.600 in fact this didn't happen. 59 00:08:23.600 --> 00:08:30.080 So those investment decisions were wrong and now they are discovered and it is necessary 60 00:08:30.080 --> 00:08:41.000 to reallocate the scarce resources and especially labor from the lines that were wrongly committed 61 00:08:41.000 --> 00:08:44.660 to new lines that should be profitable. 62 00:08:44.660 --> 00:08:50.720 So in the meantime this creates an important amount of unemployment and this is inevitable 63 00:08:50.720 --> 00:08:54.160 and it's also a healthy sign that the market is reacting. 64 00:08:54.160 --> 00:09:01.160 Yes, you have seen them. In fact, during this crisis, we have seen the market responding very well, haven't we? 65 00:09:01.160 --> 00:09:11.160 Yes, indeed. And it is funny because you sometimes hear and read that this proves that the market is not working well. 66 00:09:11.160 --> 00:09:20.160 Even I read a few days ago that this was like the fall of the Berlin Wall, but on the contrary, for the capitalist system. 67 00:09:20.160 --> 00:09:28.200 And I'm always answering the same thing, that probably the financial sector is the most intervened 68 00:09:28.200 --> 00:09:33.520 sector, the most hampered sector in the economy. 69 00:09:33.520 --> 00:09:40.920 So if the current financial crisis is showing something, it's the failure of interventionism, 70 00:09:40.920 --> 00:09:43.800 especially in the financial area. 71 00:09:43.800 --> 00:09:53.240 It's true a central planning system, let us recapitulate a little bit. 72 00:09:53.240 --> 00:09:57.000 First of all, money is not private, it's public, it was nationalized. 73 00:09:58.200 --> 00:10:04.760 Second, we have a central planning agency in the financial arena that is called the Central Bank 74 00:10:04.760 --> 00:10:09.800 or in the States the Federal Reserve. This central planning agency 75 00:10:09.800 --> 00:10:21.040 Theory, establishes the monetary supply and even it fixes a very important market price, 76 00:10:21.040 --> 00:10:24.200 the interest rate. 77 00:10:24.200 --> 00:10:31.240 Also there are a huge amount of regulations and finally private bankers do act with a 78 00:10:31.240 --> 00:10:43.680 The privilege of fractional reserve, a privilege that no other economic agents can follow in 79 00:10:43.680 --> 00:10:46.240 the rest of the market. 80 00:10:46.240 --> 00:10:52.400 So if this is a free market in the financial area, I would be very surprised that everybody 81 00:10:52.400 --> 00:10:54.920 in Paris shall think this is a free market. 82 00:10:54.920 --> 00:11:01.720 So this is a very intervened and hampered financial market and the financial crisis is just the 83 00:11:01.720 --> 00:11:10.720 proof that the central planning agency, mainly central banks, were not able to fine-tune 84 00:11:10.720 --> 00:11:12.720 the economy. 85 00:11:12.720 --> 00:11:22.000 One of the arguments of your book that makes it unique is that you have demonstrated that 86 00:11:22.000 --> 00:11:27.000 Fractional Reserve Banking is not viable in a market setting. 87 00:11:27.000 --> 00:11:31.000 Yeah, that's very important. 88 00:11:31.000 --> 00:11:37.000 And this is precisely the point that separates my analysis from the analysis of modern, 89 00:11:37.000 --> 00:11:42.000 even Austrian fractional reserve free bankers. 90 00:11:42.000 --> 00:11:51.000 The theory I developed in the book is that not only from a legal and ethical point of view, 91 00:11:51.000 --> 00:12:21.000 The theory that fractional reserve banking is not acceptable, but that also from an economic point of view, fractional reserve banking is prone to financial crisis, that whenever they appear, create an available incentive from all economic agents to ask for the creation of a lender of last resort, of a central bank, precisely to support 92 00:12:21.000 --> 00:12:51.000 the bankers with difficulties and also to try to guarantee the deposits of the people and now with this crisis, with many other crisis in the past, for instance with the so called Corralito in Argentina, we realize how strong is the force of everybody requesting the help of government, more government, the support of central banks and lenders of last resort in order to keep the deposits guaranteed 93 00:12:51.000 --> 00:12:53.680 and to maintain banks with difficulties. 94 00:12:53.680 --> 00:12:54.720 It is very strong. 95 00:12:54.720 --> 00:12:59.080 In fact, it's surprising the intolerance 96 00:12:59.080 --> 00:13:04.080 that people have towards not only declining stock prices, 97 00:13:04.480 --> 00:13:07.860 but also any bank, any financial institution 98 00:13:07.860 --> 00:13:09.660 that ever has any trouble. 99 00:13:09.660 --> 00:13:13.120 Most people feel like it should be saved. 100 00:13:13.120 --> 00:13:16.720 Yeah, so what happens is the following, 101 00:13:16.720 --> 00:13:19.960 that the deposit contract, the main cause of the contract 102 00:13:19.960 --> 00:13:29.960 to keep every time the availability of the money. Of course, if people can get interest, much better for them. 103 00:13:29.960 --> 00:13:37.960 And they are cheating themselves because what happens is that the bank loans the money received as a deposit. 104 00:13:37.960 --> 00:13:45.960 So from the moment the banks act in this way, they are not any more solvent. They cannot comply with the original contract of the deposit. 105 00:13:45.960 --> 00:13:52.280 So everybody is happy up to the moment they lose their confidence in banks. 106 00:13:52.280 --> 00:14:02.080 So all this trouble disappears if this kind of a contract, a deposit without 100% reserve 107 00:14:02.080 --> 00:14:04.080 ratio is not allowed. 108 00:14:04.080 --> 00:14:12.520 As a matter of fact, the general principle of private law does not allow not to maintain 109 00:14:12.520 --> 00:14:21.520 100% reserve ratios in any deposits, side deposits, no matter if it is money, oil or wheat. 110 00:14:21.520 --> 00:14:30.920 So, it's only in banking that this privilege is permitted and mostly to benefit both the 111 00:14:30.920 --> 00:14:34.600 producer and the consumer, but only temporarily. 112 00:14:34.600 --> 00:14:41.360 You are entirely right, this is a privilege that was granted to private bankers but not 113 00:14:41.360 --> 00:14:44.880 to any other economic agent. 114 00:14:44.880 --> 00:14:49.120 And it was granted for several reasons, I discuss in my book, among other things, because 115 00:14:49.120 --> 00:14:55.680 with these privileged bankers are able to create money from nothing through the banking 116 00:14:55.680 --> 00:14:56.680 multiplier. 117 00:14:56.680 --> 00:15:06.240 And it is a way to find cheap finance to governments and everybody is happy, at least at the beginning, 118 00:15:06.240 --> 00:15:14.600 in the Bubbles, because it seems that you can have the availability of money and at 119 00:15:14.600 --> 00:15:20.560 the same time to receive interest, and there is availability of credits and very cheap 120 00:15:20.560 --> 00:15:26.840 interest rates, and it seems as if the economy could grow a lot without the need of making 121 00:15:26.840 --> 00:15:34.600 the sacrifice of saving, so everybody is happy with the credit expansion. 122 00:15:34.600 --> 00:15:43.880 What I explain in the book is that the market sooner or later reacts, discovering the errors, 123 00:15:43.880 --> 00:15:51.720 discovering the true value of malinvestments and when this begins the assets, the value 124 00:15:51.720 --> 00:15:57.960 of the assets of the banks goes down and everybody realizes that banks are insolvent and the 125 00:15:57.960 --> 00:16:04.240 financial crisis immediately comes and this is what we experienced the last few weeks. 126 00:16:04.240 --> 00:16:18.240 Is it possible to have something like a modern commercial society under 100% reserves? Is it really a viable plan for modernization? 127 00:16:18.240 --> 00:16:31.240 Yes, of course. The question should be the opposite. How is possible that we keep the current financial system at the beginning of the 21st century 128 00:16:31.240 --> 00:16:36.240 In this kind of volatility and financial crisis, it is almost unbelievable. 129 00:16:36.240 --> 00:16:44.240 Everybody comes from a historical accident, from Bill's Bank Act of 1844. 130 00:16:44.240 --> 00:16:55.240 In this act, it was required to keep 100% reserve ratio, but only for the printing of paper bills, 131 00:16:55.240 --> 00:17:03.400 that in those days British bankers were printing, as any other private bankers worldwide, but 132 00:17:03.400 --> 00:17:11.240 the law forgot to require the same 100% reserve ratio for demand deposits. The reason for that 133 00:17:11.240 --> 00:17:18.440 is that in those days the economists had not a clear idea yet that the demand deposits were part 134 00:17:18.440 --> 00:17:27.640 of the Monetary Supply as were the paper bills. So what happened is that from this law on, 135 00:17:27.640 --> 00:17:37.080 bankers kept making credit expansion but using as collateral the deposits, not the paper bills. 136 00:17:37.080 --> 00:17:47.200 So what happened is that after the law, the cycles were not avoided. The prestige of the 137 00:17:47.200 --> 00:18:13.360 Expansion Against Deposits, The Central Bank of England appeared as a lender of last resort, 138 00:18:13.360 --> 00:18:26.880 and printing as many paper pounds as needed in order to keep bankers afloat and this went 139 00:18:26.880 --> 00:18:37.480 up to now because all the financial systems in the western world were following the British 140 00:18:37.480 --> 00:18:47.000 system created from this law, Pills Bank Act of 1844. But imagine if this law were correct 141 00:18:47.000 --> 00:18:53.360 and required 100% reserve ratio for both, not only for paper bills but also for deposits. 142 00:18:53.360 --> 00:19:01.000 So the economic history of the world would have been entirely different. Because artificial 143 00:19:01.000 --> 00:19:07.940 Federal credit expansions would not be allowed by the financial system and bankers would 144 00:19:07.940 --> 00:19:16.940 be making loans only against money borrowed previously to them, so a much more perfect 145 00:19:16.940 --> 00:19:26.700 matching between real savings and credits would have been in the market. 146 00:19:26.700 --> 00:19:30.620 So no bubbles and no recession. 147 00:19:30.620 --> 00:19:40.620 The moment of economic growth would be much more stable and sustainable, and it is inevitable. 148 00:19:40.620 --> 00:19:46.780 I think that in the 21st century the main challenge we have is to, once we have experienced 149 00:19:46.780 --> 00:19:52.620 the fall of the Berlin Wall and the fall of the Socialism, the next step that we must fight 150 00:19:52.620 --> 00:19:57.300 for is the fall of Socialism in the financial arena. 151 00:19:57.300 --> 00:20:03.340 But it's getting worse, and it's been getting worse now for at least a century. 152 00:20:03.340 --> 00:20:10.100 Every time these crises come along, the banking system is further centralized. 153 00:20:10.100 --> 00:20:15.780 Yeah well, there is a kind of cycle of regulation also. 154 00:20:15.780 --> 00:20:22.580 Whenever we have a financial crisis, a huge mess of new regulations are created by central 155 00:20:22.580 --> 00:20:33.860 Bankers, but with no result because credit expansion begins again and a new bubble appears 156 00:20:33.860 --> 00:20:36.420 and a new burst. 157 00:20:36.420 --> 00:20:45.380 So the only radical reform with everything would be around three points, first of all 158 00:20:45.380 --> 00:20:52.540 to privatize money, second to eliminate central bankers and all their regulations, and third 159 00:20:52.540 --> 00:21:06.540 This is the most important, to submit bankers to the general legal principles, so that they are not able to keep demand deposits without 100% reserve ratio. 160 00:21:06.540 --> 00:21:20.540 This more or less is the same as separating the business of making money, extracting money from the mines, gold, and providing cash services and accounting services, 161 00:21:20.540 --> 00:21:28.020 Mises, separating this kind of business from a different, entirely different business of 162 00:21:28.020 --> 00:21:41.980 mutual funding investment or investment banking, taking loans from citizens or borrowing from 163 00:21:41.980 --> 00:21:48.300 individual private citizens and making loans to entrepreneurs as pure intermediaries. 164 00:21:48.300 --> 00:22:05.300 So, it is necessary to separate these two businesses, following the principles I announced you, and as a matter of fact, it seems as if the new regulations that are announced are in a way, in a very, you know, in perfect way toward this direction. 165 00:22:05.300 --> 00:22:26.300 Yes, I can see this. Part of the problem of permitting fractional reserves with demand deposits is precisely this issue that people benefit in the short run from fractional reserves and then it leads to crisis and that leads to a call to bail out the banks. 166 00:22:26.300 --> 00:22:38.820 So, would you favor statutory restrictions on fractional reserves or is it just simply 167 00:22:38.820 --> 00:22:43.980 a matter of enforcing contracts as they would be enforced in any other sector of commercial 168 00:22:43.980 --> 00:22:44.980 society? 169 00:22:44.980 --> 00:22:49.220 Well, I think it's a matter of enforcing contracts. 170 00:22:49.220 --> 00:22:54.860 So the general principle in private law is that in any deposit, 100 percent of what you 171 00:22:54.860 --> 00:23:01.860 When you say privatized money, do you imagine private production? 172 00:23:24.860 --> 00:23:34.260 Yes, of course. For me, money is commodity money, and especially the money that was selected 173 00:23:34.260 --> 00:23:41.340 as a result of the historical evolution, mainly gold. Of course, we don't know if gold would 174 00:23:41.340 --> 00:23:47.180 be kept in the future evolution, but what is needed is to go back up to the moment in 175 00:23:47.180 --> 00:23:56.460 in which the market inclusion of money was stopped violently when gold was expropriated 176 00:23:56.460 --> 00:24:02.940 and money nationalized by governments and central banks. 177 00:24:02.940 --> 00:24:06.160 Let me ask you about Spain today. 178 00:24:06.160 --> 00:24:13.020 What is the economic situation there in light of the financial crisis? 179 00:24:13.020 --> 00:24:23.500 Well, Spain was included in the monetary unit at the beginning of the century, so now we 180 00:24:23.500 --> 00:24:33.860 have the euro as money and this was in a way healthy for the country because the former 181 00:24:33.860 --> 00:24:44.860 In theory, the euro was increasing in its supply at an incredible rate, so the euro 182 00:24:44.860 --> 00:24:53.140 has been increasing in theory at a lower rate, interest rates went down, but what happened 183 00:24:53.140 --> 00:24:58.500 is the following, is that the increase in the monetary supply in Europe has not been 184 00:24:58.500 --> 00:25:02.180 distributed evenly among the different countries. 185 00:25:02.180 --> 00:25:15.020 The monetary supply increased at least three times quicker in Spain, Ireland and other 186 00:25:15.020 --> 00:25:18.620 periphery countries than in Germany and France. 187 00:25:18.620 --> 00:25:26.860 This happened through what Mises called passive inflationism, so people asking credits to 188 00:25:26.860 --> 00:25:34.740 Bankers, and credit bankers providing those credits at a very rapid pace. 189 00:25:34.740 --> 00:25:40.980 Well, this new money, this great expansion, especially effectiveness, I tell you, in these 190 00:25:40.980 --> 00:25:48.420 periphery countries, Ireland, Spain, and so on, was mainly invested in real estate. 191 00:25:48.420 --> 00:25:55.780 So we have now in Spain, well, for several years, we were building in Spain as many houses 192 00:25:55.780 --> 00:26:01.260 as in all the other countries of the European Union together. 193 00:26:01.260 --> 00:26:10.740 So we were building around 700,000 homes per year, which is comparable to adding up all 194 00:26:10.740 --> 00:26:16.980 the homes that were built in France, Italy, Germany, England together. 195 00:26:16.980 --> 00:26:26.180 And well, those houses were built, were bought by Spanish citizens, foreigners, immigrants 196 00:26:26.180 --> 00:26:31.060 and investors, but now we have a problem of malinvestment. 197 00:26:31.060 --> 00:26:37.940 We have around one million homes that cannot buy, cannot find a buyer. 198 00:26:37.940 --> 00:26:45.900 And this is creating huge problems to real estate companies and especially to bankers 199 00:26:45.900 --> 00:26:51.100 that make the loans to those developers. 200 00:26:51.100 --> 00:26:54.180 And the country entered in an economic recession. 201 00:26:54.180 --> 00:27:01.780 For instance, car sales went down 40%. 202 00:27:01.780 --> 00:27:13.300 People using private highways went down around 10%. 203 00:27:13.300 --> 00:27:27.300 The restaurants are empty now, so we are suffering, I think the first country is suffering a huge recession in the European Union and I expect the other countries will enter after us. 204 00:27:27.300 --> 00:27:31.300 Yes, that sounds remarkably like the United States actually. 205 00:27:31.300 --> 00:27:47.300 Well, there is just one difference, is that you in the States, instead of keeping the homes without selling them, you just sold the homes to the first one coming, to those called ninjas, no income, no job, etc., people. 206 00:27:47.300 --> 00:27:57.300 No, here in Spain we were a little bit more sensible and kept the homes without selling them. 207 00:27:57.300 --> 00:28:02.300 That's right. So we just added another layer of absurdity to this process. 208 00:28:02.300 --> 00:28:08.300 Well, the American system is better for real estate developers, but worse for bankers. 209 00:28:11.300 --> 00:28:17.300 Well, I suppose you expect the situation in Spain even to get worse rather than better in the near term. 210 00:28:17.300 --> 00:28:30.300 Well, if we begin earlier, we are somewhat fortunate because we lost the possibility of using an independent monetary policy. 211 00:28:30.300 --> 00:28:35.300 Because the monetary policy is established centrally by Frankfurt, by the European Central Bank. 212 00:28:35.300 --> 00:28:40.300 And the government is practically doing nothing, which is something quite good, 213 00:28:40.300 --> 00:28:48.300 This will force the market to find where the errors were committed and will force the unemployment 214 00:28:48.300 --> 00:28:50.760 and the restructuring of the economy. 215 00:28:50.760 --> 00:28:53.940 So if this goes in this way, I'm a little bit optimistic. 216 00:28:53.940 --> 00:29:00.780 Following Mises, I always explain that a recession is the healthy phase of the cycle in which 217 00:29:00.780 --> 00:29:03.100 the market begins the recovery. 218 00:29:03.100 --> 00:29:18.100 It's like the hangover after you drank the alcohol. The hangover is just the reaction of the body against the aggression of the alcohol. 219 00:29:18.100 --> 00:29:19.100 So in a way... 220 00:29:19.100 --> 00:29:25.100 If we begin earlier in Spain, eventually we will begin to recover earlier also. 221 00:29:25.100 --> 00:29:29.100 So it's a benefit to Spain that the central bank is gone? 222 00:29:29.100 --> 00:29:49.100 Yes, the central bank. I think it's something good. Imagine monetary nationalism, each tiny country in Spain with its own monetary supply, depreciating its own currency in a competitive way. This could be a huge mess. 223 00:29:49.100 --> 00:30:01.100 Well, you've given me the idea that perhaps we need to get the Federal Reserve to move to Montreal, or even better, something like the Pacific Ocean. 224 00:30:01.100 --> 00:30:10.700 The goal would be to hold the Federal Reserve and the European Central Bank, but it is even 225 00:30:10.700 --> 00:30:19.260 worse to have your own currency in Alabama, in Texas, and able to make an inflation. This 226 00:30:19.260 --> 00:30:28.140 is the goal of monetary nationalism that was praised so much by Keynes and also by Chicago 227 00:30:28.140 --> 00:30:39.340 I would like to run a little bit technical, but to stress is that the change in the accounting 228 00:30:39.340 --> 00:30:46.940 rules has been very, you know, affecting, worsening the situation. 229 00:30:46.940 --> 00:30:53.100 Accounting rules were following traditional principles of prudency since Luca Pacioli 230 00:30:53.100 --> 00:31:02.500 Luca Pacioli was the professor of mathematics of Leonardo da Vinci, but he also wrote the 231 00:31:02.500 --> 00:31:09.020 first textbook on accounting, on double entry accounting. 232 00:31:09.020 --> 00:31:15.700 So this gentleman sent out his book on the principle of prudency. 233 00:31:15.700 --> 00:31:22.260 The goal of accountancy is to help entrepreneurs to keep their capital intact. 234 00:31:22.260 --> 00:31:29.220 As a matter of fact, there is an interesting article by Hayek, in a debate he kept with 235 00:31:29.220 --> 00:31:34.980 Pigou, precisely entitled in this way, Keeping Capital Impact. 236 00:31:34.980 --> 00:31:37.700 So the goal of accountancy should be that. 237 00:31:37.700 --> 00:31:43.180 Well, what happened with the new accounting rules is that a new principle was included, 238 00:31:43.180 --> 00:31:50.060 What is called the fair value? This is a semantic trap because who is going to be against something 239 00:31:50.060 --> 00:31:57.460 fair? This means that the principle of currency is forgotten and it is substituted by the 240 00:31:57.460 --> 00:32:05.220 so-called mark-to-market value. This is a huge problem because in the bubble years the 241 00:32:05.220 --> 00:32:10.660 market value of the assets goes up and up and up and this is reflected with the new 242 00:32:10.660 --> 00:32:19.700 Accounting Rules in the books, and everybody thinks it's much richer than they are really, 243 00:32:19.700 --> 00:32:27.460 especially companies, bankers, and everybody's thinking they have much more net worth and 244 00:32:27.460 --> 00:32:32.420 takes much greater risks. 245 00:32:32.420 --> 00:32:40.980 What happens is that all of a sudden, when the burst comes, all this artificial wealth 246 00:32:40.980 --> 00:32:56.100 disappears, especially because the new principles increase volatility, they in a way push entrepreneurs 247 00:32:56.100 --> 00:33:01.820 to commit more wrongly investments. 248 00:33:01.820 --> 00:33:12.700 So the new accounting rules are making problems worse and one of the main important steps 249 00:33:12.700 --> 00:33:17.820 that we should take is to go back to the traditional accounting principles. 250 00:33:17.820 --> 00:33:18.820 Yes. 251 00:33:18.820 --> 00:33:23.180 Imagine these rules, as a matter of fact, were developed by a private committee in London 252 00:33:23.180 --> 00:33:31.300 mainly composed by investment bankers, people benefiting from the new hypothesis, auditors 253 00:33:31.300 --> 00:33:38.540 and so on. Accounting is too important to be left in the hands of the auditors. It's 254 00:33:38.540 --> 00:33:44.540 like the war, it's too important to be left in the hands of generals. 255 00:33:44.540 --> 00:33:48.740 You discuss some of the issues of accounting in your book, is that right? 256 00:33:48.740 --> 00:33:53.420 Yes, but as a matter of fact I'm trying now to write an article on this matter because 257 00:33:53.420 --> 00:34:00.740 it's funny, now a lot of financial institutions you have read probably that in this plan of 258 00:34:00.740 --> 00:34:07.740 Henry Paulson, it was included changes in the accounting rules toward the goal I mentioned, 259 00:34:07.740 --> 00:34:09.660 and also in Europe. 260 00:34:09.660 --> 00:34:14.620 What happened is that financial institutions realized about this problem, but only now 261 00:34:14.620 --> 00:34:20.300 where they are losing money, where the market discovered that the value of the assets is 262 00:34:20.300 --> 00:34:21.300 so low. 263 00:34:21.300 --> 00:34:26.180 But these institutions were very happy in the bubble years with the new rules. 264 00:34:26.180 --> 00:34:32.580 What I'm saying is that the new rules are very bad in both parts of the cycle, in the 265 00:34:32.580 --> 00:34:34.340 bubble years and now. 266 00:34:34.340 --> 00:34:40.940 And that the important role of the traditional principle of prudency should be kept all around 267 00:34:40.940 --> 00:34:51.340 the cycle, especially to avoid this false sensation of wealthiness in the bubble years. 268 00:34:51.340 --> 00:34:54.780 Accounting is the language of business. 269 00:34:54.780 --> 00:35:21.780 Well, I hope that the sales in your book are not merely an artificial bubble and that they will continue as we just go on because it is doing very well. We are going to move into a second printing. 270 00:35:21.780 --> 00:35:28.780 And if you would stay on the line, I'll say goodbye to you for the purpose of the podcast, Dr. De Soto, and I hope to have you back again.