Peter Schiff debates Professor Richard Carnell

thanks for joining us thanks to the Federalist Society and the American Constitution Society as well as the funding provided by the Ewing Marion Kauffman Society today's debate topic is what exactly caused the financial divide and one thing that probably we all agree on as common ground is that the financial crisis whatever you think caused it was really really complicated and the economic columnist Megan McArdle once said it's funny how to get something is complicated that's not on as the financial crisis the conclusion people tend to come to is that it reaffirms whatever they believe before the phenomenon but Walter will try to avoid those simplistic answers and hopefully learn something tonight her graders will be a tear ship and professor Richard Carnell leadership is the founder and CEO of u.s. brokerage firm cific capital bullying alerted europeís if ik precious metals mutual fund management from Euro Pacific asset management and global financial services firm Euro Pacific Bank he's been interviewed by many media outlets as known for their radically release a fair viewpoint as the host of a naturally wrinkled syndicated radio show here chef show and recently discovered the timeslot of radio pioneer key gordon Liddy prior to the credit crisis here shift tried desperately to warn his colleagues and retail investors of impending collapse in 2007 he released the book cash her crack party to crash through Howard profit from the coming economic collapse sold over a hundred and fifty thousand copies a compilation of his appearances the YouTube mashup here was right seen by dozens SS released five more books including the New York Times best seller the real crash in which he warns that Washington and Wall Street earn nothing the financial crisis and are setting the unit's up for our currency collapse professor Carnell specializes in the law of financial institutions and has spent much of his career opposing bailouts 2008 was a rotten year for now that's a reminder by the way we won't simply be hearing the view that market never doesn't wrong and bailouts rose wonderful both our daters fortunately our more nuanced and our marketing professor Parnell served as assistant secretary of the Treasury for financial institutions from 1993 and 99 he played a key role in developing the Clinton administration's financial modernization proposal as senior counsel to the US Senate Committee on Banking Housing and Urban Affairs he was architect and principal drafter of the FDIC Improvement Act of 1991 which taking capital discipline on banks requires risk-based premiums and ended too big to fail treatment for 17 years professor Carnell also spent two decades on baby Mays enemies list as a consultant of President Bush's Council of Economic Advisors he helped persuade the Bush administration to demand Ackman's of workable mechanisms for handling the failure of Fannie Mae Freddie Mac and other government-sponsored enterprises he's co-author of the leading textbook in financial institutions law and holds a BA from Yale University at 18 from Harvard Law School and now I'll go in alphabetical order all two of our papers and and start out by asking a very basic question this is a title of today's debate professor Carr now what exactly was the cause of the financial debacle exactly well I'm going to point in a broad-brush way to to part of the picture here and then I want to speak in particular to banking very much the certainly the context in which the bottle and I use the word debacle because it's we're not just what's of interest here is not just the crisis of 2008 it's what led up to it and and a combination of the mistakes there and the missed opportunities is it's part of what it really makes it a truly grand Phoenix so what we see in this decade is large very budget deficits loose monetary policy and think about the consequences of loose monetary policy interest rates are lower than than they otherwise low interest rates fuel borrowing and that drives up asset prices and in this case asset prices were driven up to unsustainable levels low interest rates also created pressure for money managers to take greater risks than they otherwise would risks that they may in fact have have felt uncomfortable now but hey if you're if you're if you're not going to be giving your investors a pathetic return by the standards that the investors are used to used to you got a look and see well by by intelligently taking more risk can you get a higher more respectable looking in return you also with any sustained economic there is a complacency that sets in and we saw here for example complacency about credit risk borrowers from all the way from subprime borrowers to large corporations through rose-tinted glasses but let me speak more specifically about about banking banking was only part of the bottle it was an eminently avoidable part in most respects the banking part of the financial debacle was above all regulatory veil hey regulators have every single power they needed to establish and enforce high standards of financial soundness of banks and if anyone passed doubts about that I encourage you to name a financial soundness problem confronting the banking industry that bank regulators lack power dealer I have I have been issuing this challenge now for years and have yet to hear serious exception have yet to hear an exception to my statement so regulators could have made many people bulwark for our financial system and instead it was a source of weakness the regulator's spent much of the last decade trying to please the industry in some respects that was enlightened getting rid of regulation that that doesn't make sense but there was also a failure to establish strong standards that were necessary in the context of versus let me give you one example banks are held to standards of net worth that in bank regulation called cabinets so it's basically but I'll use the term network network is the amount by which your assets exceed your liability and it's it's the same basically a spectrum so we have rules that that talk about how much that banks can take in their equity most people would be surprised to learn that the rules week we have you now allow banks to take on $24 in debt for every dollar of their shareholders money at very high leverage you would not see in a free market it is made possible by Federal Deposit Insurance now in practice banks need more than four cents on the dollar of equity but but what we saw during the past decade was commonly about seven cents so put it differently about $13 in debt for every dollar spent now these beasts this level which I'm simply saying in simple format the four percent level was set during the 1980s after that we had two decades of prosperity and record bank profits the regulator's never raise the required love that think about this in a free market with no deposit insurance no prospect of bailouts no other government support for that what level of network would market participants expect well it's going to be a lot more than then ii sent from god it's probably going to be more than ten cents that would depend on the bank's business and asset composition but a point like this sits very poorly with the industry people want what they're used to but but regulators have a responsibility to be thinking through the answers to fundamental questions like how the people disagree that he interested to hear that but the starting point to be what would be required without the prospect of government support for banks and it's a much higher level than unfortunately the dodd-frank act responded to regulatory failures of the past day with a great deal so giving regular more powers in many cases giving them powers they already had and it also trench to fail treatment and I think it really could end up exacerbate the cyber work so we had a huge fiasco here and I tend to read that not much has been learned all right Glenn so before I ask what's actually caused the financial debacle first social act ask your shift is you disagree with any of that it sounded like a lot of what you say I said regulators and too big to fail bailout policies and Federal Deposit Insurance these money policies were for causes and the first on the things you said if you basically took some of the words out of my mouth I was going to say that I have it differently here much to disagree with so it's going to kind of make it hard to debate if I'm agreeing with my funny buddy but I can't start out green it's disagreeing with moderator you said something that I disagree with so if I couldn't make you well you start off by saying that if the come to crisis was complex well actually I think it was actually very simple I mean how about that smart if it was complex like did the figured it out it was because it was so simple that to me it was so obvious so you know I can give you in quick synopsis or my explanation of why we had a climatic crisis the interesting thing is what I'm about to say I haven't really changed the word from my explanation back in oh five and oh six as to why we were going to have a financial crisis and so you know I would challenge people who would have an alternative version of what happened to say well where were you back then I mean if that was the case then why wouldn't be able to forecast a crisis why is your explanation only work in hindsight my court before sight and the reason that we had a financial crisis and of course it was inevitable that we would have that crisis it was because of bad a monetary policy that fiscal policy that regulatory policy and all three of them had to do it and the the biggest culprit was the Federal Reserve the Federal Reserve deliberately brought interest rates down to stimulate the economy but it really didn't stimulate the economy in that we got more factories we got more production we got more output but the Fed stimulated the cut was consumption and the vehicle was housing because interest rates went down to 1% it made it very easy for Americans to borrow money to buy houses and therefore the people selling houses could raise their prices because people bid on houses based on what the monthly payments are and the loan payment is the more can afford to buy and so how's the crisis began arise at the same time though the banks allow homeowners to extract the equity so even if you didn't buy a new house your house became more valuable and unlike the stock market bubble you really were able to borrow out all that appreciation you didn't have to sell your house like you can sell stock and then spend money you have to sell anything you need to borrow against the appreciating value of your house and spend money and a lot of people were doing that and people thought they were rich they many mark exactly like they won the lottery because they own the house better than American stop hoarding is fighting in either work they will Palace and so people were spending money we didn't have the trade deficit was going through the roof back then because we were spending all this money on foreign products lose it you don't create any products with your houses going up so we were buying products from China from Japan and in exchange for sending the world our dollars which the world had nothing to buy because we weren't producing anything we're just building houses and remodeling houses but our creditors were taking the dollars and using them to buy mortgage-backed securities maniiness Danny Frank if they wanted higher yields and Treasuries ah because the Fed had rates of low so they took on a little bit more risk although they thought there was really no risk they felt that there be an implicit guarantee and so is it self-perpetuating spiral more money we extracted from our homes the more foreign products we could buy the mannequin mortgage-backed securities the lower rates were it was just people thought it was a virtuous circle as it turns out my pointed out it was a vicious circle so the Fed kept interest rates down because it wanted people spending money wanted to create a recovery even though what they did do is they prevented the legitimate recovery from taking place and instead they gave us a housing bubble and the reason that people were able to borrow so much money one who is because rates were low and is remember back in the housing bubble the concept of the teaser rate and what a teaser rate was was a temporarily low interest rate that enabled you to buy a house that you couldn't afford and where did that teacher income from it came from the 1% that country but a lot of banks you know normally they would they would see through this and say well look you know you got a teaser rate what happens in two or three years when the rate goes off you know you can't pay we're not going to lend you all this money when it's obvious that you're not gonna be able to make the payments well Fannie and Freddie we're guaranteeing those mortgages anyway the government was guaranteeing mortgages based only on the ability of the borrower to afford the initial payment no no no no bank in their right mind would make such a loan without the government guaranteed it wants the government guaranteed it the banks didn't care whether the borrowers could pay back because the cover was gonna pay so you have people taking advantage of the artificially low interest rates by the defender and then using the government guarantee to take those low interest rates and qualify to buy houses and of course as housing prices were going up you get that mentality that bubble mentality they can only go up and a higher they go up the more people want to buy them yet the Fed is making easy in fact I wrote back in 0.05 how paradoxically rising home prices were actually making buying a home cheaper because normally if you buy a house you happen to think about the cost of maintenance insurance depreciation passes all that but back in the housing bubble if you buy a five hundred thousand or how 600,000 a year later and $100,000 that you can borrow out represents income to you that will defray the cost of owning a home and so rising home prices actually make homeownership cheap in fact people were being paid to own a house so we have this big bubble and the banks of course feel we're really worried about default anyway because well the house would just go up in value so if you default it will just sell the house but nobody you know nobody could come to the conclusion that all this demand will eventually turn around and all these you know just already organized reset you have a lot of people who are buying houses with no intention of living in there they're going to flip them or try to make a quick profit you have a lot of speculations in there but all this was enabled and actually encouraged by the federales Greenspan gave a very famous speech in which he praised adjustable rate mortgages at the lows of the interest rate cycle he basically encouraged people to take out a junker able mortgages said Americans were being sophisticated in managing their home equity you know even as they were just spending it into oblivion and of course towards the tail end of the market and you have the subprime market which was not created by the by the government because once the housing bubble was really going and the government got it got it started Wall Street came in try to finance the mortgages that even the government would guarantee but the big problem there was who was the biggest buyer of these subprime mortgages it was Fannie and Freddie they actually made the market now I'm hearing even that almost 70% of the subprime market was basically underwritten by the Freddie and Fannie but they were in their mind and of course without the Fed there would have been no subprime market because the key to a subprime loan was that teaser I think the most popular one was a 2 and 28 mortgage where you had a teaser rate for the first two tiers and you know and even the mortgages that were guaranteed by the government there was so much fraud involved in the origination you know mortgage brokers were actively working with their prospective borrowers to try to falsify their documents there their income their fair fair wages in order to get up a Fannie and Freddie guarantee because nobody care and of course eventually they had mortgages we read enough anything bother you just lie you have to eat enough estate you recover from the data job you just see this may not but all of this was a function of a cheap money of the moral hazard associated with guaranteed mortgages and not only was it Fannie and Freddie but you have the FHA that was out there I actively encouraging people to buy homes they couldn't afford that all kinds of sham transactions where the sellers were gifting money to the buyers that they could use it a down payment to overpay for a house and the buyers of course working for people with no ability to really service the loans the government created all this and of course you know what the lending standards collapsed as a result of all the cheap money and people were buying houses with nothing down or something you know why not gamble when you know you have none of your own money on the line and as far as you know why we're the regulators look at the other way because they were told about the other way because nobody wanted to rain on the parade everybody wanted this phony economy going because the voters were happy they would thought they were rich they were spending a bunch of money the politicians were happy the bankers were making a fortune in the short run everybody was making money as our whole economy was you know being gutted but this was obvious to me that it was going to end badly I knew that eventually the music was going to stop that real estate prices were going to they would have to as mortgage rates went off as speculators of pot holding property that they couldn't unload I knew that people were going to be walking away from their mortgages when they had no home equity I knew that many people had borrowed out their home equity you know several times over and that banks are sitting on all this worthless paper that they were carrying on their books it's actual assets I knew if somebody has like a $600,000 mortgage on a house that three years ago was worth $300,000 you know I knew that that no that paper was going to collapse and I knew that you know all the rating agencies I could see was obvious that they were they were rating stuff investment grade or triple-a that should have been junk it should have been obvious that nobody really cared because of the environment that were in but again this was all what the Fed did to stimulate the economy out of the recession of 2001 2002 which also was a consequence of bad monetary policy in 1990s and the big problem is that with this bubble burst and the collapse came and I know that items this was coming as the banks are going to stay out that is ready to go bankrupt I mean this was obvious to be just intuitively I didn't even have any window into the bank balance sheets and I always this is an observer of what was going on I knew that these banks would fail I knew the defendants ready would go bankrupt just based on a small amount of capital they had and the enormity of the loans they insure and I saw how much real estate prices gone up but I could look at a chart and I knew if prices go like this they can go like that but nobody believed that well the problem is when this inevitable bubble collapsed the government that reserve acted as if nobody could have seen this coming it came out of left field this is 100-year flood right having nothing to do with our bad policies and and what was their conclusion that we need more regulation we had too much capitalism too much greed without any idea of how it happened like you know George Bush said that Wall Street got drunk you know I said yeah they were drunk at Main Street was drunk but they didn't bother to try to figure out where the alcohol came from why they got wrong figure out that Alan Greenspan who the bartender instead they gave the night more power you know the linker the country up commute even more than even more money because I think that the crisis that's coming that's the subject of my my most recent book to refresh the crisis that's going to come as a result of this most recent round of stimulus that isn't even over enforcement it's now that about the launching of QE 3 but this crisis is going to be worse the bubble that we have in the government in the bond market and the dollar when that worse and we have a sovereign debt crisis and a currency crisis similar to what's going on to draw up the pulley on a bigger scale when we have that I mean then there's that's the end of the game there's no way to postpone the pain anymore we're going to have to live through it and unfortunately it's going to be excruciating because of the lens that the Fed is gone to postponing and on that grim note let's see a presser Carnell that do you agree with all that and if you knew all explore some more contentious areas but basically again news how many more I think the Fed was you think the Bible I would sharply criticized here but I think we also need to handwrite mention the trade episode and the trade deficit by the way have a have a not only where we spending money we didn't have why the money was going to other countries that were holding on to it and we invested in this country so for example the government China China strength surpluses but they were invested in mortgages and treasures they were poses that we're building factory I guess I'm not I'm not a head the point I want to make was normally you think people are investing in our country that's good and but but the consequence of all that capital being available to this was to further keep interest rates low so we could we could be a borrowing binge without racing I would say it wasn't invested it was now invested it went into the wrong parts me that's a fair game if fed consumption is fed housing we obviously didn't need more housing or over house than we have a Clutton houses now what we needed were more factories more production to shrink that trade deficit but we didn't get that if the fed had led interest rates rise in 2001-2002 instead of pushing them down we would have had a more severe recession but we would have corrected some of those imbalances and we would be a far healthier economy today we would have avoided the housing bubble in the financial crisis but for political reasons delicious the Fed did not want to allow a necessary but painful group from the economy so they screwed it up even more by compounding the states with a housing bubble that exacerbated everything if you thought that trade deficits were bad but field in the 1990s I mean they went off the charts during the 2000s and look where they are now and we're still running trade deficits of 500 billion dollars a year were their regulatory with our regulatory figures I wonder though if I could respond to the first will be an agreement disagree the gift of think that the first thing I want to emphasize is is the pickup on Peters reference to Corrections there is an to put it in context there is something about human nature that makes most of us want to buy during a boom and to detect it to sell during the bust so that is there is something in most of that pushes us toward buying high and selling low and and if you really want to buy low sell high you've got a discipline to do something that goes against the herd mentality that seems to come naturally to us so up there it so booms and busts I think are built into human nature and anything you see we see them repeatedly in economic system and and so parka so part of what you gotta have is a correction that is when you have a bus in order to have a healthy economy going forward you've got to have that the deadwood needs to get burned up and instead the political dynamics for a while now have sort of been on the notion or shouldn't happen it's the government's fault if we ever have pain I mean the government has passed plenty of faults but the fact is that they're going to be up x they're going to be down x and if you try to avoid the down x you're asking for more trouble for future here's an analogy of the if you went back to nineteen and 60s you had the characters Smokey Bear I don't know how many women with them I suspected a fair number if you missed out on smokey her but Smokey the Bear was a symbol of our national efforts to prevent forest fires and smokey would stand there with shovel up right before the Rangers happen see only you can prevent forest fires except for those listen grow up in this optimism only you can prevent forest fires in the south what they don't even care about anyway here's the analogy the smokey bear was a symbol of what we could call fire suppression policies that is that forest fires were bad so we wanted to prevent them so the upshot of decades of fire suppression was that the amount of incendiary our burnable biomass in forests increased tenfold to what it was before so that whereas before you would had a dangerous an unpleasant blaze after all these decades of fire suppression you face a conflagration that would screw so in an economy and in a financial system if you don't have corrections good thing the problems the deadwood ready to burn builds up so I just I've got booms and busts are natural part of economic life I think it is right for public policy to see to mitigate booms and busts through intelligent responsible monetary policy tightening and when things are loosening when things are heading down the Federal Reserve being there to stand as a - to serve as an emergency lender during troubled times - healthy banks you need to turn asset yeah they could probably set something that then I can disagree with I agree what you're saying about the forest fires and that was a great example of Alan Greenspan throughout his entire tenure Hitler the 1990s every time something went wrong the Fed came and wrestling with with more tea money and so we never really solve the problem we paper over and we just compounded them with the bigger problem but now you got addicted so they're having vocal briefs that come in and bail us out when we held ourselves without an appellate they are built so is that much at all affectionately on Wall Street decreased and put and now there is a Bernanke put but I disagree that you know that you have these booms and busts historically just randomly the people just act irrationally for no reason I think that most of these periods are a response to the bad and false signals that are into the economy by interest rates being artificially low I think with central bank's interfere and price fix the price of money and in a free economy prices need to be set by supply and demand the market needs to discover the price to clear the market and have an efficient allocation but with a government short circuit that market mechanism and just picks an interest rate out of thin air regardless of where the market and in fact generally there is a political incentive for rates to be lower not higher than they otherwise would be there are a lot of factions in the country that benefit from cheap money particularly better because you know debtors always want inflation they want low interest rates the government is or is world's biggest debtor but American voters have mortgage loans car loans student loans credit card debt so you have more Americans in debt and do outfeed of money and CDs and so they always want cheap money Wall Street correspond to cheap money so it can speculate and to lower the cost of money the easier is to speculate and so there's a lot of political forces so when the Fed puts interest rates too low and now you've got the price of money long and now you have activity that we have otherwise you have too much borrowing because it's cheap you don't have enough savings because there's not enough return on savings we consume too much because we have that cheap money we don't produce enough don't say enough you get these big imbalances that go to your economy there you're going to service sector economy like we have because if you can just import things with your cheap money you don't need to make them and you don't need those factories with those smokestacks all the pollution just have a storefront with a bit of cash register and let the Chinese get all the pollution so we get this screwed up economy and all this is the fault of this to say that what we should put the Fed in charge of somehow mitigating the booms of bosses we should we should have them tinker around with interest rates if they think the economy is weak they should cut raise if they think it's strong we can raise rates they're not smart enough to figure out how to do that they're more likely to make a mistake and cause the problems that you want to put them in charge of I think that the best thing that you can do is take the power away from government don't let government set interest rates let interest rates be determined by market forces just like the price of everything else and have salla money you'd be on a gold standard you don't let the government try to guess what the money supply should be and go with the government monetize government and I think even if you look back at the various panics or booms and busts that we had in 19th century I think they're small compared to what we've experienced in 20th century and the 21st century and what we're going to experience I think this next crisis is going to war even the Great Depression so I think we're much better off with sound money and we didn't have you know those you know huge of miss allocations that we have now you sure yeah there's always going to be you know people will get crazy about certain thing whether it was the railroad routes or calm but these bonds would never grow as big as they did without the cheap money that's financed them and you know and just let people lose money people would learn their lesson I mean how quickly could we have really gone from a stock market bubble to a real estate bubble if the Fed had stayed out and not bail people out and let the economy heal we wouldn't happen it is it's defendant nuns of aim and so you know you keep so you can just read your ankle and so fixing it you you shoot yourself up with some kind of chemical so you don't feel it and you can keep walking on it but then you know then you break it worse because Novocain said it will fall signal to your brain and your foot was fine so you kept walking on it but when you need to do is the ellipse get off your foot so we've got all these problems in our economy and the free market is trying to fix them try to get rehab resources properly allocated bring up our savings and investment bring down our consumption bring down our trade apps and shrink our government and you have the federal government the thirds are fighting the market trying to stop that because in the short run it's a painful process that none of the politicians have discovered for it but in a long run they're not going to spare us the pain they're just going to make it that much more excruciating I certainly agree about the importance of market discipline and the importance of a a meaningful adjustment process I do want to respond if I may go to to what Pierre was was saying for example regarding the 19th century I really just say before that that I don't see any any any way Craig believing the Fed can set long-term interest rates I mean what we're talking about with monetary policies would be that the Fed can influence to some degree short-term interest although right now their policy statement policy is to bring down long-term reason that's better yeah yes and I said incredible but I just want to be sure everybody's clear on what the world looked like before the Federal Reserve and my point is not to run free for the forwarder but be sure that those listening can can better form a judgment about sort of would be what the choices are here the United States had with central bank from 1836 until 1913 Andrew Jackson destroyed the simple bank that we had injecting burdens and we had financial panics in 1837 SR 1836 1857 1873 and 1907 and so this was without a governmental role of seeking to set or moderate interest rates on top of that and on an even more frequent we had real estate booms and busts I mean you look at the big picture of American financial history the greatest pitfall that banks and things have been recently because let's say if real estate prices double a bank makes a loan a bank makes a loan borrower puts a forty percent down payment down the bank fingers would really be improved got 40% down pain and prices go down where they look and and the bank gets collared and there are this week people go into this later we're interested but they there are particular reasons why banks are fragile they're really fragile because they that operate to a large extent on borrowed money their liabilities can go out the door in the next album whereas their assets are not so regularly market and there are the reasons to so banks have repeatedly gotten burned making bad real estate loans and this in era where there was there so that I it's hard to argue that being I think that the real estate bosses under the Fed and under the guaranteed bank deposit model and government insured are much larger effect IBM even felt to paint because almost every mortgage in this country is not guaranteed by the US government solutely unfunded liabilities are enormous that the taxpayers face but I would say that if you compare US history prior to the Fed Reserve look at the the 19th century in compared to the twentieth century the economy performed much better during that time period certainly our money perform better if you look at prices prices in 1900 were about half of what they were eating so money any value since we've had the Fed the dollar has lost like 98 percent of its value I mean look the Fed is destroyed almost all the values of the dollar had before we had a Fed the dollar was score house of value in fact a mean value over time because purchasing power of the dollar went up or when we had gold has gone down uh since the feds been in charge and it's been taper and I think if you look at the wealth that was created to rise in living standards and think about what we you know what we went through the Industrial Revolution all these immigrants coming into America from Europe we absorb those immigrants we migrated our our people from the farms to the cities we created all these jobs we created all this wealth without a central bank without inflation we created the middle class I mean people were coming to America all around the world because of the wealth that was being created here without eighty eight that reserve I point out sometimes when I talk will don't even understand this but you think there's a lot of wealthy people around right now well of the thirty wealthiest Americans lived adjusted for inflation only three of them were born after the Civil War and only one of them was born after the Second World War so a lot of wealth was created but not just at the top I mean we created a living standard that was the envy of the world in the middle class was worn out of American capitalism out of the banking system that did not have a government involvement you know the biggest problem in the banks is that they socialized it is that the government ensures all the deposits and so now nobody in America cares what banks do with their money because the government covers it the bank so that you don't give a damn what they do with your money and so everybody speculates and we've turned over market regulation to the government but we had none of this people were very prudent about where they put their money and then compete with one another based on soundness you didn't have this you know six percent capital nobody would put money in a bank that that wasn't levered up like that video but people do it now I mean I got plenty money in Bank of America even though I think they're insolvent why am I putting my money into a bank I think is insolvent because the government closes they think they got it covered you know if it wasn't for that guarantee I would put my money in a solid day but now believe the moral hazard because now that smaller solid a loses the deposit that you have and instead the government directs my money into a bank that's broke well the government isn't directing it but people are responding rationally to the incentives created by them as I said it's nice certainly that's there's a difference between directing which suggests apply in your plans distinction without anything else notice you I want to get into some distinctions myself on the I certainly multi-discipline is important and it has been a terrible mistake to see market discipline on the making industry impaired that has to come and then people have been clear that there has been significant additional impairment of the last 10 or 15 years if he went if you went back and looked after the 1991 legislation that pushed back on to the prevail you saw the difference in the interest rates that banks had to pay white according to the credit quality of the bank it was possible to have more differentiation and by the way I believe it's possible to handle the failure of a big bank you've got to have the system ready and you got to have the will to have the unpleasantness of that occur and there's a lot of political reasoning I've got to let the deposited lose money because right now whatever bank fails they cover everybody they cover the people whose accounts even exceed the that's essentially implicit in my statement about Banco your it is said that insofar as they were uninsured deposit and basically the orthodoxy represented by people like secretary Geithner is that civilized countries films and we can't allow our to fail but it would be too destructive and I don't agree with that so they get larger and larger because everybody puts their money in those banks they're already they get larger and larger and they also become more and more s5 now but it's something that fun I think you want if you give your elephants a few minutes ago we're conflating some things that are of a different kind you infect it to be a little rhetorical about it you seem to be blaming the Federal Reserve for the fact that the United States was no longer a developing country I mean part of what this was a developing country during the 19th century and we had the high growth rates the sharp increases in living standards that are more possible in a in a developing economy where you're operating from the growing from a lower base than they are when the base I don't think that countries have to stop developing there's more earnings that we all want you want to improve our living we don't want to you know think that it's plateaued what do you think you think that a fifteen percent or ten percent GDP growth is a realistic goal for this country I don't know if you look with nineteenth-century ways and it's definite it is in a healthy developing economy those sorts of things realistic in a ways in their life anyway it would be very interesting to see the types of growth rates that we would be capable of if we still have the government the regulatory environment of the 19th century to because I know that if we had today's regulatory environment back then we never would have grown at all right we still be we'd still be an emerging market you know but because we had so much freedom and capitalism flourished we were able to achieve so much the problem is once we became successful we basically were our own worst enemy and we abandoned all the principles that made us rich because of politics because people want to get elected all the subject you have your wealthy people and you have people who aren't as wealthy now the politicians playing at that envy and greed and they try to buy the votes of the masses by promising to tax the wealthy and they end up killing the goose that lays golden egg but they think they create an economy that is no longer capable of growing because the government has created so many obstacles to growth that didn't exist before and so we don't know maybe we could still grow who knows me I think had we maintained our our level of government freedom throughout the 20th century we would have a very different country I mean our standard of living would be so much higher we would barely be working by now probably maybe you know maybe you'd work two days a week you know not that many I mean it was probably most that matters women with kids would not be working I mean a lot of men would not working we'd have machines with a lot of things for us but unfortunately all that progress was slowed down by bureaucrats and red tape and so we don't know so you get in your career I love the idea of the three star of the sky and I certainly there there there have certainly significant costs inappropriate government regulation the same time except if you look at the late 19th century you have what economists call the long recession a recession two decades during the time when the when we were on the gold standard and we had no central bank and we had a twenty year recession when a free quote look look at Bukit look up long recession it was it was more and was painful and look as well as the panic of 1907 which was the most which was apart from the Great Depression the most severe panic or chemical but the Great Depression was the worst at that point and that was the only one that had the Fed and had the spot with a full changing our whole arsenal of stimulus and pump priming so the corrections that we had absent the Fed we're not as bad as what we had witnessed bed that's and I said earlier what is coming is going to be worse than Great Depression no American that will ever have lived through the type of economic decline that we ready for well as a consequence of all these government policies we've got the Fed because of a considered response or the opinion leaders and the general public to the panic of 1907 the the the in the end you had part of quelling this nation and it was a this so you have a panic in which financial in which on the banks of this country for six weeks would not allow you to withdraw your money and brokers over I flown went to an annual rate of 100 percent if you could get them all and so there was a people made a considered decision that we didn't need a central bank yeah although he about money Channel yeah well first of all we did a lot of things of 1913 we passed the income tax but yeah thank you 9:16 yeah all right well that was less evolution huh morcego now wasn't it what it wasn't my teacher King it was the same here we got the Federal Reserve 1916 they thought it was a sixteenth amendment but I'm pretty sure 1913 but in any event um even if you say hey the Fed was a good idea defended they created in 1913 there's no resemblance to what we got today because that Federal Reserve number one was not even allowed to have a part of its collateral government bonds including by Treasury so it was smart enough not to let them fit by curations feathers of notes having back 100 percent by commercial paper and 40% of my gold so it was a very different animal that they were pretty back in 1913 had anybody proposed creating anything similar to what we have today he never would have seen the light of day that they would have lasted I'd go out of the country if you tried to pump us up as crazy but we now have so it was an exam the camels nose getting under the tent there were some good things I wrote my book that have I been around back now I might have actually support it the Federal Reserve Act the way it was intended but in hindsight knowing what happened you have to oppose it because you cannot trust the government that is the problem once you create a mechanism for that central bank you create that corruption in fact it didn't take in total First World War when the government wanted to finance the war by printing money that they waited amended the Federal Reserve Act and that's when they gave the Fed Reserve the power to buy Treasuries and in fact that's when we got the debt limit it'll be all talk about the debt limit now we have no national debt limit until we gave the Federal Reserve power by bonds people were saying wait a minute this could be very dangerous the government should run up a lot of debt we better put a ceiling on how much debt the doctor can have but the problem is this ceiling was raised and put a ceiling that they can always raise but at least they saw the inherent problem in allowing the central bank to monetize the debt of the government but now you know look at look in the mess we've got 16 trillion accounting of debt and we're heading for sovereign debt crisis because we have this central bank so radical they say their person might say president Carnell that two-part solution is abolished or these typologies as we know it and go to a gold standard and would you say those are crazy suggestions and where you're being alternate fixes for our problems because it's a notice that we note that we have been on essentially the monitor quite quite a while and so this is this is still a monetary question the there the gold standard has its appeal there is something there are incentives that public officials have to to avoid pain and essentially to to to to enjoy ourselves now at a way through a cross-listed neighbor but I would I would refer to macro economist whether I take it differently than us of the history during the night they're stuck there there's there certainly was a perception people who I'm a wrenching penny and there is in addition if you do not have a lender capable of leading banks need for cash or the natural boundary this time I googled it just the 16 that I was ratified February 3rd 1913 okay want to make sure I was correct like the incorrect energy and if you want to get off the end is that not kind of very adversary's but I do appreciate so so the I as I mentioned earlier banks banks own banks have liabilities that in economic terms are very little that is banks you get in a waiting to think of banks are in the business of making five-year ones with your checking deposits so it is it is a tough business in the sense that you're checking deposits and lots of other people's to go out the door before we finish this program and so if banks are going to invest in more than six months Treasury bills they are going to need to have a way of kind of being able to meet depositors needs if they're able to do that though they were always able to do that and there was a distinction between the time deposit and demand deposit I mean people would know that if they want a checkable immediately asked access to data funds that they're not going to get an interest that if you want to get interest on your account you need to give the money bank for a lot of the time to generate interest in and so there's a difference between a savings account and a checking account and the banks would market in that way in fact if you wanted to check the account they charge you money they charge you per month they charge you for check because they were just providing the service it was a savings account where they paid you because they had access to your money and it was tied up for a period of time here even in a Norman Rockwell banking system you stood banks or still intrinsic why today but nobody is it is the nature of bank I know these things well you're coming in on me more than and you are a radio program did not grow up in the deep south so you are both quicker and your you are quicker and more coherent than honest our situation location individuals who went through our entire childhood being told that spoke to point can't understand you simmer down actually I'm looking for you do it yeah disappoint me and then improve more I can feel free to oh no one took someone tentatively what do you think the big fixes see me all but the the the banking business that you see going back for centuries is this that that the banks are using money that need to pay back right away and actually I'll focus on banking over the last two centuries banks use money that could be withdrawn tomorrow or that could be withdrawn in a short time to make loans and other investments that have a longer life and it's the loans that are particularly significant here they're what making loans these banks most care is on the asset side banks the most characteristic function and it's also part of adding enormous value to society and in fact this disability to use checking accounts and for that matter savings accounts does a passbook savings account the bank has a legal right to withdraw we require notice before you can withdraw but nobody does it would be like waving a white flag and saying we give give us notice so the arm so so it used to be this this is if this is this is nothing post Federal Reserve and there's one reason to think that this function of banks which I'm oversimplifying is saying using rejecting deposits I make five hundred ones then this this is very beneficial social it makes it it makes let's say credit to small business more available that if banks felt constrained only to invest in very short term Treasury securities now there's no but you can think that sort of thing the central bank function that I'm referring to here is serving as a lender of last resort that is making loans on the collateral to the healthy banks that's the classically understood lender last resort functions and I believe that a battalion is not yeah I think it is this abstract value makes the system inherently less stable prone to bigger disasters as we're going to see see I just don't buy the idea that there's something inherently different about banks that the free market doesn't work for banks that somehow the government has to come in and fix what the free market gets wrong I believe that competition among banks for reputation for soundness will result in a reserve requirement that works in a certain amount of money that is kept in reserve loans are made in ways that you know that work off with a free market and that's when you get a banking system that really loans to entrepreneurs to businesses that improve our living standards right now under this system all the bangles are going to the government the banks are loaded up on Treasuries they buy government guaranteed mortgages or guaranteed student loans or you know all none of this is held in the economy it's all suffocating and seeing of students let's see what some people in the audience have to say about this you have questions for either the speakers let's see hands if but I like that question how about you sir me in the blue shirt right in the front there and and tell us who your question is your attitude I think you made a mistake about like people were pushing for the Fed we leave the my pushing for it without 17 years the bank is pushing for the Fed pushing for 17 years 1896 and 19 in addition you had mentioned about the recessions that took place in the 18th century point I would like to bring up is that sometimes banks issue more notes and they have gone back for black I agree with that and and I am quite going to accept that that banks were seeking a central bank before the panic of 1907 this was classic example we see many cases like this in American history where a crisis or skin brings about something but it didn't propose before but did not have sufficient or and certainly we saw because we saw before the Civil War in particular we saw during the period with no simple bank and no federal banking presents presents a pattern of over issuance of paper money by by banks up until the convergence the Bank of the United States discouraged private banks from over issuing paper money because if we could do the bank in the United States itself would go and say give us gold for this money so that discourage older issues because the bank could not redeem its paper money and gold it face closure right then but from the and then with the Civil War we get the national banking system national banks were required to back their paper money 100 percent with fairies and consumers found that a much more attractive means of paint then then the the steal banknotes of the kind you described so I put it I'm going to take the place there was there was and I think of all the bad laws that were passed after an arcane crisis or after September 11 thing about the patron and all the things they were able to do because the political climate change we're not blowing in fatal direct and it enabled the government to take advantage of crisis up to you certain more power and deprive Americans of more right people appeared locks people can take advantage of crises and scandals from all sorts of different directions and and politicians of all ideological stripes can explore crises including 9/11 another question see you in the red hair in the second to last forever hi I'm I question a um you told someone about basically the fence today but I don't have anything about the Community Reinvestment Act or about the mandates or actually passed down from government that's maybe that you could talk to us a little bit about how you know banks are actually being pushed so even closes subprime mortgages they have to give out to the demonstrate that they were giving to minority is giving to low-income difference people who couldn't provide the down payment no actually you know given mandates I eventually lose it out when I talk about Fannie Freddie with for government created entities and I talked about the FHA and the programs they have it was basically financing 0% down mortgages well you are correct that admission all the ways the government interfere in Community Reinvestment Act was one of them where the government for political reasons push banks to make loans that otherwise will not have been made because they were bad business decisions I mean the banks weren't discriminating the banks are a bunch of racists they don't they don't know the color of the borrower they're just looking at the numbers they want to make loans they don't want to turn down alone but if they look at the numbers and it doesn't work it was too risky and making there was a reason a lot of minorities were getting these loans because he hasn't been back you could afford a house but for political reasons and especially as housing prices were rising because of the cheap money and subsidized mortgages appear as if the only thing you needed in America to get rich was to own a home and therefore why should only the middle class and the rich be able to get work you know get rich for nothing you know why can't the poor just own a house and get ready for doing nothing so it became like you know it's like the realtors were able to redefine the American dream as homeownership see the American Dream used to be you can succeed no matter how hard they work about how humble your beginnings you didn't have to be born into a wealthy family your lot life was not determined by your who your parents were you could be whatever you could be based on your own hard work if you're in your own ingenuity but all of a sudden the American dream became owning a home why because if you bought a home you got rich that way and so a lot of people wanted to own homes and so politicians wanted to make it so that everybody can get on that gravy train up again this is why you cannot trust governments to regulate anything is if you put the government in charge of the banks even if it starts out with a noble purpose right it's not going to stay that way because the political pressures are going to be there and that means that's why we had the bills because there were a lot of boats to be had by people who are now going to be able to buy a house and get rich whereas you know this bank wasn't letting them do it and that's why you talk about all the regulator's the regulators matter how many regulars we had they were not going to rank on this great in fact the executive at Fannie Mae you know I forget the guys name so I actually saw an interview with him on CNBC and this is you know way after the peak and he said that they were going to reassess their their their lending standards at Fannie and Freddie and they were no longer going to guarantee loans that they knew couldn't be repaid that they weren't going to just look at the teaser rate they were going to look at the the the recess and he said the reason that we did not do this earlier the reason he were guaranteeing mortgages even though it was obvious that the borrower couldn't afford the payment is that we didn't want to hurt the grow state market we didn't want to interfere with speculation they said people were getting rich buy houses they couldn't afford and it wasn't up to the van and a to put it into that and yeah perpetuated it I think professor carnival has an objection to yes I would note here that very eloquently our screen together a number of different things and the if you didn't work with that into that one but a fair number of uh things now I want to go back to the Community Reinvestment Act and the the issue of the question about whether the government cursed financial institutions to make bad loans I have been looking among my papers here because I brought a copy of the Community Reinvestment Act with anticipating that this might come up and somehow I it seems to have gotten if I could have kept it down to two Peter and ask you now to just say it says whatever you want by anyway know that the the no lender was was forced to make an unsound loan the Community Reinvestment Act doesn't have teeth a part of the speaking it has gone Bobby basically keep second is a rope Sam Peter Schiff now by by dropping but I mean it that's writing and main that they could imagine second dialog privileges they didn't get a hide the phrases and show you that would and I investing in my boy just minorities is it that take the sense the Community Reinvestment Act has two provisions the first says that that regulator of Congress's that regulators must evaluate an fdic-insured banks record of making loans to its entire community the second provision says that regulators must consider the rating when evaluating applications by the banks to engage in things like mergers and acquisitions now the almost never has any regulatory application been denied on community reinvestment grounds there was a few instances like this in the late 80s and early 1990s but it is the bank regulators are not none of them have that enthusiastic enthusiasm but the whole goal is safe here at you're hotter than I am I'm sorry that we are you know us a world weather flooded mammals we need to have something take to the air so of what I like your pieces me so long tt-they but beyond that the both the statute and the regulations for the Community Reinvestment Act but talking about making sound lines so there's no push to make us sound long as there are no quotas that say everybody has to do it beyond them there is nothing that ties that where it when the CRA was pushing for for for subprime unsigned subprime lending now let me let me but just underscore that point and this was something that I was going to talk Beverly or Peter um and that is that that much of the subprime market was fully cried most most subprime loans were not originated by FDIC insured depository institutions that was subject to the that's one act the if you look at the top 25 subprime lending only one as I recall was an FDIC insured depository institution subprime loans were originated predominantly by mortgage companies and first Fannie and Freddie played a role securitizing them but a lot of it was also going fully private deals by Wall Street firms but they sold a lot of them too and Freddie bought they they say me Freddie may have bought them but nobody forced them to do it and to try to prop the market up the housing market because they knew that housing prices were being determined by the market Meyer we're getting we're here notice that we're getting into something that isn't the government twisting somebody's arm to make that long but Fannie and Freddie what was the government because without the government guarantees they never could've got away with this but you know you just said them that Fannie and Freddie jump in to buy this stuff because they didn't want to see the housing market go down now last time I checked jumping in is different from having your arm twist their little Eagle one opposite for your comment work the Community Reinvestment Act is different than the moral hazard of Fannie and Freddie for two gigantic companies that were making huge problems we have a stock shock that they had a government guarantee so the market allowed them to borrow enormous amounts of money to prop up housing prices that normally would but with the Community Reinvestment Act it is clear the intent of Congress was for banks to make loans that absent that act they might not have any not that is not true nor is that what was in her as we act the purpose of the Act was to push banks to look to see if there were ways to find sound loans to me but why would they do that anyway there's a Providence and I think I think that the banks don't need the government to force them to make a good loan they're going to do that on their own it wasn't well you know taking what you've just said either literally figured that there are no market failures and in fact there there's there saw after a number of market failures and take these so the bank the governor was trying to get the banks to do this for their own good because the bankers were too stupid the services market on their own come on if you're gonna interrupt be a little you know having lessons a mobile I'm not get to being interrupted but it's it's it's it's one thing you know where the interruptions are coming at why how it is the rate that Meyer that no that's a fair point a debate requires an ability for even the southern born slugger - Dennis hoping I didn't get out to add a little structure we probably actually just have a couple of interruption free closing statements how about what you think that the changing should be to prevent future disaster passes so if you give us in fact you can give us just about one or two minutes bullet list a bullet point lists of what you think needs to be different to prevent catastrophe what you do okay so I'm going to start with bank regulation the area that I have have spent of the my professional life I would require banks to have significantly higher network when regulators have required in the past and the lodestone for that should be how much capital would be required in a free market with no government guarantees and their expectation now so that would be considerably higher than me right now if you have that bankers will have a healthier set of incentives for all of their decisions and the system will become royalism in addition we need to look more broadly at the financials and look at the interconnections among financial products and and also at the sub food wiring moment of the system and and and consider is there and so I'm going to speak in the context of banks which are regularly good are we allowing those to have an unsound and excessive credit exposure to other financial we have a general rule limiting how much of a bank can lend in one borrower but who works regulator success doesn't apply to banks lending to each other and that has provided the rationale for too big to fail tree because the proponents of it say if this bank fails it will take everybody else down with it well let's yes let's have limits as in the Congress hold for two decades of a another example of a regulatory change it would be involved the asset or it would involve the money market mutual funds right now the money market funds are able to set their share price at one dollar even though the actual value of their assets is fluctuating from day I would I would have the the asset the the share price the money market funds walked away with the value of the funds assets if in fact money market funds are investing in the kind of assets they were they were set up the whole the fluctuation won't be much and people use so though these would be some examples of what I would I will not hit the central maxima and your ship just in two minutes or so ago which in Changhua I mean I agree with you that Bank should me or capitalized and I think if we had a free market they would be more capitalized I think it's the government that protects the banks from market forces from competition and it's so I think that the best way is to get rid of government regulation and to reinstitute market regulations and it's not I think that the market never failed and the market makes mistakes the differences I think the government almost always fails and at least with the market base in the state it corrects it when the government's mistaken compounds it and so I think we've got to get rid of things like Deposit Insurance I don't think the government should be in the business of insurance bank deposits and want to buy private insurance for the deposit they can do it they can market it they can advertise it but I want banks to compete with one another over the safety of the institutions of the prudence of their lending policies of their balance sheet stuff I don't want the Federal Reserve said price-fixing interest rates i want the market to discover the true interest rates so that we have a proper balance in our economy between savings and investment and consumption and borrowing so that we don't have the distortion so that land labor capital go to where the market these of the go not where the government wants to go because that way we don't have the properly balanced economy so i think you don't necessarily need to abolish the central bank is to achieve that ends i mean we can rein it in and maybe restore it to its original purpose when it was first created but i do believe that we would improve our monetary system it was went back to bowls and i think we would have we have much more economic growth when we have some money and we take that power away the governor particularly for middle-class for people who are really adversely affected by the erosion of the person power of their savings of their wages their income of their retirement assets i think if we have some money we'll have more economic growth we have to learn from the states of bubbles and paths and said of constantly repeating them and i do believe that that in the free market profit opportunities will be met if there's an opportunity to make profits therapy banks or any other business or not dumb enough to let it go and if a bank is not making a loan there's a valid reason for and the government should try to encourage and if a banks or anybody did to make an investment something that absent the government incentive they would choose not to do because all that does is create big mistakes and that ultimately have to be corrected down the line those Corrections become very painful which unfortunately opens up yet another window for the government to come right up to the rescue of what is perceived to be another market failure but what is really a government failure and then just simple government and the process gets worse and worse all right thank you very much to everyone came to [Applause] and I had yourself say that even though we all learned a great deal I still think the financial crisis is kinda complicated

Channel: Peter Schiff

Views: 94,544

Rating: 4.8906527 out of 5

Keywords: Economy, Crisis, Peter Schiff (Stock Broker), Economic, stimulus, fanny, freddie, housing, FHA, obama, bush, clinton, Barack Obama (US President)

Id: Qj2MYgxbqFU

Length: 81min 34sec (4894 seconds)

Published: Wed Oct 10 2012

Reddit Comments

[u/prof_doxin]

Not much of a debate since Carnell mostly agrees with Schiff. It is a lot like retired cops finally supporting ending the war on drugs.

However; 1h12m it starts to get good when discussing Freddie and Fanny.