WEBVTT NOTE Bubbles Made of Paper: Then and Now 1 00:00:00.000 --> 00:00:11.000 Hey, y'all. I've been working on that for about a month, trying to get the lingo down here for Auburn. 2 00:00:11.000 --> 00:00:19.000 I know we've all been kind of sequestered here in this great conference, and you probably don't keep up on bank failures, 3 00:00:19.000 --> 00:00:24.000 but I have this sort of morbid curiosity about it. 4 00:00:24.000 --> 00:00:36.000 Bank number 17 was seized yesterday in Florida and interestingly enough, it was a bank called Freedom Bank. 5 00:00:36.000 --> 00:00:43.000 It works out wonderfully for this speech. 6 00:00:43.000 --> 00:00:53.000 But Freedom Bank probably did not have any gold deposits, probably practiced fractionalized money, of course, and paper money. 7 00:00:53.000 --> 00:01:16.000 For a bank of only $287 million, so that's a relatively small bank, what's interesting per the FDIC release on this is that the FDIC is going to be responsible from $80 to $104 million, is going to be the loss that the FDIC takes on this. 8 00:01:16.000 --> 00:01:32.000 And when you start doing the math that the FDIC only has $48 billion and when they were insuring deposits up to $100,000, they were insuring $5 trillion. 9 00:01:32.000 --> 00:01:46.500 Now at $250, presumably, they're insuring $9 or $10 trillion, and if they're going to lose $100 million with the failure of a $287 million bank, 10 00:01:46.500 --> 00:01:57.500 well, you can see pretty quickly that the FDIC may go the way of the FSLIC, if anybody remembers that entity. 11 00:01:57.500 --> 00:02:03.660 Now, you might quickly say, well, why didn't they go to that TARP money? 12 00:02:03.660 --> 00:02:07.460 You know, they got that TARP money out there, they're buying equity in banks. 13 00:02:07.460 --> 00:02:18.700 And in fact, there was a newspaper in Florida that speculated Thursday that the TARP might save Freedom Bank. 14 00:02:18.700 --> 00:02:22.860 And then the very next day, Freedom Bank failed. 15 00:02:22.860 --> 00:02:27.260 And I think from what my sources tell me, and believe me, 16 00:02:27.260 --> 00:02:57.160 I don't have sources inside the FDIC. The FDIC is not a big necessarily a fan of me and for whatever reason but what I'm told is that the only banks that can really access the TARP or the new equity money that's being made available by the government are banks that are rated one or two 17 00:02:57.160 --> 00:03:14.100 The FDIC doesn't release those figures but banks that are one or two are fairly good shape. Banks that are three and four are in bad shape, banks five are on the verge of being closed. 18 00:03:14.100 --> 00:03:43.700 3 and 4 are in bad shape, banks 5 are on the verge of being closed, so it isn't any 3, 4 and 5 banks that are going to be able to access the TARP money, it's what I'm told, it's only banks that are Camel 1 and Camel 2, so what you'll see is relatively healthy banks get money from the government to turn around, probably not to lend the money, but to go ahead and buy out weaker competitors. 19 00:03:43.700 --> 00:03:58.700 So you'll just see a consolidation of the banking industry, and unfortunately for Freedom Bank, they probably didn't have any friends either at the government or at Goldman Sachs, evidently. 20 00:03:58.700 --> 00:04:07.700 So unfortunately, they are the 17th bank failure of the year. 21 00:04:07.700 --> 00:04:28.700 I, of course, as Lew mentioned, I used to be a banker, but I was carried out on my shield back in May and had resident fairly high in this bank, little bank in Las Vegas and we were very active in construction lending. 22 00:04:28.700 --> 00:04:36.700 In fact, that's what I did for a living was make construction loans. In fact some people considered me very good at it. 23 00:04:36.700 --> 00:04:43.700 In fact, kind of an idiot savant, if you will, at being able to structure real estate loans. 24 00:04:43.700 --> 00:04:51.700 Of course, at the end, they just considered me an idiot, because it wasn't working out. 25 00:04:51.700 --> 00:04:55.700 And it's been mentioned to me by a few people who are here. 26 00:04:55.700 --> 00:05:03.700 They've made kind comments about some of the articles I've written for Lew about what was going on in Las Vegas. 27 00:05:03.700 --> 00:05:18.700 And I would just tell the students in the audience that writing about the market, if you're a banker, is not good for your career path. 28 00:05:18.700 --> 00:05:24.700 Telling the truth in print really doesn't do you a whole lot of good if you're working for a bank. 29 00:05:24.700 --> 00:05:30.700 Now, it's okay if the market's good. If the market's good, they kind of look by it, and that's okay. 30 00:05:30.700 --> 00:05:38.700 But when the Las Vegas economy began to spiral down very quickly in the spring and early summer, 31 00:05:38.700 --> 00:05:44.700 I remember a particular piece that I wrote about an auction. 32 00:05:44.700 --> 00:05:48.700 One of my customers was having an auction of some homes. 33 00:05:48.700 --> 00:05:52.700 He had about 50 homes around Las Vegas that he was trying to auction. 34 00:05:52.700 --> 00:05:58.700 And he held the auction on Derby Day, so it had been the first Saturday in May. 35 00:05:58.700 --> 00:06:04.180 and they had this auction and I stood off to the side and you had these fancy 36 00:06:04.180 --> 00:06:07.580 auctioneers and they're all wearing tuxes and they're young guys and they're 37 00:06:07.580 --> 00:06:12.260 energetic and they're saying yes there's a bid and all this and they're banging 38 00:06:12.260 --> 00:06:16.820 gavels and all this stuff so I thought from my vantage point they were actually 39 00:06:16.820 --> 00:06:25.340 selling homes my customer called me up had me sit next to him at the podium and 40 00:06:25.340 --> 00:06:37.340 And he said this is all fake. These aren't real bids. And as I watched these guys go through this kabuki dance that they were doing, that's exactly what it was. 41 00:06:37.340 --> 00:06:46.340 There were actually no bids. And they had 50 houses that they needed to auction. They actually only got live bids on about two or three. 42 00:06:46.340 --> 00:06:52.340 And of course, silly me, I decided, this is a pretty good father for an article. 43 00:06:52.340 --> 00:07:12.340 We put it on lewrockwell.com and a few people picked it up and our CFO started getting calls from New York. 44 00:07:12.340 --> 00:07:18.340 And they said, gee, Doug, you're tanking our stock today. 45 00:07:18.340 --> 00:07:21.340 I said, well, what tanked it for the previous six months? 46 00:07:21.340 --> 00:07:25.340 But anyway, that's what happens at the end. 47 00:07:25.340 --> 00:07:31.340 You know, you go from being a genius to an idiot and then a scapegoat. 48 00:07:31.340 --> 00:07:36.340 And ultimately at the end, I used to be a member of the management team 49 00:07:36.340 --> 00:07:40.340 that would be on the earnings call for the bank. 50 00:07:40.340 --> 00:07:47.740 Because I was the guy that knew the Las Vegas market, and they would have me spew out all this stuff about the Vegas market. 51 00:07:47.740 --> 00:07:54.740 Well, when the Vegas market started doing nosedive, I felt compelled to tell the truth. 52 00:07:54.740 --> 00:08:04.640 Well, the truth didn't really serve the purposes, and by the first quarter earnings call, I was told that I didn't need to participate anymore. 53 00:08:04.640 --> 00:08:12.640 Such are the things that happen in booms and then in busts. 54 00:08:12.640 --> 00:08:20.640 And what I wanted to talk about today is not necessarily recent bubbles, but as Lew mentioned, the title of the speech is early bubbles, 55 00:08:20.640 --> 00:08:28.640 modern bubbles of paper and early bubbles and now the various kinds. 56 00:08:28.640 --> 00:08:36.640 The speech could be called, things may change, but they always stay the same. 57 00:08:36.640 --> 00:08:39.640 I mean, we keep doing these things over and over again. 58 00:08:39.640 --> 00:08:47.640 And what's interesting is that I wrote a thesis for Murray Rothbard and had that tremendous privilege. 59 00:08:47.640 --> 00:08:54.640 But how did I know that I would directly participate in one of the biggest bubbles in the history of the world? 60 00:08:54.640 --> 00:09:02.640 But the title of my thesis was actually Early Speculative Bubbles and Increases in the Price of Money 61 00:09:02.640 --> 00:09:12.640 And one of the guys that I wanted to talk about today is a very interesting gentleman named John Law 62 00:09:12.640 --> 00:09:20.640 A lot of people haven't heard of John Law, a John Law fan right up front here 63 00:09:20.640 --> 00:09:25.720 and some people view John Law as a genius certainly at the time when he was 64 00:09:25.720 --> 00:09:30.280 creating money out of nowhere they thought he was a genius course later he 65 00:09:30.280 --> 00:09:35.220 was considered a madman and a swindler and I tend to think that 66 00:09:35.220 --> 00:09:39.360 Bernanke is kind of going the same way that's the way this thing's working out 67 00:09:39.360 --> 00:09:46.080 so so again the the more things change the more they stay the same but the 68 00:09:46.080 --> 00:09:54.080 The interesting thing about John Law is that he wasn't your old fuddy-duddy economist type. 69 00:09:54.080 --> 00:10:01.080 His father was a very sound banker, actually he was a goldsmith banker in Scotland, 70 00:10:01.080 --> 00:10:05.080 and John Law learned the banking business from him. 71 00:10:05.080 --> 00:10:13.080 John Law was very good with numbers, so he learned economics. 72 00:10:13.080 --> 00:10:23.080 and Economics. His mother made sure that he got a good grounded economics education both in theoretical and applied economics. 73 00:10:23.080 --> 00:10:31.080 So, John Law was very well equipped in the banking area, very well schooled, and then his father died. 74 00:10:31.080 --> 00:10:37.080 His father died in his teens. There's some dispute as to exactly when his father died. 75 00:10:37.080 --> 00:10:44.080 But after the death of his father, law's interest in the banking business kind of waned. 76 00:10:44.080 --> 00:10:53.080 And what contributed to that was the fact that he got a little inheritance from his father. 77 00:10:53.080 --> 00:10:58.080 And he liked girls. It's the darndest thing. 78 00:10:58.080 --> 00:11:05.080 And in spite of the fact that his face was deeply scarred, he had smallpox as a kid, 79 00:11:05.080 --> 00:11:12.860 his big strong strapping guy and he was very much the ladies man in fact the 80 00:11:12.860 --> 00:11:19.120 ladies called him Beau Law fortunately the men called him 81 00:11:19.120 --> 00:11:25.600 jesumy John so they weren't quite as impressed with him but he he took his 82 00:11:25.600 --> 00:11:29.880 father's inheritance and he decided that he wanted to go see the world so he 83 00:11:29.880 --> 00:11:35.880 He stopped in London and decided to just gamble, and he was a pretty good gambler. 84 00:11:35.880 --> 00:11:45.880 He was good enough at math that he had these systems that he was able to work and made good money gambling at night. 85 00:11:45.880 --> 00:11:50.880 And, of course, a fair amount of womanizing in there. 86 00:11:50.880 --> 00:11:55.880 He had all the choice of the best looking women in London. 87 00:11:55.880 --> 00:12:05.880 Of course, I don't think we can really say that our current monetary cranks are those kind of ladies men. 88 00:12:05.880 --> 00:12:11.880 I'm not sure if Hank Paulson or Bernanke or... 89 00:12:11.880 --> 00:12:16.880 I guess Greenspan kind of had his time there. 90 00:12:16.880 --> 00:12:22.880 Anyway, Law had a life of leisure for nine years, but he got addicted to gambling. 91 00:12:22.880 --> 00:12:30.880 So he had to give it up, and about the same time his love life got in trouble. 92 00:12:30.880 --> 00:12:35.880 He fell for a woman named Elizabeth Villiers. 93 00:12:35.880 --> 00:12:41.880 Unfortunately, Ms. Villiers had a jealous suitor named Wilson. 94 00:12:41.880 --> 00:12:46.880 But law was as good with a gun as he was in bed, evidently, 95 00:12:46.880 --> 00:12:50.880 Because they fought a duel and he shot Wilson on the spot 96 00:12:52.760 --> 00:12:58.520 Now it's really hard to imagine Alan Greenspan or Bernanke in a duel. I mean 97 00:13:00.280 --> 00:13:04.480 Now Hank Paulson, yeah, maybe, I don't know, but 98 00:13:05.800 --> 00:13:08.560 anyway, law was, it was good with a gun and 99 00:13:09.440 --> 00:13:13.120 and normally this was, those are considered a fair fight, so 100 00:13:13.840 --> 00:13:15.920 wouldn't have been that grave of an offense, but 101 00:13:16.880 --> 00:13:30.880 But this Wilson character that he killed had some influential friends, so Law was put on trial and he was actually sentenced to death. 102 00:13:30.880 --> 00:13:42.880 But on appeal it was lowered to a fine and then he was able to bribe a guard, he was a pretty enterprising guy, and he was able to bribe a guy and the guard and escape to the continent. 103 00:13:42.880 --> 00:13:50.380 So, he actually spent 14 years gambling his way across Europe. 104 00:13:50.380 --> 00:13:57.880 He couldn't stay in Scotland because he couldn't get a pardon for the murder, but he gambled his way across Europe. 105 00:13:57.880 --> 00:14:04.880 But during the day, he studied banking because he had this training in banking. 106 00:14:04.880 --> 00:14:12.380 He was a big fan, initially, of a very sound bank, the Bank of Amsterdam. 107 00:14:12.380 --> 00:14:31.380 The Bank of Amsterdam had a free coinage policy around the time, early 1600s, of coining any money that was brought to them and had a huge influx in their money supply based on sound money. 108 00:14:31.380 --> 00:14:36.380 They attracted sound money because they had a very good system in place, at least initially. 109 00:14:36.380 --> 00:14:48.980 So he was a big fan of that, he studied that, and he also, when he was out at night, he made friends with the Duke of Orleans, amongst many other princes and influential people. 110 00:14:48.980 --> 00:14:56.180 So John Law not only studied banking, but he made influential friends. 111 00:14:56.180 --> 00:15:05.780 So John Law attempted to put what he thought was a system in place to help the economy. 112 00:15:05.780 --> 00:15:35.780 and he first went to Scotland, which is his native land and they were in the depression and he said he went to pardon moment and he said I know how to fix your problem and of course the way to fix the problem is what we've been hearing about all weekend you need more money and so he thought that the best way to increase the amount of money 113 00:15:35.780 --> 00:15:40.100 was not the way that the Bank of Amsterdam did it. 114 00:15:40.100 --> 00:15:46.540 He decided by that time that the way the Bank of England, 115 00:15:46.540 --> 00:15:52.580 which we heard about earlier in earlier speech, was a better idea. 116 00:15:52.580 --> 00:16:00.260 And so he changed his system from maybe being fairly soundly based 117 00:16:00.260 --> 00:16:06.100 to money that was backed by land. 118 00:16:06.100 --> 00:16:08.540 So imagine if all of our currency 119 00:16:08.540 --> 00:16:13.060 was backed by the public lands of the United States. 120 00:16:13.060 --> 00:16:14.220 Well, that was his idea. 121 00:16:14.220 --> 00:16:18.100 And of course, this falls apart rather quickly. 122 00:16:18.100 --> 00:16:20.540 Because if you go into the treasury 123 00:16:20.540 --> 00:16:22.180 and take your treasury note and, well, 124 00:16:22.180 --> 00:16:24.580 give me some of that dirt out here in the garden, 125 00:16:24.580 --> 00:16:27.780 this doesn't work very well. 126 00:16:27.780 --> 00:16:46.780 And so ultimately, John Law had the idea that he wanted unbacked currency because that's really how the Bank of England had paid for England's previous wars and that's really what he thought was the best way to revive an economy. 127 00:16:46.780 --> 00:16:55.780 It's interesting that Law, even though he advocated a system of fractionalized banking, he wasn't ignorant to its harmful effects. 128 00:16:55.780 --> 00:17:11.780 And it's very interesting that Yuri had that quote from Keynes, where Keynes understood that expanding the money supply was essentially a tax on the people, but let's go ahead and do it anyway. 129 00:17:11.780 --> 00:17:17.780 John Law was the same way, and this was back in 1705, he wrote this. 130 00:17:17.780 --> 00:17:30.780 Raising the money in France is laying a tax on the people which is soon paid and thought to be less felt than a tax laid on another way. 131 00:17:30.780 --> 00:17:35.780 This tax falls heavily on the poorer sort of the people. 132 00:17:35.780 --> 00:17:45.780 So even though he advocated for these systems, he was very well aware of their very harmful effects. 133 00:17:45.780 --> 00:17:58.780 But he was all in favor of that in expanding the money supply in just an unbacked paper. 134 00:17:58.780 --> 00:18:08.780 And he was able, finally at age 45, after he'd shopped this monetary system all over Europe, 135 00:18:08.780 --> 00:18:16.780 Again, he's gambling at night, and he's meeting princes and studying economics. 136 00:18:16.780 --> 00:18:24.780 But he finally finds a taker for his system, and it was in 1716, and it was France. 137 00:18:24.780 --> 00:18:34.780 His old friend the Duke of Orleans was able to put him in a position to where he could put his system in place. 138 00:18:34.780 --> 00:18:42.780 So this was 1716, and Law was 45 years old at that time. So you might ask, well, why would France want this? 139 00:18:42.780 --> 00:18:51.780 Well, as we've heard from Ron Paul and a number of speakers, the reason you need to create more money is to pay for war. 140 00:18:51.780 --> 00:19:00.780 And France had been devastated economically, they had fought the War of Hispanic Succession, they had piled up huge debts, 141 00:19:00.780 --> 00:19:10.780 and Law's plan was to refinance this government debt to lower interest rates and stimulate the languid French economy. 142 00:19:10.780 --> 00:19:19.780 Something that we hear day after day after day, if we can just lower these darn interest rates, all will be well. 143 00:19:19.780 --> 00:19:29.780 So Law began the Company of the West, he started the General Bank, this became the Royal Bank in 1718 144 00:19:29.780 --> 00:19:35.520 and then he merged the companies into what was called the Mississippi Company, 145 00:19:35.520 --> 00:19:45.780 whose only asset, by the way, was trading privilege with Louisiana, essentially. 146 00:19:45.780 --> 00:19:53.220 And so, for that, he was able to capitalize that company. 147 00:19:53.220 --> 00:20:10.220 So while that company's shares were traded, the Royal Bank increased the money supply and not only did he know that increasing the money supply would flow into the price of these shares, 148 00:20:10.220 --> 00:20:22.220 the higher the shares go, the more he could refinance the government's debt. And he also put people on a payment plan. Very low money down. 149 00:20:22.220 --> 00:20:31.460 Low money down, extended terms, kind of a sub-prime way to market stock. 150 00:20:31.460 --> 00:20:40.060 So then the shares essentially rose tenfold in the case of over the course of two years 151 00:20:40.060 --> 00:20:50.260 and ultimately he tried to support the price of the shares with increases in the money 152 00:20:50.260 --> 00:20:59.060 1720 supply and unfortunately in the spring of 1720 the system began to unravel and this 153 00:20:59.060 --> 00:21:07.200 led to a series of decrees. He didn't go down without swinging. Legal tender laws, people 154 00:21:07.200 --> 00:21:11.980 wanted specie by this point, they wanted silver, they wanted something real for their money, 155 00:21:11.980 --> 00:21:16.820 but he didn't give them that choice and go out and confiscate silver. The government 156 00:21:16.820 --> 00:21:28.820 He had the power to do that, he put in place legal tender laws, he did all he could do, anti-hoarding laws, maybe that's where FDR got that idea back in the early 30s. 157 00:21:28.820 --> 00:21:43.820 But law did all of these things to keep the system alive, but ultimately the Mississippi shares fell 86% in a year. 158 00:21:43.820 --> 00:21:47.820 And so you had this huge bubble and this huge crash. 159 00:21:47.820 --> 00:21:56.820 And you may wonder, well, were these just a few people trading shares, some rich people that lost out? 160 00:21:56.820 --> 00:22:03.820 But that's not the case. The commodities went up in that four-year period, 64 percent. 161 00:22:03.820 --> 00:22:10.820 And real wages for real people went down, went down 19 percent. 162 00:22:10.820 --> 00:22:15.820 And similar to today, law's success was envied. 163 00:22:15.820 --> 00:22:29.820 It was envied across the British Channel, the Bank of England, of course, we know as very instrumental in creation of paper money. 164 00:22:29.820 --> 00:22:38.820 But they also wanted a vehicle to refinance that government's debt because they had been involved in wars. 165 00:22:38.820 --> 00:22:44.820 And so the South Sea Company was formed by a gentleman by the name of Sir John Blunt 166 00:22:44.820 --> 00:22:49.820 And he was given the monopoly rights to trade with South America 167 00:22:49.820 --> 00:22:52.820 It was the only tangible asset this company had 168 00:22:52.820 --> 00:22:54.820 But they capitalized this company 169 00:22:54.820 --> 00:22:58.820 And for doing that and being given that monopoly 170 00:22:58.820 --> 00:23:03.820 They turned around, refinanced the government's debt 171 00:23:03.820 --> 00:23:06.820 And ultimately refinanced 40 million of it 172 00:23:06.820 --> 00:23:10.820 but that system unwound as well. 173 00:23:10.820 --> 00:23:16.820 Ironically, in the South Sea case, the South Sea Company was upset 174 00:23:16.820 --> 00:23:23.820 because promoters in Exchange Alley saw the success of the South Sea Company 175 00:23:23.820 --> 00:23:27.820 so they started creating what were known as bubble companies 176 00:23:27.820 --> 00:23:30.820 and they were so unhappy about the competition 177 00:23:30.820 --> 00:23:32.820 they were taking money away from their shares 178 00:23:32.820 --> 00:23:40.320 that they had the government come in and have an anti-bubble act 179 00:23:40.320 --> 00:23:48.320 and it was because of this bubble act that eventually unwound the South Sea Bubble as well 180 00:23:48.320 --> 00:24:02.320 and those shares fell 80-some percent in one year and again inflicted tremendous pain on that economy. 181 00:24:02.320 --> 00:24:16.160 So what's going on now is really just a repeat of what we've seen as far back as the early 1700s. 182 00:24:16.160 --> 00:24:24.880 I mean, Hank Paulson and his crew from Goldman Sachs may think they're doing something new, but they're not. 183 00:24:24.880 --> 00:24:38.080 This was known as a lifeboat operation back when Robert Walpole put an operation to bail out the banking system in England in 1721. 184 00:24:38.080 --> 00:24:41.180 Of course, it takes a little more than a lifeboat now. 185 00:24:41.180 --> 00:24:50.280 I mean, we've got the whole fleet employed trying to keep this thing afloat. 186 00:24:50.280 --> 00:24:57.880 In fact, you can just imagine all the captains of these little boats work at Goldman Sachs, it appears. 187 00:24:57.880 --> 00:25:04.880 But, of course, we have the TARP and we have other things, all these acronyms nobody understands. 188 00:25:04.880 --> 00:25:10.280 Somebody put it best, they call it YAP, which is Yet Another Program. 189 00:25:10.280 --> 00:25:12.880 So, every day. 190 00:25:12.880 --> 00:25:18.880 Of course, my favorite term for creating more money out of nothing is, 191 00:25:18.880 --> 00:25:25.080 I think I heard this on CNBC the other day. It's called a systematic policy response. 192 00:25:25.080 --> 00:25:28.580 Now, that sounds pretty tame. 193 00:25:28.580 --> 00:25:35.080 Yeah, it sounds like something you'd go on a routine procedure at your doctor's, possibly. 194 00:25:35.080 --> 00:25:41.680 But that is called creating more money out of nothing to try to bail out the system. 195 00:25:41.680 --> 00:25:53.680 But, Mises wrote about this, he wrote about this a long time ago, and explained how this would happen, really at the end. 196 00:25:53.680 --> 00:26:03.680 He says, if the crisis were ruthlessly permitted to run its course, bringing about the destruction of enterprises which were unable to meet their obligations, 197 00:26:03.680 --> 00:26:08.680 And that's exactly what we have today, and thus we live from one speculative bubble to the other. 198 00:26:33.680 --> 00:26:44.680 Another, I wish it were different, but the people who can make it different over time are the people in this room and the Mises Institute. Thank you.