WEBVTT NOTE A Recent History of the Federal Reserve 1 00:00:00.000 --> 00:00:08.360 I have only had two comments made about my work by the Fed. On both occasions, an official 2 00:00:08.360 --> 00:00:13.240 spokesman for the Fed was asked to comment on stories that I had published relating to 3 00:00:13.240 --> 00:00:20.840 what they were doing, but on each occasion he said it was a lot of baloney. As it turned 4 00:00:20.840 --> 00:00:30.600 And out both the stories were very close to the mark and I was able to say subsequently 5 00:00:30.600 --> 00:00:43.920 the spokesman for the Fed was a liar, which is not an uncommon experience of anybody dealing 6 00:00:43.920 --> 00:01:02.280 I had a very bad training academically for a life devoted to writing about the dreadful 7 00:01:02.280 --> 00:01:06.440 things that governments and central banks do. 8 00:01:06.440 --> 00:01:16.920 I was educated at the University of Western Australia, which has had the advantage that 9 00:01:16.920 --> 00:01:24.860 when I applied to go to the University of Cambridge in England, my then supervisor at 10 00:01:24.860 --> 00:01:30.760 Cambridge upon receiving my application said that anybody who had managed to survive the 11 00:01:30.760 --> 00:01:35.760 The University of Western Australia must be good and they simply had to have him at Cambridge. 12 00:01:35.760 --> 00:01:48.760 When I went to Cambridge, I was educated, if you could use that word very loosely, 13 00:01:48.760 --> 00:01:55.760 by people such as Richard Cairn, Cairn's disciple who invented the multiplier, 14 00:01:55.760 --> 00:02:09.000 Joan Robinson was a Marxist, Nikki Kaldor was a quasi-socialist, Richard Goodwin an 15 00:02:09.000 --> 00:02:17.560 American communist on the land from the MacArthur Committee. I didn't have a hope. 16 00:02:17.560 --> 00:02:25.920 Anyway, I managed to regurgitate their ideas sufficiently well that I got a 17 00:02:25.920 --> 00:02:32.000 number of prizes while I was at Cambridge. I went into the Australian 18 00:02:32.000 --> 00:02:39.240 government service in the Treasury and soon found out what an appalling mess 19 00:02:39.240 --> 00:02:45.640 government really is. I got out of the Treasury and spent the rest of my 20 00:02:45.640 --> 00:02:51.640 and my professional career, opposing governments and all their works. 21 00:02:53.640 --> 00:02:58.640 This was not a risk-free occupation. 22 00:02:59.640 --> 00:03:07.640 As in 1968, I became so unpopular with the Australian government, 23 00:03:07.640 --> 00:03:19.640 having caused, I suppose, it would be fair to say, the breakdown and collapse of the government in 1968. 24 00:03:19.640 --> 00:03:29.640 That the powers that be in that government, who were very dirigist minded, raided my house, 25 00:03:29.640 --> 00:03:40.640 14 Commonwealth Police and tried to put me in jail for seven years for my knowledge of Her Majesty's Secrets. 26 00:03:40.640 --> 00:03:51.640 In Australia it is not only illegal to give out Her Majesty's Secrets, it is also illegal to receive Her Majesty's Secrets. 27 00:03:51.640 --> 00:03:55.640 And I had received a lot of them. 28 00:03:55.640 --> 00:04:03.520 Anyway, I sued the Commonwealth government for a legal entry on my premises and won in 29 00:04:03.520 --> 00:04:10.200 an important landmark decision that severely limited the Commonwealth police powers of 30 00:04:10.200 --> 00:04:12.360 entry, search and seizure. 31 00:04:12.360 --> 00:04:19.840 So my attitude towards the works of governments is somewhat juandist. 32 00:04:19.840 --> 00:04:27.280 And today I'd like to talk about a title called The Enemies of Freedom are Alive and Well 33 00:04:27.280 --> 00:04:29.280 in America. 34 00:04:29.280 --> 00:04:34.160 A remarkable success has been achieved in American economic policy in the last four 35 00:04:34.160 --> 00:04:35.480 years. 36 00:04:35.480 --> 00:04:41.120 Inflation has been smashed and has stayed beaten during the most vigorous recovery we 37 00:04:41.120 --> 00:04:43.640 have had for 40 years. 38 00:04:43.640 --> 00:04:50.440 By now we are almost at the end of the second year in recovery from the 1978-82 recession, 39 00:04:50.440 --> 00:04:53.520 the longest recession in 50 years. 40 00:04:53.520 --> 00:04:58.680 Yet all the principal indicators of inflation are still showing negligible increases. 41 00:04:58.680 --> 00:05:03.760 The rate of inflation in America is in the range of 3 to 4 percent a year, and the United 42 00:05:03.760 --> 00:05:11.360 States has provided the driving force in the world economic expansion since 1982, far outstripping 43 00:05:11.360 --> 00:05:15.900 Other Major Industrial Nations and Growth of Employment and Output 44 00:05:15.900 --> 00:05:26.400 Commodity prices today are only 10% above the all-time low reached at the bottom of the longest recession at the end of 1982. 45 00:05:26.400 --> 00:05:33.100 Commodity futures prices are 25% lower than the inflationary peak reached in 1980. 46 00:05:33.100 --> 00:05:37.560 The real price of oil has fallen by more than a quarter from its peak. 47 00:05:37.560 --> 00:05:42.400 Stock prices have risen 50% since their 1982 bottom. 48 00:05:42.400 --> 00:05:45.040 Nominal interest rates have tumbled. 49 00:05:45.040 --> 00:05:52.160 The prime rate has dropped from an average of 19% in 1981 to 12.5% today. 50 00:05:52.160 --> 00:05:59.000 It's even possible to believe that the United States economy will achieve a soft landing in 1985, 51 00:05:59.000 --> 00:06:04.800 passing from the necessarily above-average growth rate in the recovery phase from the recession 52 00:06:04.800 --> 00:06:10.240 to the necessarily lower growth rate that is possible over a long period of time, 53 00:06:10.240 --> 00:06:14.480 the feasible or secular growth rate set by wide parameters, 54 00:06:14.480 --> 00:06:19.120 such as the rate of growth of productivity and population. 55 00:06:19.120 --> 00:06:24.200 Such a soft landing has been the dream of economists for 40 years. 56 00:06:24.200 --> 00:06:32.280 In the 1960s and 1970s, when Washington was invaded by a team of ambitious and arrogant economists 57 00:06:32.280 --> 00:06:47.280 Under Presidents Kennedy, Johnson, Nixon, Ford and Carter, it was believed that fine-tuning of the American economy would make the achievement of a soft landing from economic recovery to long-term growth a rather easy matter. 58 00:06:47.280 --> 00:06:59.280 Experience has shown that fine-tuning assumes a degree of knowledge and a degree of skill that is far beyond the present capabilities of the economics profession. 59 00:06:59.280 --> 00:07:04.280 Tinkering made things far worse than they need have been. 60 00:07:04.280 --> 00:07:09.280 The arrogance of economists far exceeds their understanding 61 00:07:09.280 --> 00:07:14.280 and their ability to forecast with any accuracy at all. 62 00:07:14.280 --> 00:07:17.280 Let's be quite clear at this. 63 00:07:17.280 --> 00:07:21.280 At this very moment, at the end of October 1984, 64 00:07:21.280 --> 00:07:27.280 there is a debate beginning to develop about the appropriate stance of Federal Reserve policy. 65 00:07:27.280 --> 00:07:33.360 It appears that the Federal Reserve has frozen the money stock for the last five months and 66 00:07:33.360 --> 00:07:41.580 this money freeze has precipitated a weakness in the economy and a weakness in credit demand 67 00:07:41.580 --> 00:07:47.000 that has in turn been reflected in a collapse of short-term interest rates and an important 68 00:07:47.000 --> 00:07:48.000 bond rally. 69 00:07:48.000 --> 00:07:54.200 Soon, I believe, the Federal Reserve will be pressed to expand the money supply vigorously 70 00:07:54.200 --> 00:07:57.800 in order to avoid a recession in 1985. 71 00:07:57.800 --> 00:08:02.400 Meanwhile, many influential economists, friends of mine, 72 00:08:02.400 --> 00:08:05.920 have been warning the Federal Reserve to contain money growth 73 00:08:05.920 --> 00:08:09.560 in order to ward off an approaching inflation. 74 00:08:09.560 --> 00:08:12.680 These people, including Milton Friedman 75 00:08:12.680 --> 00:08:16.600 and the eminent economists on the Shadow Open Market Committee, 76 00:08:16.600 --> 00:08:20.640 predicted an inflation this year that has not happened. 77 00:08:20.640 --> 00:08:24.320 They predicted a recession this year that has not happened. 78 00:08:24.320 --> 00:08:30.480 The last year has been a graveyard of reputations among economists. 79 00:08:30.480 --> 00:08:33.480 This should be a warning to us. 80 00:08:33.480 --> 00:08:38.880 Economists have been far too willing to tell the country what to do when their own knowledge 81 00:08:38.880 --> 00:08:44.080 and forecasting skills are abysmally deficient. 82 00:08:44.080 --> 00:08:49.820 But the arrogance of economists was not the only deterrent to the United States achieving 83 00:08:49.820 --> 00:09:12.340 In the last 15 years, an attempt has been made to transform the United States into a socialist 84 00:09:12.340 --> 00:09:14.820 economy. 85 00:09:14.820 --> 00:09:18.660 This has gone under the name of the Great Society. 86 00:09:18.660 --> 00:09:23.960 The Great Society programs were initiated by Presidents Kennedy and Johnson, but they were 87 00:09:23.960 --> 00:09:30.280 put into full effect by President Nixon and Arthur Burns, who as Chairman of the Federal 88 00:09:30.280 --> 00:09:38.000 Reserve from 1970 to 1978 financed a fantastic inflation. 89 00:09:38.000 --> 00:09:46.360 The result was that between 1967 and 1983 consumer prices trebled, the worst inflationary 90 00:09:46.360 --> 00:10:01.520 Between 1960 and 1981, the number of dependent Americans, partly or wholly supported by government 91 00:10:01.520 --> 00:10:07.860 handouts, rose from 20 million to over 100 million. 92 00:10:07.860 --> 00:10:16.120 In addition to more than 36 million Americans receiving Social Security, there were 19,788,000 93 00:10:16.120 --> 00:10:24.120 8,287,000 households receiving Medicare, 8,287,000 households receiving Medicaid, 94 00:10:24.120 --> 00:10:35.120 6,769,000 households receiving food stamps, 5,532,000 households receiving school lunches, 95 00:10:35.120 --> 00:10:41.120 2,777,000 households receiving public housing benefits. 96 00:10:41.120 --> 00:10:57.120 In addition, there were 4,019,000 recipients of supplement mental security income, and a further 10,335,000 recipients of aids to families with dependent children. 97 00:10:57.120 --> 00:11:09.120 In 1965, Federal Government social welfare expenditures amounted to 5.7% of gross national product and 32.6% of total Federal outlays. 98 00:11:09.120 --> 00:11:17.520 By 1979, these government's social welfare expenses had ballooned to 11.4% of GNP, twice 99 00:11:17.520 --> 00:11:23.800 the share, and to over 55% of federal government outlays. 100 00:11:23.800 --> 00:11:30.420 To finance this radical shift in the allocation of the nation's spending, a huge inflation 101 00:11:30.420 --> 00:11:33.960 was generated by the use of Federal Reserve credit. 102 00:11:33.960 --> 00:11:41.080 A massive confiscation of wealth occurred between 1965 and 1981. 103 00:11:41.080 --> 00:11:48.160 The real value of municipal bonds fell 85% and the real value of the Dow Jones Industrial 104 00:11:48.160 --> 00:11:54.000 Average of common stocks fell a stunning 61%. 105 00:11:54.000 --> 00:11:59.160 The operation of the economy was further stunted by the massive controls over prices and labour 106 00:11:59.160 --> 00:12:02.640 conditions that was part of the legacy of the New Deal. 107 00:12:02.640 --> 00:12:09.640 The interest rates were controlled. For long periods the external value of the dollar was controlled by the intervention of the Federal Reserve. 108 00:12:09.640 --> 00:12:17.640 Banks were subject to extreme geographical restraints and were forbidden to enter a whole range of financial services businesses. 109 00:12:17.640 --> 00:12:23.640 Capacity was controlled in key industries such as communications, trucking, airlines and shipping. 110 00:12:23.640 --> 00:12:29.640 The whole of the farm sector was subject to qualitative controls on output and hence on prices. 111 00:12:29.640 --> 00:12:37.640 During the 1970s, the American economy was in a straight jacket that was laced up tight during the 1930s. 112 00:12:37.640 --> 00:12:46.640 Into this restricted economic corpus, a powerful blast of inflationary hot air was propelled by the Great Society programs, 113 00:12:46.640 --> 00:12:52.640 whose most important enforcers were Richard Nixon and Arthur Burns, traitors to their cause. 114 00:12:52.640 --> 00:12:59.760 Cours. In the 15 years to 1980 a program of wealth confiscation by inflation was 115 00:12:59.760 --> 00:13:05.400 implemented. The result was to pose the most serious threat to the wealth of the 116 00:13:05.400 --> 00:13:12.480 working middle classes and ultimately to the viability of the whole economy. By 117 00:13:12.480 --> 00:13:17.360 1980 there was widespread discussion of the decline of America and the failure of 118 00:13:17.360 --> 00:13:27.360 The Climax of the Attempt to Impose a Socialist Revolution in the United States came in 1979 119 00:13:27.360 --> 00:13:36.840 and 1980. In 1979, consumer prices rose 13% and in 1980 they rose 12%. A financial collapse 120 00:13:36.840 --> 00:13:44.280 was in the making. Yet, four years later, we can think of the possibility of America 121 00:13:44.280 --> 00:13:51.600 are moving at last into a phase of non-inflationary economic growth, something we have been seeking 122 00:13:51.600 --> 00:13:55.560 since the beginning of our economic history. 123 00:13:55.560 --> 00:14:02.320 At the end of 1980 federal funds were 19%, today they are 9%. 124 00:14:02.320 --> 00:14:10.120 In 1984 for the third year in a row the rise in consumer prices will be likely under 4%. 125 00:14:10.120 --> 00:14:17.880 In the six quarters ending the second quarter this year, Real GNP rose $150 billion a year 126 00:14:17.880 --> 00:14:20.880 in terms of 1972 prices. 127 00:14:20.880 --> 00:14:27.040 This 18-month increase in Real GNP was more than the entire increase in the five years 128 00:14:27.040 --> 00:14:31.480 between 1977 and 1982. 129 00:14:31.480 --> 00:14:39.760 Who or what was responsible for this astounding transformation? 130 00:14:39.760 --> 00:14:43.120 was not due to the Federal Reserve. 131 00:14:43.120 --> 00:14:47.280 The economic transformation of America in the last four years owes virtually nothing 132 00:14:47.280 --> 00:14:53.840 to the Federal Reserve, the supreme economic policy body in this country. 133 00:14:53.840 --> 00:15:03.480 The annual growth rate of money, M1, since 1977 through 1984 has been, I'll read these 134 00:15:03.480 --> 00:15:15.480 8.1%, 8.2%, 7.2%, 6.6%, 6.5%, 8.7%, 9.3%, 6.9%. 135 00:15:15.480 --> 00:15:20.480 The outstanding characteristic of the growth path of money, M1, the story is virtually 136 00:15:20.480 --> 00:15:27.020 the same for M2 or M3 or total debt, is that year after year there have been only very 137 00:15:27.020 --> 00:15:33.400 minor changes in the average rate of growth of money over this period of eight years. 138 00:15:33.400 --> 00:15:39.120 The Federal Reserve has certainly not been a significant force in smashing inflation. 139 00:15:39.120 --> 00:15:47.560 Rather, it has carried on in its own self-indulgent fashion, contributing nothing to any rectification 140 00:15:47.560 --> 00:15:54.320 of the financial chaos it has perpetrated over the last 17 years. 141 00:15:54.320 --> 00:15:58.360 Nor has Congress made any contribution. 142 00:15:58.360 --> 00:16:03.280 Socialists and other advocates of economic planning who do not like to be called socialists 143 00:16:03.280 --> 00:16:08.580 will have us believe that politicians are the best people to manage our economy, yet Congress 144 00:16:08.580 --> 00:16:13.360 has made no contribution to solving the financial crisis of 1980. 145 00:16:13.360 --> 00:16:19.080 We may measure the inflationary zeal of Congress by reference to the federal budget deficit 146 00:16:19.080 --> 00:16:21.960 and the federal debt. 147 00:16:21.960 --> 00:16:28.640 In the years of rampant inflation from 1976 through 1980, the total federal budget deficit 148 00:16:28.640 --> 00:16:32.720 on a national income account basis was 206 billion. 149 00:16:32.720 --> 00:16:38.740 In the years of declining inflation from 1981 to 1984, the federal budget deficits total 150 00:16:38.740 --> 00:16:47.640 573 billion. It's laughable to suggest, as some economists still do, that fiscal policy 151 00:16:47.640 --> 00:16:54.560 can be used as any part of an armory of fine-tuning this economy. Fiscal policy is a lumbering 152 00:16:54.560 --> 00:17:01.880 elephant smashing the nation's intricate economic machine. And the elephant driver, 153 00:17:01.880 --> 00:17:15.880 The Mahut is a rabble of political monkeys, each seeking some nasty little advantage for himself while the elephant crashes and staggers along, breaking and bending any workable item in its path. 154 00:17:16.880 --> 00:17:22.880 Neither the Central Bank nor Congress contributed a whit to the transformation of the American economy. 155 00:17:23.880 --> 00:17:28.880 The Congress made things much worse. The Federal Reserve is about normally bad. 156 00:17:28.880 --> 00:17:37.880 Several important reforms hold the key to the understanding of America's outstanding success in the last four years. 157 00:17:37.880 --> 00:17:44.880 All these reforms have led to a great increase in the influence of free markets. 158 00:17:44.880 --> 00:17:53.880 First, the invention of the money market mutual funds in 1979 and their explosive growth 159 00:17:53.880 --> 00:17:59.960 Growth, smashed the power of the Federal Reserve to control interest rates. 160 00:17:59.960 --> 00:18:03.780 The Federal Reserve detested the money market mutual funds. 161 00:18:03.780 --> 00:18:09.480 As anyone who has read the ravings of Anthony Solomon, the former governor of New York Fed, 162 00:18:09.480 --> 00:18:16.560 will readily grasp, the Fed wanted to force the money market funds to hold reserves and 163 00:18:16.560 --> 00:18:19.760 to come under the Fed's control. 164 00:18:19.760 --> 00:18:26.100 This did not happen, largely because the politicians who would have had to support such an extension 165 00:18:26.100 --> 00:18:31.100 of the Fed's already excessive powers, knew that the ordinary American with savings to 166 00:18:31.100 --> 00:18:38.380 invest was sick of being robbed by the inflation generated by the Federal Reserve. 167 00:18:38.380 --> 00:18:43.540 With the explosion of the money market mutual funds, the banks demanded and got freedom 168 00:18:43.540 --> 00:18:46.660 to raise the rates they offered on money. 169 00:18:46.660 --> 00:18:53.340 By May 1984, their answer to the money market mutual funds, the money market deposit account, 170 00:18:53.340 --> 00:19:00.180 had ballooned to $395 billion, twice the amount then invested in money market mutual funds 171 00:19:00.180 --> 00:19:03.100 of all kinds. 172 00:19:03.100 --> 00:19:08.660 These fundamental changes in money administration meant a major elevation of the whole structure 173 00:19:08.660 --> 00:19:14.700 of interest rates and a radical change in the return Americans could earn on their savings. 174 00:19:14.700 --> 00:19:24.660 To give an example, in 1979, Prime's six-months commercial paper paid 10.91%. 175 00:19:24.660 --> 00:19:31.620 In that year, inflation was over 13%, so the net return to the lender after inflation was 176 00:19:31.620 --> 00:19:35.900 about minus 2%. 177 00:19:35.900 --> 00:19:42.940 By June 1984, that paper was paying about 11.1%, a little different from the nominal 178 00:19:42.940 --> 00:19:48.940 The story was repeated across the whole spectrum of American money. 179 00:19:48.940 --> 00:19:54.940 High real rates of interest were and are the order of the day. 180 00:19:54.940 --> 00:20:00.940 The bad old days of the rape of savers' wealth through inflation and interest rates, 181 00:20:00.940 --> 00:20:04.940 and the rise in interest rates in the United States, 182 00:20:04.940 --> 00:20:08.940 and the rise in interest rates in the United States, 183 00:20:08.940 --> 00:20:14.560 Some days of the rape of savers' wealth through inflation and interest rate controls have 184 00:20:14.560 --> 00:20:21.460 largely gone, but let us be clear of this, they did not disappear because of some selfless 185 00:20:21.460 --> 00:20:24.360 act by the Federal Reserve. 186 00:20:24.360 --> 00:20:29.260 On the contrary, the Federal Reserve fought tooth and nail against freedom for American 187 00:20:29.260 --> 00:20:38.920 savers right down the line, but the Fed bureaucrats were defeated by ingenious American financiers 188 00:20:38.920 --> 00:20:48.920 The effective deregulation of interest rates after 1980 was pervasive. 189 00:20:48.920 --> 00:20:53.700 It changed radically the relationship between saving and spending by adding some balance 190 00:20:53.700 --> 00:21:00.080 in favour of savings, a balance that had been lacking during the 1970s great inflation when 191 00:21:00.080 --> 00:21:05.600 savings seemed not only foolish but downright irresponsible. 192 00:21:05.600 --> 00:21:10.800 In the financial markets, there was a fundamental change, which I have called the revolt of 193 00:21:10.800 --> 00:21:13.920 the financial markets. 194 00:21:13.920 --> 00:21:19.760 As things worked out, the financial markets, particularly the crucial bond markets, were 195 00:21:19.760 --> 00:21:25.180 free to express their deep-seated suspicion of the Federal Reserve. 196 00:21:25.180 --> 00:21:30.040 As soon as it seemed that the Federal Reserve was excessively increasing the supply of money, 197 00:21:30.040 --> 00:21:35.600 The bond market sold bonds, thus raising bond yields. 198 00:21:35.600 --> 00:21:42.720 Two very important occasions on which this occurred were the end of the 1983 bond rally 199 00:21:42.720 --> 00:21:49.900 in May 1983 and the big bond decline in the first half of 1984. 200 00:21:49.900 --> 00:21:56.600 On both occasions the bond markets cut bond prices and raised yields in response to fears 201 00:21:56.600 --> 00:22:09.840 of Excessive Money Growth and Excessively Exuberant Economic Growth, The Free Dollar. 202 00:22:09.840 --> 00:22:16.440 Upon gaining power in early 1981, one of the first acts of Beryl Sprinkle, Under-Secretary 203 00:22:16.440 --> 00:22:22.400 for Monetary Affairs in the US Treasury, was to make it entirely plain to the Fed officials 204 00:22:22.400 --> 00:22:28.680 The days of official intervention in the foreign exchange markets were over. 205 00:22:28.680 --> 00:22:34.800 Beryl had a little table in his office in the Treasury and a phone on it. 206 00:22:34.800 --> 00:22:36.880 And I said, well, you know, I had to work out Beryl. 207 00:22:36.880 --> 00:22:42.200 And he said, well, when we came here, New York Fed used to ring up every morning 208 00:22:42.200 --> 00:22:47.400 and say, what he wants to do today, Mr. Rear Sprinkle, and I'd say nothing. 209 00:22:47.400 --> 00:23:07.640 In one stroke, a huge new area of freedom was opened up. Imports and exports were deregulated, 210 00:23:07.640 --> 00:23:13.600 and the dollar continued its booming appreciation. This appreciation provided a most powerful 211 00:23:13.600 --> 00:23:21.600 and the World Disinflationary Force. Imports have flooded into America and so has the foreign capital needed to finance those imports. 212 00:23:21.600 --> 00:23:28.600 A major new area of competition for a domestic American industry evolved. 213 00:23:28.600 --> 00:23:31.600 Long way to go. Still got a long way to go. 214 00:23:31.600 --> 00:23:39.600 Free oil markets. In one of his most significant strokes for freedom, President Reagan deregulated the American oil industry. 215 00:23:39.600 --> 00:23:42.960 This has been one of the most spectacular success stories, 216 00:23:42.960 --> 00:23:48.640 showing how free markets will soon rectify seeming shortages and turn them into gluts. 217 00:23:48.640 --> 00:23:57.440 I've only written a very short paragraph about that because I feel that as I'm in Houston I should perhaps word black on that. 218 00:23:57.440 --> 00:24:05.360 The real price of oil has fallen by about one quarter since 1980. I'll now scurry on to the next subject. 219 00:24:05.360 --> 00:24:15.880 The weakness of American unions played a very important part in the successful combination 220 00:24:15.880 --> 00:24:20.120 of strongly rising prosperity and low inflation. 221 00:24:20.120 --> 00:24:26.000 By now, American unions probably command the loyalty of less than 20% of the American labour 222 00:24:26.000 --> 00:24:27.000 force. 223 00:24:27.000 --> 00:24:34.000 Further major reduction in the power of unions has come with the spread of deregulation. 224 00:24:34.000 --> 00:24:40.720 In the past, to take one example, American airline pilots were the envy of the world. 225 00:24:40.720 --> 00:24:44.280 They flew very few hours for very big money. 226 00:24:44.280 --> 00:24:51.920 In fact, I remember talking to many Australian pilots and American pilots used to get $100,000 227 00:24:51.920 --> 00:24:56.680 a year in about 1970 for flying 20 hours a month. 228 00:24:56.680 --> 00:25:01.680 The Australian pilots used to get $30,000 a year for flying 50 hours a month and they 229 00:25:01.680 --> 00:25:11.720 The deregulation of the airline industry meant that old line airlines with highly paid pilots 230 00:25:11.720 --> 00:25:14.720 could not compete with the new intruders. 231 00:25:14.720 --> 00:25:19.680 As deregulation has spread, it has contributed to breaking down the power of unions. 232 00:25:19.680 --> 00:25:24.600 This goes for trucking, for airlines, for communications, for coal. 233 00:25:24.600 --> 00:25:28.200 Import competition has helped break down union power. 234 00:25:28.200 --> 00:25:35.080 The UAW is only able to hope to maintain its present extravagant wage scales because of 235 00:25:35.080 --> 00:25:41.800 the indefensible quotas on the import of Japanese and other foreign cars. 236 00:25:41.800 --> 00:25:47.560 America is the envy of the advanced industrialized world, nevertheless, with their flexible labor 237 00:25:47.560 --> 00:25:48.560 force. 238 00:25:48.560 --> 00:25:51.960 It's certainly the envy of Europe. 239 00:25:51.960 --> 00:25:58.600 Another very important reform was the decline in the influence of economists. 240 00:25:58.600 --> 00:26:04.040 Another important institutional change has been the discrediting of the economics profession. 241 00:26:04.040 --> 00:26:10.440 This is a great step forward, as economists have sought power in government and have largely 242 00:26:10.440 --> 00:26:13.040 abused that power. 243 00:26:13.040 --> 00:26:19.760 Back in the 1950s and 1960s, economists were rising to great influence. 244 00:26:19.760 --> 00:26:26.120 Now it is clear that the study of economics has an extremely fragile basis of verifiable 245 00:26:26.120 --> 00:26:31.960 theory, and a poor to abysmal ability to forecast. 246 00:26:31.960 --> 00:26:38.660 These drawbacks of economics were not completely known in the 1950s and 1960s, except by very 247 00:26:38.660 --> 00:26:45.020 few economists such as Friedrich von Hayek and Ludwig von Mises, who were ridiculed by 248 00:26:45.020 --> 00:26:47.320 the Keynesian economists of the day. 249 00:26:47.320 --> 00:27:08.400 Today however, a couple of decades of abysmal forecasting and arrogant policy making of almost 250 00:27:08.400 --> 00:27:14.920 totally discredited economics as a model for analyzing cyclical movements in modern economies 251 00:27:14.920 --> 00:27:21.840 and for making policy recommendations, it's a joke, economics is a joke. 252 00:27:21.840 --> 00:27:26.520 Economics has been used in the last 20 years as a basis for arguments in favour of the 253 00:27:26.520 --> 00:27:31.120 ever expanding state control over the economic life of the nation. 254 00:27:31.120 --> 00:27:38.900 An Australian economist Jack Crawford once said, of economists I would say, our standing 255 00:27:38.900 --> 00:27:43.600 is too high and our standards are too low. 256 00:27:43.600 --> 00:27:52.880 And I think in the last six months, the crash of reputations on Wall Street has been very, 257 00:27:52.880 --> 00:28:02.640 very loud and I think it's probably indicative of the status that economists have reached 258 00:28:02.640 --> 00:28:15.040 that a clown like Henry Kauffman can continually get up and make various, what shall I say, 259 00:28:15.040 --> 00:28:21.960 utterly inaccurate statements and keep on being able to do it. 260 00:28:21.960 --> 00:28:31.080 Names like Walter Heller, Otto Eckstein, Herb Stein, Arthur Oaken, James Tobin, Gardner 261 00:28:31.080 --> 00:28:43.880 Anna Ackley, Paul Volker and Arthur Burns will go down in infamy. 262 00:28:43.880 --> 00:28:49.060 They were among the many economists who used their skill and knowledge to help destroy 263 00:28:49.060 --> 00:28:52.080 freedom in America. 264 00:28:52.080 --> 00:28:57.440 They thought they could run the American economy from Washington. 265 00:28:57.440 --> 00:29:04.320 We now know that the ability of economists to forecast is so limited as to be laughable, 266 00:29:04.320 --> 00:29:11.840 and accordingly the pretension of economists to manage the American economy are ridiculous. 267 00:29:11.840 --> 00:29:17.480 Under the Reagan administration, the last major holdout of economists with the pretensions 268 00:29:17.480 --> 00:29:24.080 to manipulate the economy and the power to use it is in the Federal Reserve. 269 00:29:24.080 --> 00:29:29.480 That is why it is so important to abolish the central bank, which is a canker on the nation's 270 00:29:29.480 --> 00:29:32.680 healthy body. 271 00:29:32.680 --> 00:29:38.600 And I must admit, although I am a very great admirer of the President, I think that his 272 00:29:38.600 --> 00:29:48.240 failure to deal with the Fed is one of his most important mistakes. 273 00:29:48.240 --> 00:29:53.720 With the departure of Martin Felstein, President Reagan does not have a senior economic policy 274 00:29:53.720 --> 00:30:04.780 The Council of Economic Advisers has degenerated into a redundancy. 275 00:30:04.780 --> 00:30:13.300 The pretensions of economists to hold sway over major policy issues has been squelched. 276 00:30:13.300 --> 00:30:18.600 The means that have been used to smash inflation and to provide a possible soft landing onto 277 00:30:18.600 --> 00:30:42.280 The recent evidence of the stunning success that American capitalism can achieve when 278 00:30:42.280 --> 00:30:48.440 allowed to do so does not mean that the enemies of freedom have been firmly defeated or even 279 00:30:48.440 --> 00:30:59.980 The New Deal is dead, that is true. It has outlived any usefulness it may have had. The 280 00:30:59.980 --> 00:31:06.000 free operation of markets has proved to be a marvellous stimulant to economic success. 281 00:31:06.000 --> 00:31:11.480 But the Federal Reserve bureaucracy remains as large and as pervasive as ever. There is 282 00:31:11.480 --> 00:31:17.120 not a tittle of evidence that Federal Reserve policies have changed. Money growth is excessive 283 00:31:17.120 --> 00:31:27.040 May I give you a specific example of the power held by the Fed? 284 00:31:27.040 --> 00:31:34.320 On September 22, we were told that Mr Gerald Corrigan, a Fed official from Minnesota, had 285 00:31:34.320 --> 00:31:38.480 been appointed to the position of Governor of the New York Fed. 286 00:31:38.480 --> 00:31:44.960 This appointment means that the self-perpetuating oligarchy of the Federal Reserve bureaucracy 287 00:31:44.960 --> 00:32:01.400 has had its way again. Mr Corrigan, a protege of Paul Volcker, has been appointed to the 288 00:32:01.400 --> 00:32:11.320 second most important position in the Federal Reserve on the say-so of Volcker. Volcker is 289 00:32:11.320 --> 00:32:23.320 Mr. Corrigan is just another Fed flunky. He deplores budget deficits. He disbelieves in monetarism. 290 00:32:23.320 --> 00:32:34.320 He's the very epitome of a central banking bureaucrat who is anxious to offload responsibility for mistakes and disasters onto fiscal policy 291 00:32:34.320 --> 00:32:44.320 and always determined to avoid means whereby arrogant bureaucracy can be judged. 292 00:32:44.320 --> 00:32:51.320 Mr. Corrigan sounds like someone who has never advanced in his learning beyond the slogans about the Burns, 293 00:32:51.320 --> 00:32:55.320 the great destroyer of America's money. 294 00:32:55.320 --> 00:33:02.320 Burns fought tooth and nail against congressional interference in the doings of the Fed. 295 00:33:02.320 --> 00:33:09.200 When, in 1975, the Congress imposed rules and targets on the Fed, the Fed officials 296 00:33:09.200 --> 00:33:16.520 lied and cheated their way out of compliance, changing base periods and changing definitions 297 00:33:16.520 --> 00:33:23.720 so that they would not have to obey the laws of the United States. 298 00:33:23.720 --> 00:33:29.720 Mr Corrigan's predecessor at the New York Fed, Mr Anthony Solomon, led a campaign against 299 00:33:29.720 --> 00:33:34.720 The Money Market Mutual Funds, arguing that they should be subject to reserve requirements. 300 00:33:34.720 --> 00:33:40.720 In his 1982 speech to the New York State Bankers Association, Solomon said, 301 00:33:40.720 --> 00:33:47.720 The money funds have introduced potential new complications for monetary control. 302 00:33:47.720 --> 00:33:54.720 Any bureaucrat, a potential complication means something they can't stamp on a control and lock down to the floor. 303 00:33:54.720 --> 00:33:59.720 In my view, said Solomon, these concerns require a legislative response. 304 00:33:59.720 --> 00:34:05.720 Part of the response is to expand the reach of regulatory instruments, wacko. 305 00:34:05.720 --> 00:34:10.720 Faced with the threat to their power from the unregulated money market mutual funds, 306 00:34:10.720 --> 00:34:15.720 Solomon and the Fed officials demanded still more power regulation for the central bank. 307 00:34:15.720 --> 00:34:21.720 Earlier, faced with the threat to their power from unregulated cash management accounts, 308 00:34:21.720 --> 00:34:26.720 Accounts, Solomon said in the 1981 annual report of the New York Fed, 309 00:34:26.720 --> 00:34:33.720 In this new world, the bulk of transaction balances will be paying market-related rates. 310 00:34:33.720 --> 00:34:36.720 That was under the Cash Management Account Scheme. 311 00:34:36.720 --> 00:34:41.720 Thus, all meaningful definitions of money might exhibit the kinds of control problems 312 00:34:41.720 --> 00:34:45.720 that the broad definitions are already beginning to show. 313 00:34:45.720 --> 00:34:50.720 One possible means of remedying such a situation would be to develop legislation, 314 00:34:50.720 --> 00:35:02.720 Defining a transaction is able to, very broadly, perhaps to include all instruments payable at par within a few business days, and then to impose reserve requirements on judge instruments. 315 00:35:02.720 --> 00:35:09.720 Here again we see the characteristic response of these Fed officials. If it gives you trouble, control it. 316 00:35:09.720 --> 00:35:17.720 If it had been left to the likes of Solomon, undoubtedly speaking, with Volcker's authority, the money market funds, the cash management accounts, 317 00:35:17.720 --> 00:35:24.720 and many other of the new financial instruments would have fallen under the control of the Fed and would have been killed. 318 00:35:24.720 --> 00:35:31.720 There would have been interest rate controls, just as there were from the time of the New Deal until 1981, 319 00:35:31.720 --> 00:35:36.720 when the money market mutual funds broke the Fed's control. 320 00:35:36.720 --> 00:35:43.720 That control over interest rates was a fundamental factor leading to confiscation of wealth in the 1970s, 321 00:35:43.720 --> 00:35:51.720 As interest rates were held down by the Fed while they pumped up unprecedented inflation and robbed the American people of their wealth. 322 00:35:53.720 --> 00:36:05.720 What I ask is, why must we allow these unelected officials, responsible to no one but themselves, have the power of life and death over the money of America? 323 00:36:05.720 --> 00:36:08.720 Why do we need these people at all? 324 00:36:08.720 --> 00:36:14.720 They are nothing more than bureaucrats, jacks in office, who have gained the power to control our money. 325 00:36:14.720 --> 00:36:17.720 They have no special insights. 326 00:36:17.720 --> 00:36:26.720 Their theoretical knowledge is just as lacking in value as is all knowledge derived from that most fallible of the social sciences, economics. 327 00:36:26.720 --> 00:36:31.720 They are free to do favours to their clients, the big New York banks. 328 00:36:31.720 --> 00:36:36.720 They have defied Congress and they have cheated and lied to Congress. 329 00:36:36.720 --> 00:36:43.800 I've been astounded at the glutinous reception Mr Corrigan has received in the media. 330 00:36:43.800 --> 00:36:49.640 He is only yet another official whose natural instinct has expanded his power and his prestige 331 00:36:49.640 --> 00:36:53.280 and that means at our expense. 332 00:36:53.280 --> 00:36:58.480 We should clean house and get rid of the whole lot of these Fed bureaucrats sitting in their 333 00:36:58.480 --> 00:37:03.320 paneled halls issuing their diktats. 334 00:37:03.320 --> 00:37:07.680 Congress is still dominated by the disciples of the New Deal. 335 00:37:07.680 --> 00:37:14.640 The Tip O'Neill House of Representatives is as dedicated as ever to state socialism. 336 00:37:14.640 --> 00:37:19.960 Even inside the Reagan administration there is a powerful contingent of officials, James 337 00:37:19.960 --> 00:37:27.160 Baker, Vice President Bush and Senator Dole, who favour swinging tax increases. 338 00:37:27.160 --> 00:37:32.500 The Chairman of the Council of Economic Advisers, Martin Felstein, was a powerful advocate of 339 00:37:32.500 --> 00:37:40.700 of Higher Taxation, working for the Republican President. 340 00:37:40.700 --> 00:37:45.300 He was as much a pessimist about the potential productivity 341 00:37:45.300 --> 00:37:48.620 of free market capitalism as anyone. 342 00:37:48.620 --> 00:37:53.300 You don't find out about freedom sitting up in some Harvard 343 00:37:53.300 --> 00:37:56.740 office, cross-eyed students looking at you. 344 00:37:56.740 --> 00:38:06.020 I recall a tense argument I had with Felstein at the offices of the New York Post in late 345 00:38:06.020 --> 00:38:11.340 1982, when he was trying to tell me that there was going to be a slow and grudging recovery 346 00:38:11.340 --> 00:38:12.340 in 1983. 347 00:38:12.340 --> 00:38:20.460 It was a ridiculous notion, I said, it's ridiculous, I said, it is ridiculous, the rate of growth 348 00:38:20.460 --> 00:38:26.260 between the fourth quarter of 1982 and 1983 would be 6%, you're saying it's 3%, and by 349 00:38:26.260 --> 00:38:50.260 The enemies of freedom and economic success dominate the International Monetary Fund and the World Bank, these places are repositories of all the failed officials from the treasuries around the world. 350 00:38:50.260 --> 00:39:09.260 The enemies of freedom have then persuaded a business round table, one of America's top corporate clubs, that higher taxation is the only answer. 351 00:39:09.260 --> 00:39:17.260 I had a sit there with that McGillicuddy, head of the manufacturers, I never trust about that, he got very nasty, I said you're nothing but a socialist. 352 00:39:17.260 --> 00:39:34.260 The so-called responsible media in this country, the New York Times, the Washington Post, the Boston Globe, the TV networks, are deeply weathered to state socialism and the welfare state, and you are reading that every day of your lives. 353 00:39:34.260 --> 00:39:40.260 These people seem to have some desire to destroy this country. 354 00:39:40.260 --> 00:39:48.340 Just because freedom has proved such a success in the past four years, there is no reason 355 00:39:48.340 --> 00:39:55.740 to believe that the powerful political and bureaucratic cliques have accepted the idea 356 00:39:55.740 --> 00:39:59.740 that the New Deal is dead and should remain interred. 357 00:40:16.740 --> 00:40:23.740 It's refreshing and indeed it is heartening to hear somebody with the insights and the 358 00:40:23.740 --> 00:40:28.120 The Courage to Say the Things that Need to be Said in Our Journalistic Profession that 359 00:40:28.120 --> 00:40:32.160 Maxwell Newton does, and Maxwell, I applaud you for it. 360 00:40:32.160 --> 00:40:37.760 I think if Maxwell had a message to deliver to us here, it was that in spite of massive 361 00:40:37.760 --> 00:40:43.760 government intervention, control, intrusion into our lives, especially in the areas of 362 00:40:43.760 --> 00:40:51.720 money, that we with an entrepreneurial spirit and an ability to see ahead can overcome at 363 00:40:51.720 --> 00:40:55.720 and at least partially some of these controls that have been placed on our lives. 364 00:40:55.720 --> 00:41:05.720 The money market deposit accounts and mutual funds that Maxwell mentioned, which have erupted in our financial sector in recent years, are only one such example. 365 00:41:05.720 --> 00:41:17.720 But Maxwell having said that, I can't, I think, let you go and make your highly accurate remarks about my profession without at least a little bit of a rejoinder. 366 00:41:17.720 --> 00:41:24.720 I'll readily admit I don't disagree with much of what Maxwell said about the economics profession. 367 00:41:24.720 --> 00:41:29.040 Grudgingly I will admit there is much we cannot do. 368 00:41:29.040 --> 00:41:31.300 There is one thing we can do. 369 00:41:31.300 --> 00:41:39.280 We as economists can, by and large I think Maxwell would agree, we do respond to incentives. 370 00:41:39.280 --> 00:41:44.440 Consider the following, Otto Eckstein, who Maxwell mentioned, and was one of the architects 371 00:41:44.440 --> 00:41:50.400 of the Socialist Economics of the Johnson Administration, died about a year and a half ago, leaving 372 00:41:50.400 --> 00:41:54.840 in a state in excess of $100 million. 373 00:41:54.840 --> 00:42:00.220 Henry Kaufman, who Maxwell mentioned, one of Wall Street's best-known socialists, makes 374 00:42:00.220 --> 00:42:05.720 in the neighborhood of $3 million a year as a managing director with Salomon Brothers. 375 00:42:05.720 --> 00:42:11.840 Martin Feldstein, when he was being hearings for his appointment to the Council of Economic 376 00:42:11.840 --> 00:42:16.460 advisors did reveal he had a salary in excess of a million a year. So maybe we 377 00:42:16.460 --> 00:42:20.380 don't do much good on that but we do line our pockets or some of us do. Let's 378 00:42:20.380 --> 00:42:26.380 have some questions please. I'd just like to say that always that confirms the 379 00:42:26.380 --> 00:42:30.800 well-known theory bullshit baffles brains. 380 00:42:41.840 --> 00:42:54.240 I've never believed the theory that Volcker would quit after the election, mainly because 381 00:42:54.240 --> 00:43:01.640 the theory is often expressed in terms of, oh, he's only getting $60,000 a year and he 382 00:43:01.640 --> 00:43:05.120 only has an apartment in Manhattan and so on and so forth and he can get half a million 383 00:43:05.120 --> 00:43:08.640 a year or a million a year, something with a chase. 384 00:43:08.640 --> 00:43:16.640 I don't think amounts of money like that motivate people who have got jobs that are that influential. 385 00:43:16.640 --> 00:43:23.640 I think that Volcker is a man who loves being the most powerful economic official in the world, 386 00:43:23.640 --> 00:43:32.640 and I can't see him wanting to give that up for any job in a private bank even if it paid $2 million a year. 387 00:43:32.640 --> 00:43:34.640 And that's one part of the answer. 388 00:43:34.640 --> 00:43:41.280 The other part is that I think he has succeeded in bringing interest rates down very handsomely 389 00:43:41.280 --> 00:43:46.400 in time for the election and thus ingratiating himself with the President. 390 00:43:46.400 --> 00:43:50.320 I don't think he would necessarily have been trying so hard if he'd meant to quit after 391 00:43:50.320 --> 00:43:51.320 Christmas. 392 00:43:51.320 --> 00:43:53.400 Let me add an addendum. 393 00:43:53.400 --> 00:43:58.080 As Maxwell mentioned earlier, Jerry Corrigan has been named President-elect of the New 394 00:43:58.080 --> 00:44:03.920 York Federal Reserve and he is a Volcker protégé, so in the event that Volcker does step down 395 00:44:03.920 --> 00:44:19.880 I remember seeing some image reports in the last few months about the Legislature. Congress 396 00:44:19.880 --> 00:44:26.880 had not passed a legislation stripping non-banked banks. They were happy that the deregulation 397 00:44:26.880 --> 00:44:30.880 continued. I'm not sure what all that meant, but it sounded like there was... 398 00:44:30.880 --> 00:44:42.880 No, I think the Congress is actually moving to restrict that, those non-banked banks, and also to halt the process of banking deregulation. 399 00:44:42.880 --> 00:44:50.880 And the excuse that will be used is that under this deregulation, you know, a few banks have gone broke. 400 00:44:50.880 --> 00:44:59.880 And so we can't afford to sort of leave these free markets to, you know, operate on their own, it's too dangerous, people actually lose money. 401 00:44:59.880 --> 00:45:04.880 Money, which is the object of all free markets, of course, but that will be the excuse. 402 00:45:04.880 --> 00:45:11.880 And what I'm very concerned about is that that campaign will gather enough momentum that 403 00:45:11.880 --> 00:45:19.880 they will be able to re-institute interest rate controls or put controls on some of these 404 00:45:19.880 --> 00:45:27.880 new instrumentalities which would lay the foundations for another big inflationary burst. 405 00:45:27.880 --> 00:45:32.880 Once they've put a ceiling on rates, then we're back to the bad old days. 406 00:45:49.880 --> 00:45:53.880 Then if Balko really wanted to make money, he could short the bond market any day that he liked. 407 00:45:57.880 --> 00:46:03.880 Well, I suppose he doesn't want to make money. Maybe he already has made it. We don't know about it. 408 00:46:03.880 --> 00:46:04.880 We don't get to. 409 00:46:04.880 --> 00:46:06.880 Well, the last ones to hear. 410 00:46:06.880 --> 00:46:08.880 He may own, basically. 411 00:46:08.880 --> 00:46:10.880 Yeah. 412 00:46:10.880 --> 00:46:17.880 Well, that's a good point. Effectively, he has some ownership, given his vast powers at the Federal Reserve. 413 00:46:17.880 --> 00:46:20.880 What he does clearly has an effect on all of the major banks. 414 00:46:20.880 --> 00:46:25.880 So maybe not in an equity sense he owns them, but certainly in a power sense. 415 00:46:25.880 --> 00:46:35.880 You referred to the Federal Reserve Board officials in your remarks as the unelected officials. 416 00:46:35.880 --> 00:46:38.880 I wondered if you thought that it would be better if they were elected. 417 00:46:38.880 --> 00:46:52.880 I wondered if you see in the land a growing feeling among the electors to put somebody in charge and have them be responsible for the people. 418 00:46:52.880 --> 00:47:01.040 Well, my priorities are, number one, abolish the Fed, number two, put it under the control 419 00:47:01.040 --> 00:47:05.400 of the Secretary of the Treasury, and then you at least have a political head who would 420 00:47:05.400 --> 00:47:19.640 be at least answerable to the normal political process that every other part of economic 421 00:47:19.640 --> 00:47:34.680 The idea that the Fed should be independent is a nice notion invented by bankers and officials 422 00:47:34.680 --> 00:47:38.840 so that they can do what they want to do. 423 00:47:38.840 --> 00:47:47.960 The idea is that money and confidence are so fragile and delicate matters that they couldn't 424 00:47:47.960 --> 00:48:03.960 can possibly be left in the hands of any body associated with politics or subject to the pressures of the unwashed masses. 425 00:48:03.960 --> 00:48:14.960 Just leave it to us and everything will be okay, which is the argument of every dictator and every oligarch through history. 426 00:48:14.960 --> 00:48:18.860 Well, that's what these people have got, a cozy little set up. 427 00:48:18.860 --> 00:48:22.860 They've got the New York bankers, the New York government securities dealers, 428 00:48:22.860 --> 00:48:26.360 and a Fed official apparatus. 429 00:48:26.360 --> 00:48:28.860 And they can do what they like. 430 00:48:28.860 --> 00:48:31.160 They don't tell you what they do when it's relevant. 431 00:48:31.160 --> 00:48:33.760 They tell you weeks later. 432 00:48:33.760 --> 00:48:38.060 They don't explain what they're doing. 433 00:48:38.060 --> 00:48:43.660 They're even incapable of measuring what they're doing. 434 00:48:43.660 --> 00:48:50.660 We found out in February this year that all the money numbers for the last half of 1983 were wrong. 435 00:48:50.660 --> 00:48:52.660 The whole bloody lot were wrong. 436 00:48:52.660 --> 00:48:56.660 I'd been going around the place saying there's going to be a recession, there's going to be a recession, 437 00:48:56.660 --> 00:49:03.660 Milton Friedman standing up, making speeches, Carl Brummer rang me up before Christmas 1983 and said, 438 00:49:03.660 --> 00:49:09.660 Marx, Marx, the Fed are going to get Mondale elected, they're going to have a recession in 1984, 439 00:49:09.660 --> 00:49:11.660 and they're going to be Mondale, it's going to be elected. 440 00:49:11.660 --> 00:49:15.660 Well, it turned out that all the numbers were wrong. That's all. 441 00:49:15.660 --> 00:49:22.660 So how could they possibly have been able to do anything? 442 00:49:22.660 --> 00:49:26.660 They were running with the same wrong numbers that all the rest of us were. 443 00:49:26.660 --> 00:49:29.660 It was a farce. 444 00:49:29.660 --> 00:49:36.660 But they persist with this notion that, you know, leave it to us and everything will be okay. 445 00:49:36.660 --> 00:49:40.660 Leave it to us and everything will be okay for us. 446 00:49:40.660 --> 00:49:55.660 These people should be made to get into the grubby business of politics like all the rest of us, instead of sitting in their marvelled halls. 447 00:49:55.660 --> 00:50:06.660 My question is predicated on the re-election of Ronald Reagan. Did you see a continuation of the deregulation plan under another four years of Reagan? 448 00:50:06.660 --> 00:50:27.660 No, I don't. No, I don't. I think the forces opposed to deregulation are regrouping and I think that, I mean, deregulation only occurred, it occurred because nobody was really noticing what was going on. 449 00:50:27.660 --> 00:50:33.660 That fellow Alfred Kahn got in there and deregulated the airlines without anybody really noticing. 450 00:50:33.660 --> 00:50:40.120 There's a big court case involving AT&T, that sort of went on and suddenly it was all over and it was decided. 451 00:50:40.120 --> 00:50:56.920 A few other ones like trucks, railways and so on, and then Beryl just got in there and Reagan obviously said well it's okay to let the dollar float and Beryl said no, so. 452 00:50:56.920 --> 00:51:10.920 But then in banking the deregulation happened because you had these two geniuses who formed the reserve fund in New York and it got away from the Fed. 453 00:51:10.920 --> 00:51:19.920 But once it's structured on the basis of as a matter of policy are we going to have deregulation? 454 00:51:19.920 --> 00:51:47.920 As a related question, I was happy to hear you say that the economists have been discredited, more or less, in logic, among the groups of economists trying to influence Reagan, that's right, Chandra, Keynesians, applied-siders, conservative opportunity people, whatever. Which do you see coming to power, winning out in the next four years? 455 00:51:49.920 --> 00:52:02.920 The Dallas Convention was by the low tax people, which was really Jude Wienyski and Alan Reynolds who he wrote about. 456 00:52:02.920 --> 00:52:07.920 Apart from that, there really aren't any. 457 00:52:07.920 --> 00:52:17.920 In the Treasury, you've got Beryl, who spends most of his time on LDC debts, Manuel Johnson, 458 00:52:17.920 --> 00:52:47.600 Yes, you're right. What you said about them is quite right, that they've got no real 459 00:52:47.600 --> 00:52:57.000 There is a lot of speculation about to what extent the Fed will support the member banks 460 00:52:57.000 --> 00:52:58.800 in case of collapse. 461 00:52:58.800 --> 00:53:04.000 Recently the Fed commented that they would support the top 11 banks. 462 00:53:04.000 --> 00:53:09.600 I'm not quite sure what that meant and I would really appreciate your expansion on that subject. 463 00:53:09.600 --> 00:53:13.500 I didn't read that. 464 00:53:13.500 --> 00:53:23.500 I'll interject. I think what it means in part is the Federal Reserve, in cooperation with the FDIC and the Comptroller, bailing out continental Illinois, 465 00:53:23.500 --> 00:53:30.500 sent a signal that it will not allow any large bank to fail. It just will not allow that to happen. 466 00:53:30.500 --> 00:53:40.500 Now think of the inequities. We have increasing bank failures among small banks in the United States, but just because a bank is so-called large, 467 00:53:40.500 --> 00:53:46.740 large, and that's what they meant by the top 11, Federal Reserve will not allow it to fail. 468 00:53:46.740 --> 00:53:52.780 That's a tremendous subsidy out of you're in my pockets as taxpayers to the officials, 469 00:53:52.780 --> 00:53:56.340 the workers, the stockholders of these major money center banks. 470 00:53:56.340 --> 00:54:15.340 You support Reagan and his program. If he gets elected, which I think he will, where is he going to go with the deficits? 471 00:54:15.340 --> 00:54:22.340 Eventually these deficits have to do something. They've got to bury the country. You can't go on with it. 472 00:54:22.340 --> 00:54:29.340 Is it, as you said, that it's going to happen, that they're going to evaporate? 473 00:54:29.340 --> 00:54:33.340 No, they're not going to evaporate, but I think they'll just ignore them. 474 00:54:33.340 --> 00:54:41.340 I don't think they'll, they might put some, maybe some mild tax increase through it, 475 00:54:41.340 --> 00:54:49.340 and try and hold, I think what they'll likely try to do is hold the line on non-government, 476 00:54:49.340 --> 00:55:09.340 non-defense expenditure, keep on increasing defense spending and look the other way. 477 00:55:09.340 --> 00:55:13.940 No I think the harmful thing is the growth of government spending and I just don't know 478 00:55:13.940 --> 00:55:18.940 I don't know how you control that. I do not know how that can be done. 479 00:55:18.940 --> 00:55:27.940 I think that is the one reason why ultimately America may go the same way as Europe's gone. 480 00:55:27.940 --> 00:55:33.940 And I just don't think the American political system or any democratic political system 481 00:55:33.940 --> 00:55:41.940 seems to be able to withstand the constant pressure from sexual interests 482 00:55:41.940 --> 00:55:44.940 for improvement in their position. 483 00:55:44.940 --> 00:55:48.440 But I think that one thing that could blow up very soon, 484 00:55:48.440 --> 00:55:51.940 and which I think is a big headache coming up on the left, 485 00:55:51.940 --> 00:55:59.440 is that if this country were to experience very slow growth 486 00:55:59.440 --> 00:56:06.940 in 1985, or zero growth, there could be a fall in the dollar 487 00:56:06.940 --> 00:56:08.940 as a result. 488 00:56:08.940 --> 00:56:22.440 And that could be accompanied by a tighter Fed policy to try to hold the line and a further reduction in economic growth 489 00:56:22.440 --> 00:56:30.940 and a sort of unwinding of the United States economic success into the sort of failures that they have had in Europe. 490 00:56:30.940 --> 00:56:35.940 Because the Europeans are being drained of their capital when it's coming to this country 491 00:56:35.940 --> 00:56:41.940 Because the capitalists there can't see any point in investing in countries that don't seem to be going anywhere. 492 00:56:41.940 --> 00:56:44.940 They've got very high taxes. 493 00:56:44.940 --> 00:56:54.940 It's quite possible that we, who have been in the virtuous cycle, increasing capital inflow, 494 00:56:54.940 --> 00:57:01.940 a strong dollar, strong economic growth, disinflation, we could turn around 495 00:57:01.940 --> 00:57:13.940 and go into a phase of slower economic growth, declining capital inflow, a falling dollar, a tighter money, the other way around. 496 00:57:13.940 --> 00:57:25.940 One of the reasons for that would happen is a miscalculation by the Federal Reserve, which is very much on the cards. 497 00:57:25.940 --> 00:57:38.940 It seems to me that we may be giving a little too much credit to these premiums to account for these remarkable changes since the 70s. 498 00:57:38.940 --> 00:57:52.940 I would suspect that possibly part of that may be a relative weakness or insecurity, political and otherwise, in Europe and Asia, which has led to this enormous flow of assets into the country. 499 00:57:52.940 --> 00:58:02.940 Don't you think that the perception could change, as you think you're suggesting right now, from back in the 70s, or something very much like that? 500 00:58:22.940 --> 00:58:37.940 Well, I think that is quite on the cards. The present happy state of affairs does rest on a whole lot of variables like the capital inflow. 501 00:58:37.940 --> 00:58:40.940 Well, thank you very much, Maxwell, for those two.