Raw footage of Jim Grant interview from The Housing Bubble and The Bigger Bubble docs

it is almost inconceivable to realize but one does realize because it actually happened that the government created what amounted to two Titanic hedge funds these organizations were really immense super structures of mortgages resting on the tiniest sliver of capital the theory behind these immense objects was that house prices really went sideways at worst up mostly and one prices did soften the solving took place in regions and not deafened coast to coast Fannie and Freddie were institutions founded on the conceit that the government can and should subsidize the ownership of houses and that it should do so the immense leverage one can do one's mortgage interest expense from one's income and filing a personal tax return I'm all in favor of loopholes and deductions in general but shouldn't we have loopholes and deductions that don't advantage one particular form of financial asset and it seems to me the answer that question is yes therefore L not friendly towards the mortgage deduction on Wall Street there is a useful lie expression and if those there's no such thing as a bad bad bond only bad prices mortgage securities are intrinsically neither good nor bad depends how they are structured and most of all how they're priced mortgage-backed securities filled with dubious assets priced 100 cents on the dollar very questionable mortgage-backed securities full of dubious assets priced at 10 cents on the dollar potentially very interesting now through most of an era of enterprise and capitalism in this country and indeed of the world governments had very little to do with with banks no deposit insurance very little formal state directed examination in the City of London about the turn of the 20th century I think it was next to no government intervention in the banking business ditto in France when the government when the authorities order a certain level of capital for instance the rule itself creates I think a false sense of security about the stability of the banks being regulated history is full of examples of amply capitalized banks that came a cropper he found as the the assets on the other side of the balance sheet were illiquid that a city could not be turned into cash when the depositors suddenly wanted their money in certain Bank of the United States the iconic failure in this country in 1930 was an example of the well capitalized illiquid and a finally disastrous Bank so capital regulations on their face seemed to be unhelpful and at times talent areas you know in this country until 19:35 the federal banking rules stipulated that the stockholders in the bank they became impaired or insolvent were required to step up more capital in order to pay the depositors and the other creditors that it is only logical it seemed it was their bank after all not the taxpayers then with the Banking Act of 1935 and before that with glass-steagall in 1933 when the institution of the FDIC there came a great sea change in our banking affair is sudden and and indeed ever since by degree owners of banks remained nominally the stockholders they certainly got the upside but the final owners of the problem of banking became us became we the people became the taxpayers a very very unfortunate and insidious turn of affairs it's been going on for decades and decades but surely there's something to be learned by the arrangements of yesteryear in which a failed Bank fell into the laps not of taxpayers but into the laps of negligent stockholders the FDIC is part and parcel of the socialization of the risk of lending and borrowing which has been at the center of our troubles lowly's many decades you know depositors certainly doesn't mind the government standing by his or her deposits but there are of course unintended consequences of Deposit Insurance Milton Friedman and Anna Schwartz in the history of American money monetary and banking Affairs singled out the FDIC is one of the great advances in our banking arrangements but they wrote in a time of relatively Placid a banking experience and I think that they underestimated the unforeseen consequences of the socialization of that a kind of risk certainly the unforeseen consequences have become all too visible and prominent and I think that on balance Deposit Insurance does us no good Alan Greenspan was the was the figure headed more federal intervention and involvement in our financial and monetary affairs he came to Wall Street they came from Wall Street as a great intellectual and social ally of Iran the famous individualist and Objectivist he came did Greenspan to Washington with the hope of reforming us away from our collectivist ways into a sensible libertarian arrangement in dollar with respect to dollars in banking and ironically and perhaps sadly for the rest of us Greenspan became the archetype of one of the stock villains and Iran novel he became a bureaucrat who wielded federal power sometimes arbitrarily I think always conscientiously but ultimately I think unhappily for us that people manipulating interest rates trying to push the economy this way and that he was an important figure in the in the migration of the intellectual migration of central banking into a kind of co2 pant central planning so his career was a study in among other things irony I'm all in favor of a free-range interest organic interest rates I think interest rates ought to be grown in nature like a good egg or a good piece of chicken we ought not to have these hothouse government mandated interest rates why should a bunch of people sitting around the comms room of the Federal Reserve Building in Washington DC know better about the proper level of interest rates then they know about the proper level and say of corn prices interest rates are for reasons all too rarely discussed or examined kind of the last redoubt a federal price fixing you know the Fed Chairman Ben Bernanke gave a series of lectures to the I hope distracted and inattentive students of George Washington University in which he said that the federal government's experience with price controls in 1971 was a disaster he said prices after all I said the Chairman prices are the signals the market economy we must not manipulate or suppress them he said this did were not he the same man who suppresses manipulates and distorts that price called the interest rate he seemed not to connect the dots between what he told the students and what he himself does for a living but we ought not to fail to connect the dots they're very important dots indeed in nineteen the biggest failed bank had liabilities Tennessee deposits of something in the order of three million with an M dollars it was in Texas tiny bank even then the unsocialized unsubsidized banking system held together and big city banks did rather well something has changed and to be sure not all the change has been for the better at our finances glass-steagall was bill enacted in 1933 the glass in question was Carter glass who was legislative father or one of the legislative fathers of the Federal Reserve Act of 1913 and one of the ideas behind glass-steagall was that commercial banking ought not to be mixed up with Investment Banking that such outfit says as what was then called the National City Bank today no the citigroup ought not to be playing around in the stock market at the same time and was acting as the depository for its customers funds and it was a reaction to the disaster of 1929 and 33 especially 1931 through 33 and more especially still I think the banking holiday in 1933 and the revelations about the dubious conduct of our bankers in the aftermath of the of the crash and the banking crisis my persistent question concerning this crisis of 1933 is how relatively well the unregulated banking system did at a time when nominal medicine nominal GDP measured in dollars unadjusted for price changes how relatively well the banking system did to be sure thousands of banks failed but more thousands did not this at a time when our national income was down in one dairy dollars almost close to 50 percent not quite by half but close enough to have astounding to think that some banks any banks where we may in saw that where the national income was almost sawed in half as I think that's much a testament to the cupidity of ordinary bankers but rather to the confidence of the survivors but nonetheless in the wake of this crisis these reforms were instituted and and the FDIC was part and parcel of glass-steagall and I think as with so many reforms the intentions were honorable the crisis certainly undesired undeniable but the most interesting feature of those reforms is not the intended consequences but the unintended consequences and the past two or three years have been all about the unintended consequences of federal involvement in finance and banking some years of gone by since the institution of the various stimulus plans and to be honest they rather run together in memory I do recall as if for yesterday the expressed emphatically ins for expressed good intentions of both Presidents Bush and Obama they did mean to do well but I can't help notice as perhaps many others have and today we are suffering unemployment above 8% as measured this economy gets out of bed in the morning and feels like an old man and if you are twenty-something and jobless your hopes of finding anything that resembles the life's work you had hoped for yourself though those chances are very small indeed it's a funny thing about this stimulus the more they seem to stimulate the the more lethargic the patient becomes I wonder if perhaps we are not over medicating him or her there was a very instructive to me episode end or not so distant past and that is the depression it was a depression of 1920 to 21 as measured by the economists to measure these things expand about 18 months from January 1922 mid summer of 1921 and during this period everything collapsed well done everything but many things the GDP for example was down in nominal terms 20% prices at wholesale we got 40% stock market cratered unemployment as then counted once a 3 percent to 12 percent disaster so how did the federal government meet this this Cataclysm well the Treasury that wants the budget right a small surplus and the Fed raised its money market interest rate from six to eight percent notice however the depression of nineteen twenty twenty-one did end we are not still in it without stimulus as that word is used somehow forces natural market forces I gather we're successful in clearing markets and clearing away the debris from the boom and reinstituting set of prices and of expectations that allowed free individuals more or less operating spontaneously in markets to get out of the business of growing again burdock never talks about that depression talks about the Great Depression which virtually never did end and in in their 40s but I would urge the Fed to make a closer study of the depression of nineteen Twenty twenty one very instructive and very pertinent we're talking about so-called stimulus back time of our sorrows in 2007 2008 not the least of the problems was the almost invariable apprehension of Sunday evening our bailout teams worked tirelessly and more or less sleeplessly for the weekend to devise the next rescue plan in the case of Bear Stearns there was the shotgun marriage with JP Morgan in the case of Lehman Brothers there was no shotgun marriage at all just a shotgun but the the problem I think that the systemic problem as it were with the succession of of patchwork interventions was the very unpredictable nature of the response that if no one knew exactly what's going to happen on a given Monday morning what they would announce on a given Sunday night would they bail out would they not would they invoke the rhetoric of the untrammeled marketplace and let chips fall or would they more likely intervene to save us from ourselves and from Cataclysm that we were promised would make the Great Depression look like a walk in the park we didn't know we still don't know not the least of the unintended consequences of the interventions of that day was to sow the seeds of insecurity we don't know what they have up their sleeve chances are it's something big and disruptive dodd-frank is in about 2,300 pages is the is the crystallization a federal intrusion and of the socialization risk the government not unreasonably because it is the guarantor of seemingly or every financial contract not on reason where the government wants to minimize its losses it's like the sidewalk superintendent who is told you sidewalk superintendent will now pick up the pieces and paint the insurance bills of this construction project so the government has become more and more intrusive and this intrusiveness is it's never has never been better exhibited than in this voluminous bill which would put the government right up in the driver's seat of the automobile of American banking now American bankers based on the experience of 2007 8 & 9 may not know much about banking but this one institution that knows too less and that institution is the United States Congress Congress having written this rule these rules myriad rules has allowed the bureaucrats to administer them which entails all manner of drafting holding hearings finally writing rules that will allow the administrators bureaucrats and legislatures to sleep quietly and soundly knowing that they will not be responsible for what happens next so when someone was quoted as saying a trade paper yesterday the dodd-frank rules are like dissertations in a ph.d department of an economics program as rewritten by lawyers they are impenetrable they are impossible to follow and they are glasses in the joints and in the arteries and veins of our banking system they are in short an abomination now what's the alternative well the alternative is to reinstitute something like individual responsibility for outcomes infinite as it as it is or has been the bankers take risk with little bear risks we the people don't take risks but all too frequent we will bear the consequences of them the bankers got the upside and we taxpayers suffer the downside so friend of mine on Wall Street named Paul Isaac and says how about this how about that if a regulated financial institution hits the wall that anyone who was making ten times the average manufacturing wage for the seven years preceding the insolvency surrender anything over ten times manufacturing wage he or she is earned and those funds go to repair the damages caused by the bankruptcy and to compensate the creditors to me this is an elegant simple and highly desirable solution it might not be perfect but what it does is make a statement that the government's got the upside and and they get the downside this I think would reinstall the spirit of the general partnership back into our corporate Enterprise spirit general partnership of course as the general partners are online are responsible for the debts of the firm they are responsible individually and collectively if you're the general partner of a firm that goes bankrupt you are liable to the extent of your house your paintings your car and your golden retriever all of your personal property is at risk this had been that represented the characteristic form of organization of American Finance and long since that organization has morphed into the corporate form but you can't have both the corporate form and the socialization of risk by the feds we do have that today but the Isaac clawback plan it seems to me would go a great distance in restoring the sense the missing sense of capital spirit that I think to keep us off the rocks in the future quantitative easing is a very fancy phrase for what an ordinary civilian might call money printing a couple years ago a reader of the Financial Times wrote to the editor of that newspaper and I said finally at long last I I think I understand the meaning of the phrase quantitative easing I understand that what I no longer understand is the meaning of the word money that is the risk of quantitative easing is that we lose all sense of what money is in not so many months the Fed materialized from the thinnest of cyber air two trillion dollars with a tea the central bank in Europe the European Central Bank has done the Fed several better in the way of hundreds of billions of dollars in materialization of money these days they don't need a praying press all I do is use a computer keyboard it does make you wonder about the value of material they are conjuring sorry twist is a manipulative exercise carried out by the Federal Reserve the idea is to push longer-term interest rates for example mortgage interest rates lower while allowing short-term interest rates perhaps to climb somewhat higher so the Fed - I do this by is longer-term Treasury securities and longer-term mortgages and simultaneously selling it's shorter dated instruments it's part and parcel is operation twisting of the feds approach to central banking which would seem perilously close to the institution of central planning the Fed wants to stimulate the recovery of house prices and to do this it wants us all to be able to borrow money on the cheap to buy a house which by the way would seem how we got into this state of affairs in the first place for all the good intentions for all the hundreds of billions indeed of trillions in outlays in subsidies in promised interventions contingent interventions for all these trillions I wonder if we have done much more than prevaricate procrastinating and postpone it seems to me that that what is wanted is the clarity of what the economists call by the price mechanism simple supply and demand would it not be simpler would not have been much less costly to allow the marketplace to speak in save perhaps houses a little in the rich side we we over get it too much mortgage debt too much bad mortgage debt let us see what a house is actually worth the house prices would have fallen and speculators those sainted beings would have come in to buy cheap assets without subsidies as it is we have been spending and promising intervening subsidizing on and on creating more and more dollars of dubious value simply to postpone this day of honest reckoning a day of honest reckoning is supposed to a degree ominous it is also clarifying and it's also the beginning such a day is the beginning of something new people during this so-called recovery were forever invoking the example of Japan in 1990 is Japan and it's sleepwalking lost decade well yes the Japanese collectively as a society have since the turn of the 20th century certainly have refused to admit error certainly degree price error and to move on to the next thing America is meant to be has been should be a dynamic economy and a society that is not afraid of Arabs are afraid to reprise it that to me was the was the tragedy our collective exercises and intervention whether it was tarp whether it was health whether it was the bailout of Detroit whatever it was we did our best to drag our feet to postpone and to pretend I am ultimately optimistic that Americans will simply not do in Japanese we are too impatient we are too forgiving of error to pretend it didn't exist I think we will reap rice it eventually we are reprising it it's been a long road unnecessarily long road and by the way a cruel road for those who not been able to find work there's term of art in the federal reserve operations called excess reserves these are dollar bills over and above the level required to secure adequately a deposit the deposits of a bank for it so for example for bank and it's $100 in deposits it must and checking account balances it must set aside ten dollars and the event the depositors want their money back you might suppose that they would set aside $100 in case the depositors want their money back that is somewhat different question however over the course of the past couple of years the dollar bills above and beyond the amount legally required to secure these deposits has positively exploded more than one and a half trillion dollars piled up almost two trillion I forgotten what the required number is call it fifty billion in mints and men's surplus these excess reserves could if mobilized by banks support a truly astonishing level of inflationary credit creation Fed has it in mind to intervene in a timely fashion and as it were to sterilize or immobilize these non-redundant dollars and to save us from the inflation otherwise occur the Fed wants us to believe that it has the judgment and the skill and the dexterity to come and do this and I say it might but to date the Fed is impressed no one with its judgment or its - business or its skill so I I think that these excess reserves are a clear and present danger to the stability of our money and to the stability of our finances the Fed never before until last year or two had had paid interest on these reserve balances banks had this had to post them at their local Federal Reserve Bank and these dollar bills lay fallow like so much unclouded land during the crisis the Fed began paying a nominal sum of interest at one quarter one percent on these reserve dollars which doesn't sound like money or a lot of money but when you consider that they were paying interest on almost two trillion dollars worth of excess reserves it was indeed kind of an interesting proposition for the banks they could earn nothing by having the dollars lay in their own banks unused or they could learn earn 1/4 what percent of the fence so the dollars piled higher and higher at the Fed by manipulating the interest rate the Fed pays it things it can immobilize such dollar balances as it needs to if it if they're the banking system is now is picking up and if there's a demand for loans the Fed could pay a much higher interest rate on these reserve balances and thereby as it were bribe the banks from putting out the dollars into the economy so reasons the Fed and on paper it sounds fine so many things haven't find on paper but what we have learned and what we indeed didn't need to be told one could assume as much is that the Fed is a bureaucracy of ordinary well-intentioned intention Earthlings and they're not going to intervene long time they're not going to see what in the future and prospect what they will see so clearly in retrospect you just how people behave so I take very little solace in the fact that that could and indeed means to raise interest rates artfully on these valances to give you an idea of how little the Treasury now pays an interest expense and how much you would have to pay if rates were normalized if rates merely went back to say five percent the Treasury had to pay five percent and held everything else constant something would have to give in the national budget say defense you'd have to cut defense spending by 44 percent forty-four percent just to pay the national debt so the Fed truly is in a bind it is not supposed to be thinking about how little the government really can afford to pay an interest expense but surely that must be in the front of its mind the united states with this so-called reserve currency there's the world's money the United States and this magic credit card we consume more than we produce we pay for the balance with the dollars we alone may print lawfully it's as if we were paying our bills with the credit card that never and you never got an invoice in the mail to pay the balance it's fabulous in fact it's better than fabulous because we pay our bills in dollars and our obliging creditors send these dollars right back to us in the shape of investments and mortgages and Treasuries what to be better the trouble is that the debts do mount and in the absence of any check on our spending we spend is people would as anyone would that's the nature of this reserve currency now under the gold standard every nation has what would be regarded is it's kind of a debit card you must pay your bills and they come to which is like monthly under the reserve currency system the favored nation that is to say this nation America alone gets the special credit card and it constitutes an ever-present temptation which we do not resist which I think no nation of human beings good reason is to spend beyond our capacity to earn and tempted to do so we have done so and the results are as you see them incredible public debt and growing by the day week month and year I think there's a bubble as of courses as a term of art that is meant to connote an unreasonable enthusiasm for something or other in finance and I have a nomination for a bubble and that is the bubble in the idea of modern-day central banking it is the the collective insanity about the capacity of our masters of the Fed to see into the future and to improve that future before I can come to pass that is effectively what we all at least believe implicitly we think the Fed can manage the future seriously it can't so for the bubble of 2012 I nominate our collective misplaced faith in the institution of central banking as practiced today you

Channel: TheBubbleFilm

Views: 31,835

Rating: 4.8469944 out of 5

Keywords: Jim Grant, Interest Rate Observer, Wall Street, The Bubble, Panic of 2008, Financial Housing Crisis, Boom Bust, Austrian Theory Business Cycle, Great Depression, Bear, Stearns, Lehman, Brothers, AIG, Mortgage, Backed, Securities, Credit, Default, Swaps, Savings, Investment, Capital, Stagflation, Keynes, Keynesian, Finance (Industry), Economy, Economics (Field Of Study)

Id: VquBWxn0QLQ

Length: 35min 16sec (2116 seconds)

Published: Sat May 12 2012