Why the Meltdown Should Have Surprised No One | Peter Schiff

it is my great and distinct pleasure to introduce the Henry hazard lecture Peter Shiff shift president of Euro Pacific Capital is familiar to everyone who has watched financial coverage in the last year he is famed for being the most vocal financial economist to have perfectly predicted the crash he also happens to be a dedicated student of the Austrian school is the author of the prophetic crash-proof and most recently the little book of bull moves in bear markets whenever he speaks about finance and economics he also seeks to teach sound economic theory writing for publications such as the New York Times and The Washington Post today he will speak on the relationship between theory and practice and financial markets leadership you know I just looked at the topic for my speech about 30 seconds ago before I walked in the door but apparently I'm talking about why you know why is it dead people didn't see this coming or should people have known that this this meltdown was coming I know is there anyone in this room that was surprised by the economic meltdown that I mean did anybody didn't does anybody think it's over anybody raise your hand if you think it's over and does anybody think that the government the government's solutions are going to work or that they're going to help is there any anybody one one all right so I guess there's really no reason for me to speak here I don't know that I don't know that I'm an Italian to anybody any they don't know but anybody if you want to indulge me I guess I can talk about it a little bit anyway but now you know I don't know why so few people seem to understand what was going to happen I mean I guess you know when you're living inside a bubble it's very difficult to actually see what's going on from your point but it's just you know I I lived through two of them because I you know I'm a stockbroker and you know I was lived through the Nasdaq bubble and to me at that point in time it seemed pretty obvious what was going on in 1997 98 99 I mean it seemed obvious to me that these companies that people were touting couldn't possibly be worth other prices that people were paying yet nobody seemed to be able to figure that out back then I mean everybody seemed to be living in this new era in the end the internet had captured everybody's imagination I mean to me I couldn't see the difference between the the internet really and a catalog or a telephone I mean people were saying that everybody's going to buy everything on the internet and I why I mean why aren't people just shopping you know by telephone or why aren't they just buying everything in a Spiegel catalog I mean I it didn't seem that it was any different that I knew that the valuations they were putting on a lot of these companies I knew they did come out with a company you know maybe would be door knobs calm or whatever it was and you said well gee even if they sold every doorknob in the world they couldn't possibly be worth the multiples that they're trading at and of course you know they didn't even make they didn't even make any money selling selling them and the whole the whole idea behind so much of the e-commerce was just nonsense the idea that it was more cost-effective to individually FedEx items to people as opposed to letting them show up and buy them and put them in their cars and leaves I mean there's no way I mean there are certain items that lend themselves to online sales but most items didn't but it didn't matter everybody was coming public and people were getting rich but none of the people were getting rich because the businesses were successful the businesses people are getting rich because suckers were buying their stock I mean the guy that started etoys lived in my apartment building in in in downtown Los Angeles and you know I started my company your Pacific capital about the same time he started his he made a lot more money than I did but he didn't make a profit he never made a profit you know but he made a lot of money because he found people to buy into his idea and at one point he toys was worth more than toys-r-us worth you know I mean I remember when I was trying to get clients back when I was you know starting out at your Pacific capital and I was trying to I was trying to get people to buy foreign stocks I remember one country I was active in was in New Zealand and I remember trying to convince people who own shares of stocks like Yahoo why they should sell their Yahoo and buy a stock in New Zealand I would point out that Yahoo was worth twice the entire country of New Zealand I mean every every every every stock they had at all the real estate I said what would you rather own this entire country I mean the dividend yield the dividend yield on the on the New Zealand stock market was over a billion dollars a year that was a dividend yield yet Yahoo was trading for more than twice the value that of that whole stock market so what would you rather own this company that just got started a couple years ago or this whole country and and and you know you could take all the dividends no no one cared they wanted Yahoo they didn't want you know but it was just all nonsense but nobody saw it of course after the internet bubble burst everybody was was talking about how crazy was and the politicians were ready to you know throw people in jail and you know they vilified Wall Street but it didn't last very long I mean the whole thing was in a year or two we just moved right from that stock market bubble almost seamlessly into the real estate bubble and nobody could see that there was any any similarities I mean here's what I actually somebody recently put together another one of those Peter Schiff videos I love them there was one that somebody made this Peter Schiff was right that was on YouTube that I know about a million 3.3 million 300,000 people have seen but someone else put together like a CNBC version of that recently and I happen to watch it and REI reviewers one particular clip he put out with me and Mark Haines and I'm talking to him about you know this impending collapse in the economy in the real estate market and mark Haines just says to me says Peter this is you expect me to believe he says real he said bubbles are like a once-in-a-lifetime occurrence we just had one he said do you expect me to believe that we have another one within 10 years you know and he was just incredulous that there could be another bubble so close to the stock market bubble but of course they were really interrelated it was almost like the same bubble because we never really had the the the fallout from the bursting of the of the Nasdaq bubble we simply replaced one bubble with a bigger bubble and we postponed the consequences of the unwinding of the imbalances until right now and of course we're still trying to postpone it but I think at this point the damage has been so great and the problems are now so huge that I don't think there's another you know another economic rabbit they can pull out of their hat at this point I think that it's we're just going to have to face it now and basically what happened is why did we have a stock market bubble you know we had a stock market bubble because the Federal Reserve was too easy they were too loose in the 1990s money interest rates were too low we created too much money and that fed the the investments in the stock market and we we had a lot of malinvestments right we had companies were created that never should have existed they were created not because they could generate a profit but because they could go public because investor is wanted these stocks it didn't matter that they could make money so what did they do they took land labor and capital they took all the factors of production and they combined them in ways that actually destroyed value but it didn't matter because these companies got financing the Fed made the financing cheap so they were able to flourish they were able to flourish despite the fact that they were losing money you know the old saying used to bet but used to be they lose money on every sale but they make it up on volume and and so they but as long as they can raise money and I used to get I was you know I used to you know what i was working at Euro Pacific Capital I would see deals and people would send me uh you know prospectus azan new companies they wanted to fund I remember one I got from a small Internet company that was I never would they were they were they were like a it was like a like a browser or whatever they were like a service where you know you you go like a provider I don't even remember what they did but it was a small start-up and they had their prospectus and they were coming around looking to raise money and they were trying to raise oh no five or ten million dollars they were in public yet but they were selling a little small piece of their company so they were validating their company about 50 million dollars now these guys were you know the guys were in their 20s they probably started the company less than a year ago Eimer saying well how could you how could you possibly think your business is worth 50 million dollars said you have no assets you've got no revenues you got no customers he's like you don't have anything I mean you don't have I mean I could recreate your entire business from scratch myself you know for you know next to nothing yet you want you want me to pay you five million dollars to get five percent of this thing I mean why would I do that and all they kept telling us well you don't understand we're going to go public and you're gonna make a lot of money and I'm like well how am I gonna meet you guys you think you're going to find people to pay even more than this in a public offer how you ever going to make any money but that was the concept and he said well you you know you don't understand how the stock market works you know I look I understand how business works I understand that you know you're not worth these two you guys are not worth fifty million dollars because you started an Internet company last week and uh but this is this is how I was working for a while it was crazy but you know I got the same things during the real estate bubble I remember you know I was renting houses and so I would go and you know I'm still renting my house now in Connecticut and I would go and I would go to you knows houses for rent and I remember one time I went and there was a house for rent I looked at it and the realtor is there and apparently the person who was renting it out was an investor who just bought the place and I asked them you know what's the win was a rent and I wouldn't forget what it was maybe it was $4,000 a month whatever it was for this place and I knew I said well you know what the guy pay for this what he paid and I said well I said how could he how can he make any money renting it out to me if I mean isn't this gonna lose money I mean isn't he doesn't he have negative cash flow I said well yeah I mean you know you lose he loses a couple thousand dollars a month and I say well and I said to him but but you recommended this as an investment I mean this was he suggestible but why would you recommend as an investment property a property that has a negative cash flow I mean why would you have him buy it and he said well you know understand this property is going to appreciate this property can double in the next couple years and I said why why would it double I mean you can't even cash flow it positive at the price it's at now how's it going to go up in value and I said real estate is a function of rents and then the guy said to me same thing said you know you don't understand real estate he was telling me that rents don't matter to real estate just like when I was telling people to buy stocks they were telling me dividends don't matter I'm buying this stock because it's going to go up well why should it go up it doesn't even pay a dividend it's already I mean who would buy it you know I did same thing when I rented my apartment I had I was rent an apartment after I got divorced I was renting apartment in Stanford and beautiful apartment right on the water I had my boat there I was beautiful views of the sound at the corner great you know beautiful building a Takashi Aires I've had you know a pool it had a you know covered parking was a security building and had racquetball courts had a gym with it with a trainer on staff a lot of amenities right next door there were maybe 20 year old town homes for sale and I went to one of the open houses just for kicks and there was a unit on sale whatever they wanted five or six hundred thousand dollars for this unit that was about the same square footage is what I was renting but it had no view of the water it was dark it was old there was no security it had none of the amenities yet the property taxes and maintenance fees alone worth like a thousand dollars a month and by the time I would have paid the the the mortgage if that's how I financed it I would have been spending more money per month to live in one of these little little places then this really nice apartment I was renting right next door and I asked the realtor us you know so you know why would anybody buy this place you could just rent right next door there's more units available no I know I just rented and and the lady said to me well you know but if you when you rent when you move out you're not going to have any equity I said what what do you mean just as well when you buy this property you know then you know it appreciates and then when you can sell it when you move out you make money I said well why the hell should it appreciate I mean then you understand it's already overpriced you can rent right next door why should it go up and she said well that's how real estate works I said so you mean the way real estate works is I have to sacrifice I have to turn down the opportunity to live in a really nice place I live in this dump for a while and because I did that I make money and somebody else is going to come to me a year two for now and overpay by even more and saying I don't want to live in that nice place next door I'd rather pay more to live here because this is going to appreciate and they totally forgot you know what real estate meant I mean real estate see a place to live but everybody thought it was gonna go up so they wrote they were all crazed but anyway getting back to where I was before I went off on all these Tanja's uhm so we had the the stock market bubble gets the Fed the Fed was too easy and eventually Greenspan started to raise interest rates I mean he saw what he was doing you know he talked about irrational exuberance back in 1996 and they took him to the woodshed because he you know he said something negative so he shut up going forward but eventually he started raising interest rates and he burst a bubble he burst the stock market bubble and of course when the stock market bubble burst a lot of the malinvestments were exposed a lot of people that were working at these comms well they needed to find real jobs because they were wasting their time because they were they were destroying well they weren't creating anything of value so we had a lot of companies that had got capital that shouldn't have got capital a lot of people invested foolishly they're going to lose their money but we were going to go through a painful recession certainly as we digested and worked off those malinvestments and allowed capital to be reallocated to where it can be productively used which meant labor which meant their land capital whatever was involved in these businesses and of course with all the wealth that was squandered because remember as people invested in these new companies the money was just spent it was squandered it wasn't put away productively so people lost real money so people were going to have to come to terms with the fact that they lost money they were gonna have to try to save and replace them so there was going to be a big recession when George Bush came in but rather than being honest and admitting that the Clinton error was a was a fantasy was a boom and now we had to live through the bust and that would have been a perfect opportunity right away to to repudiate what had happened under Clinton and say look Clinton didn't give us a good economy we had a bubble economy and now he's now the bubble is burst and we've got to clean up the Clinton mess and it's not going to be fun but instead of doing that he was like what we need to stimulate the economy we need to fight off this recession sounds familiar right but so he wanted an economic stimulus and what was the economic stimulus that we got out of Bush deficit spending cut taxes increased government spending and Alan Greenspan cooperated and slashed interest rates down to 1% and so we had massive monetary and fiscal stimulus massive inflation and what was the result well we blew up another bubble a bubble that was bigger than the one that just burst and of course during that shallow recession that we had and Bush was so proud of that so proud of the fact that he kept the recession from being more substantial we had record car sales we had record auto sales well we're the word Americans get all the money for all his car sales and all these homes what they borrowed it all we went into debt we had a massive spending spree the biggest spending spree in world history we borrowed trillions what do we do with the money spent it we build houses we remodeled our houses we bought cars appliances furniture gadgets you know iPods and cell phones and plasma TVs all sorts of things we didn't make any of the stuff we just borrowed the money to buy it and our trade deficit just skyrocketed I mean we started running 60 billion dollar month trade deficits for years and our savings rate went negative and it went negative even after the government doctored the books and recalculated how we calculate savings I mean if they if they were calculating the savings rate they way they did 10 or 15 years ago would've been - maybe five or six percent but they changed it and they decided to count certain thing the savings at in the past they didn't count because they wanted to make the savings rate look higher although at some point no one even cared I mean that we said whether we saved any money or not no one thought that we had to save any money so we had this huge bubble that was much bigger than the stock market bubble and of course the major difference in something that I pointed out repeatedly was the leverage the leverage in Vaman when people bought stocks they pretty much bought it with their own money and if they got a margin account maybe they had they had to put 50% down and many of the brokerage firms were requiring higher margins on on on internet stocks so when the bubble burst the losses were pretty much confined to the people that made the bad bets and at least when the losses happened there were nobody tried to bail anybody out if you lost money you lost money there was no one looking to the government to get their money back because they bought a dot-com stock that went to zero right none of the brokerage firms fail nobody failed because they had loaned money to people to buy real estate to buy stocks no this time around of course everybody who bought real estate did it was somebody else's money very few people were paying 100% many people were buying real estate with none of their own money people were buying real estate was nothing down I mean is it any any surprise that people gambled when they had nothing to lose you know and especially when they had so much to gain real estate prices were rising you know at one point in California they took a survey I think back in 2005 and the average home buyer believed that his house was going to appreciate by twenty percent a year for the next ten years that was what was expected now about at the time the average California home was selling for about five hundred thousand dollars which was about ten times what the average household actually earned right so but these guys actually believed that if they bought that house they would make three million dollars over the next ten years that's what they believed now is it any wonder that they lied on their mortgage to get that three million dollars is it any wonder that they signed up for a teaser rate you think they cared what happened to the loan two or three or five years from out they didn't care what the reset was they were going to be rich all they had to do is buy the house and they were going to be rich it didn't matter what the mortgage payment was going to be because the house would take care of it in fact if you figure what the average Californian expected to earn on house appreciation it exceeded what he expected to earn from his job you know so it was like he used to be that you'd work hard and have a job so you can afford a house but it became the fact that well if you have a house you don't need a job and in fact in the past people used to you know if you lost your job you might have to sell your house no not not like in California if you lost your job you just bought a vacation house because you got the extra the extra income you know houses were not expenses they just you know didn't they were free because if you had a $500,000 house I mean it's appreciating one hundred two hundred thousand dollars a year and for a few years it worked the people that bought houses were getting rich and the banks made it very easy to monetize that game you know you didn't even have to sell your house to make the money because you could borrow out all the appreciation and still live there right so it's like the Golden Goose that kept laying golden eggs nobody would sell one of these things why would anybody want to sell a house it just kept going up and you can buy another house with nothing then so I mean nobody wanted to sell everybody wanted to buy of course I knew at the time that this is all going to change I was renting and I was watching all the nonsense I mean I I rented a house in California the first I rented this place and I panned I first moved in I mean they were selling for about a million a million one he's a little townhomes and I rented it for about forty two hundred forty seven hundred and at the time I rented it so well it's no brainer I mean the rent I mean compared to the property taxes the homeowners fees I knew but I lived in that house for almost two years and when I moved out they were selling for over two million apiece so obviously I I could have made a lot of money have I bought and sold had I flipped one of those things but when I moved out the new guy that rented my house I think he had to pay an extra $200 more than I paid but I mean but it was an extra mean so obviously the prices had absolutely nothing to do with the rents back the place I rent now I mean people still always ask me you know why why are you throwing your money away on on rent like well I'm not throwing my money away I need to live I mean I they don't ask me why I'm throwing my money away on food or throwing my money away on whatever else I'm buying but that was there that was the Realtors but you're throwing if you're renting you're throwing your money away as if buying a house you get to live for free like you don't I'm asking well why are you throwing your money away on mortgage on insurance on maintenance on taxes you know I'm not that I'm not worried about any that you know I mean I I live in a huge house now and I just pay I pay first and last and a security deposit that was it but I know that the rent that I'm paying after my landlord pays their property taxes they're getting less than a 1% return on what they paid for the property assuming nothing goes wrong because if anything breaks they got to fix it and which is going to destroy their 1% I mean so I mean and I so basically I get all the enjoyment of the property and none of the headaches and my landlord gets all the headaches and none of the enjoyment so what I mean what's the good deal there but there but the realtors you know I mean the realtors were able to redefine the American dream right the American dream was always you save your money you work hard and anybody can succeed you don't have to be born to a you know to a royal family you know you don't to be an aristocrat anybody of modest means can grow up to be a captain of industry can be President the United States that was the American dream somehow the Realtors turns it into home ownership and buying a home and just getting rich that was the American dream that you didn't have to work well that that dream is now is now dying and if you want to see a very good presentation because I don't spend too much time on it but if you go on YouTube I made a presentation in front of the Western Regional Mortgage Bankers I spoke at their annual conference two years in a row 2005 and 2006 now they stopped the invitee so maybe I don't know maybe they don't have a conference anymore on that they have enough members left but I spoke in 2005 and I said a lot of things were going to happen and they brought me back in O six because a lot of things did happen but the 2006 presentation is on YouTube and there it's eight clips and I it's a lot of really good stuff on on real estate market so and it's a lot better to watch what I said back then because none of it had happened yet so talking about it now I don't I don't look as smart but but anyway so we had this gigantic bubble and the bigger problem here was the lenders and I knew that when a real estate bubble burst that was going to be the end of it because I knew that the banks and the financial institutions had as the bedrock of their assets all these IOUs all these mortgages well then if the mortgage holders don't pay then the assets aren't worth what everybody thinks they are which means the banks are undercapitalized and I knew just you know just just you know just by looking at it that Fannie and Freddie we're going to have to go bankrupt I knew they guaranteed 50% of the mortgages and I knew that those mortgages were not worth you know anywhere near what Fannie and Freddie thinks I knew what people were borrowing the body's houses so I knew that ultimately when people didn't pay the companies would have to go under and and anybody who bought I knew about the securitization process I knew because at the time I was helping a guy set up a hedge fund in 2005 that was shorting subprime mortgages and I learned about the whole securitisation industry and I knew that there are a lot of people that owned of these structured products which was one of the main reasons that there was a market for them you know the reason that it was so easy for people to borrow all this money to buy houses was because of securitization I mean first it started with Freddie and Fannie right if it wasn't for Freddie Mae and Freddie Mac Americans couldn't borrowed all this might of buy houses the only reason they did it was because the US government was co-signing their mortgages and people knew well if you lend somebody might have buy a house and if they can't pay you back the government will pay you back and so people were able to borrow a lot more money than a free market would have allowed because the government was there a co-signing it but there were some mortgages that the government wouldn't cosign these were the ones known as this - subprime mortgages but Wall Street figured out that while we can secure ties these mortgages the government won't guarantee him but we're going to buy them all up and put them into these structured products and by structuring them like this we're going to reduce the risk and it was crazy but something like after they sliced and diced them better than two-thirds of these subprime mortgages and these are mortgages where people put nothing down have lousy FICO scores don't have jobs or in prison whatever it was these mortgages two-thirds we were rated triple-a triple-a I mean how can that be I said how can you take all these lousy mortgages and and they're rated triple-a well I mean but it was because Wall Street was able to secure dies all these bonds and sell them to the Japanese the sounds of the Chinese and some of the hedge funds that there was demand and of course you know where did why was why was there so much demand for high yielding assets because the Fed had interest rates too low everybody needed yield and they were willing to take risks to get it and where did all these foreign central banks get all this money that they recycled back into these bonds because of our trade deficits because rates were too low so you have the government perpetuating this this crisis and you had the attitude that you know that real estate prices couldn't fall I mean I remember I had a booth I had a booth in in Phoenix Arizona at an investment conference it's probably back in 2004-2005 there's a guy writing a booth next to me and yeah yeah he had a real estate company and what this guy did was he put people together who had lousy credit and who couldn't buy homes with people who had good credit and the people with good credit co-signed the loans for the people with lousy credit and therefore everybody you know now this guy with bad credit can get a house and the other guy got some extra payments forever was night but there was one flaw in his whole argument and I said - I said well what if the guy this deadbeat person that can't get a loan but your client is co-signing what if that guy doesn't pay what happens to your client then he lose money I said well then we just sell the house I said okay but what if the house goes down and he looked at me like I was from like I was from Mars he said this is Phoenix this is real estate prices don't go down at Phoenix and and I imagine how many of his how many people lost a ton of money now because that's probably one of the worst housing markets in the country but this kind of stuff so Wall Street everybody had this this idea that housing prices couldn't go down so nobody questioned these triple-a ratings it didn't matter because if somebody defaulted you had the house to sell but I knew that housing prices were gonna fall I remember when I would go on television and talk about housing prices falling and people would say well that's not going to happen that hasn't happened since the Great Depression that's impossible but people would ignore everything that happens in the last five years they would see here was housing prices there was like this then they went straight up and said well they can't because they've never fallen they can't fall so but they've never done this how are they going to stay up here you know they were saying it was like a permanent Plateau you know and I said look I said there's no way and of course everybody now in hindsight everybody wants to criticize the lacs lending standards the there's the lack of a down payment everybody knows all these things that we did that we did wrong right that we had too many people buying houses and credit was too cheap so everybody can agree that we need to go back to a prudent a form of lending but nobody wants to go back to prudent pricing everybody wants to go back to sound lending principles but leave the bubble prices intact that's impossible so far how can we nobody can afford to pay these high home prices without these gimmicks but the reality is of course you know the best thing that could happen to the real estate market is that prices come down you know used to be that the mission of Freddie Fannie before you know they went broke was to try to make homes homeownership affordable now their mission is to keep home prices high to keep homes unaffordable to make sure that we have to mortgage ourselves you know to the hilt to buy a house the government solution is high high prices but low mortgage payments subsidized by the government the free market solution is low prices because the real estate prices go down you don't need to borrow that much money to buy a house so it doesn't matter that your mortgage payment is a little higher but you know the government still looks at the problem that home prices are falling that's that's the solution the problem is that they went up so the problem there and the real problem that we have of course is now that the bubble has burst you know first in the stock market now the real estate market and now that we're having this massive recession which is just getting started and we barely gotten a taste of it but unfortunately all the blame is on the free market all the blame is on capitalism it's because there wasn't enough regulation there was too much greed right and you know Alan Greenspan or not Alan Greenspan uh President Bush in one of his one of his speeches said that Wall Street got drunk and he was right they were drunk so was Main Street the whole country was drunk but what he doesn't point out is where they get the alcohol what why were they drunk you know obviously Greenspan poured the alcohol the Fed got everybody drunk and the government helped out with their moral hazards and the tax codes and all the the incentives and disincentives they put in all the various ways that they interfered with the free market and removed the the necessary balances that would have existed that would have kept all this from happening I mean we've always had greedy people everybody has been greedy not just Wall Street but all of a sudden everybody was greedy all at the same time I mean can't they understand that there's a trigger for this there's a reason that everybody acted this way I mean normally when people are greedy they also have they're also fearful of loss and people's fear of loss overcomes their greed and checks their behavior but what the government did repeatedly was try to remove the fear they tried to make speculating as riskless as possible first they provided us with almost you know costless money with which to speculate and then they created the the idea or that you know the Greenspan put but whenever there's a problem don't worry the government is going to rescue you the government's not going to let the stock market go down the government's not going to let your bets go bad so go ahead and keep placing them that was the idea that was the mentality it was nothing that the free market did in fact the only entities that needed more regulations were the ones that the government created I mean Freddie and Freddie and Fannie I mean if Freddie and Fannie didn't have a government guarantee they wouldn't have needed any regulation because the market would have regulated them right people would have looked at their balance sheet and said hey you don't have any capital you can't guarantee these mortgages who you kidding right and they never could have expanded the way they did it was only because the government was stood behind them that people didn't care people said all the government will never let Fannie and Freddie go bankrupt and they were right they didn't right that was a question we didn't know when I wrote crash-proof and I said they're going to go bankrupt I didn't know the answer to that question I said we don't know is the government gonna let him fail or is the gummer gonna stand behind him and I knew the worst thing was that they that they stood behind them it would have been much better had George Bush said you know what we had no guarantee we told you in fact on the Prospectus --is when you bought the securities on the front page it said these securities are not guaranteed by the US government so the US government said you know we told you we didn't guarantee him and we don't now a lot of people would have been pissed a lot of people have lost money but it would have been better than what we did because we didn't make the losses go away we just postponed them and we just put them on the backs of American taxpayers and more more realistically holders of US dollars but where was I see I dressed like that and I forget I forgot what I was talking about but what was I just on huh no no no no no I was talking about Freddie and Fannie so yeah they this so they knew and that no one cared that their balance sheet was small because the government had the government guaranteed it so the one place that the government needed to regulate was Frannie and Freddie and that's where they didn't regulate it in fact every attempt to regulate them was thwarted by Congress I mean they were Freddie and Fannie gave huge amounts of money to both Democrats and Republicans anybody they tried to regulate them but the reason they needed to be regulated was because they operated with the government guarantee once you gave them that guarantee then the government had to regulate them and regulate them heavily because it was government money they were dealing with it wasn't their own money it wasn't private money if their four normal lenders we don't need any government regulation the government could stay out but in that circumstance now part people could say well what about Wall Street I mean the subprime did there was a situation where there was no government guarantee that's true but Fannie and Freddie were the biggest buyers of subprime mortgages in the country they were helping to legitimize the subprime market they were big bidders in the subprime market and of course it was Fannie and Freddie and FHA that really gave the impetus to the housing bubble got it started got to mentality there is responsible for that that way of thinking I mean so once the momentum was there people just jumped along for the ride and of course there were a lot of conflict of interest going on I mean obviously the rating agencies are in bed with with the with the brokers they're raiding these bonds triple I mean they have to know that they can't possibly be be that secure but you know they're just like the Real Estate Appraisers the rating agencies want jobs and they get jobs by coming out with good ratings just like the appraisers I mean it the appraiser is just come and kept appraising houses high because they knew if they didn't appraise them high they would never get another job and again you know the whole the whole reason when you once you got to the securitization process which is a natural occurrence once you got securitization once you separate the originator of the mortgage from the risk of the mortgage you've got the moral hazard the guy that the guy that's getting the mortgage done the mortgage broker he couldn't care less whether that loan is ever get repaid he just wants to originate it and since he's the one that hires the appraiser he just wants to hire an appraiser who'll appraise the house high enough to fund the mortgage that's all he cared about in the olden days when the banks were lending out their own capital and they hired the appraiser they wanted a fair appraisal they wanted to know what the collateral is any good for the loan because that loan was gonna be on their books but in the securitization industry so there were a lot of these moral hazards but a lot of them got started because of government and they never would have been able to grow to the extent that they did if it wasn't for government and of course one of the very reasons that so many financial institutions are in trouble so many of the major banks and in this country and of course all of our major banks would already be insolvent they would already be broke if they hadn't got got money from the government and if the Fed hadn't been buying up all these assets but one of the reasons that no one cared is because of the FDIC insurance program I mean nobody in this country cares at all what the banks do with our money once we put it there because it's all insured by the government no one cares doesn't matter people do a lot of research before they buy a plasma TV but nobody does any research before they put their money in the bank no one cares like who can care because the government is created in moral hazard by guaranteeing the accounts if the government didn't guarantee bank accounts then banks would not be doing foolish things with our deposits because people would care because people would know gee if you make loans and they don't get paid back I'm going to lose my money so banks would not just compete on how much interest they'd pay but they would compete on how safe their balance sheets are and there would be a lot of people looking out for them because probably individual consumers before they made a deposit would want to look for some type of equivalent of a consumers report where somebody rates banks and follows banks and says here's the safe banks nobody bothers to do that now why because they're all no one has any riskier than anybody else because they're all guaranteed by the government it doesn't matter but it creates a huge moral hazard when you do that I mean the same thing I mean look look what Bernie Madoff was able to pull off right I mean you think you think he could have done that without the SEC giving them a stamp of approval or thou FINRA I mean there's no way that if we didn't have regulators the private sector wouldn't have ferreted this guy out there would have been a lot more due diligence if everybody didn't think the government was doing it for us and of course I said you know instead of putting Bernie Madoff in jail we should just make him secretary of the Treasury because he's got a lot of experience exactly the kind that we need running a Ponzi scheme because you know the Chinese just mentioned yesterday they were getting a little concerned about all about all the money they loaned us and that just maybe we won't pay him back you know I'm sure there are a lot more than just a little concern because that's what they said publicly imagine what they're saying privately because they know we're not we're not going to pay him back who look of course we're not going to pay the Chinese back their money it's impossible we don't have we can't we can't possibly and can you imagine I mean imagine if that the President Obama you know given us the following type of speech to the American citizens to say go national televised address and say you know my fellow Americans I've got a little news for you today we're going to have to have a massive across-the-board tax increase on average working Americans any American that still has a job is going to have to pay much higher income taxes as a matter of fact we have to cut Social Security across-the-board if you're getting a Social Security check we're gonna have to reduce it a number all my plans about more education and health care for everybody and you know energy independence we got to put all those plans on hold because the Chinese need their money we need we we borrowed a lot of money from the Chinese and we're good for our debts now they work hard for that money they loaned it to us and we're going to pay it back that's going to require a big sacrifice on our part does anyone think that we're going to do that are they kidding me no we're going to tell the Chinese we're going to say you guys are predators predatory lenders we need a modification program we need to cram down on this you never should have lent us all this money you know we can't pay it back it's not our fault I mean ah I mean that the Chinese know this I mean the Chinese they can't even vote in our elections why are we gonna care what they think we're going to tax voters to pay non-voters this is the so the Chinese know they're in this box I mean the US government we're just we don't pay our bills we're like Bernie Madoff right people loan us money how do we pay it back we borrow more right had it but if somebody came to Bernie Madoff a couple years ago and wanted their money they got it why did they get it because they were able to take in new money they found another sucker who didn't know it was a Ponzi scheme same to the US government does every time a bond matures we just go sell another one and every time we need to pay interest on the national debt we go borrow that too well it works until nobody wants to lend us any more money then we're going to have a default just like just like Bernie did and there's only two ways we can default we just legitimately don't pay or we print money that's it there's only two ways to repudiate your debt there's no way we're gonna pay the debt the Chinese have to know that and we're going to figure that out but anyway they get back to I keep going off on too many tangents but all right so the free market so I was the free market was getting the blame for a problem that was created by the government and what's happening now of course is the government is using this economic crisis that they caused to get even bigger to grow their power to expand to come to our rescue to save us from the evil forces of capitalism with government with socialism and you know when you listen to Barack Obama I listen to his most recent speech and a lot of what he said was true he talked about the fact that we need a genuine economy we can't have a false prosperity we can't have a prosperity based on debt and spending we need to have a sound foundation all that was true but then of course everything else he said is wrong I mean he wants the US economy to have a sound foundation but he wants to be the one that builds it he thinks the government can erect a sound foundation that central government planning can replace the market that resources could be allocated efficiently by politicians who want to get votes as opposed to entrepreneurs who are looking for profits right he wants to replace the invisible hand with that with the hand of the state and he thinks that he could do it better I mean the problem is sure we had a phony economy that's true we had a phony economy because of the government because the government undermined our productive capacity undermined our ability to save undermined our ability to manufacture and nurtured and cultivated the consumer bubble disservice sector economy that we had that's now collapsed and it's not government that's going to restore it we need we need free market forces the government right now everything that they're doing what does the government trying to do right now they want to bail people out and they want to stimulate well the bailouts are the worst thing that you can do because they want to bail out companies that should fail that should be bankrupted bankruptcy is a good thing it's the way the market cleanses the economy of companies that shouldn't be there why shouldn't they be there because they're not generating profits they are not effectively utilizing resources those resources need to be freed up there right now they're being held hostage we the free them up so that we can use them productively you know they say oh we can't let General Motors go bankrupt because some auto workers will be unemployed well I mean we don't want work just so we can have a job we want work because we can produce something we want the value right I mean if if somehow if you know some you know we can all have like a little little machine and we could just push little buttons or whatever we want it would magically appear right nobody would have to work right and the government of course would try to outlaw those gadgets because it would create a lot of unemployment but who would care we don't we don't we wouldn't need employment we would have everything we want so we work because we want stuff not because we want to work so to preserve jobs doesn't make any sense if they're not productive if they're not efficient now I can understand why some of the auto workers we want to preserve their jobs if they're being overpaid I certainly understand why a lot of these executives want to preserve their jobs but society doesn't want to do it the government shouldn't be doing it we need to let companies go bankrupt and when I talk about letting you know General Motors go back up and I of course I was predicting that they would go bankrupt five or six years ago I knew they they couldn't survive but if we let them go bankrupt does that mean it's an end to the automobile industry does that mean that all those plants and Detroiter in that in the in the Detroit to sit idle that all those skilled workers are just going to sit there and nobody is going to try to hire them of course not what would happen if we let General Motors go bankrupt is that some entrepreneurs would step up and buy up the assets out of bankruptcy and they would no longer be encumbered with big length labor union contracts or healthcare obligations or interest on debt they would be able to buy the assets without the liabilities and organize them in such a way to make cars profitably now in order to do that they would probably have to pay their workers a lot less than workers are being paid now but at least they'd be working for companies that made cars profitably and we'd probably end up with a lot more people working in the automobile industry than we have today and but and the fact of the matter is rather than making cars for Americans we should be making cars to export because Americans we don't really need any car we have too many cars we have what two or three cars per household at this point I mean you have when the president makes a speech and he says we need to restore credit he keeps saying credit is the lifeblood of the economy we need credit so Americans can go out and buy more cars I mean like that's that's you can look at the United States say what's wrong with our economy we don't have enough cars we need more cars I mean that's the last thing we need now we need to make cars we know I need to make cars because there's a lot of people in China that are still on bicycles they need cars we should be able to make cars for them and export them we don't need them for ourselves because we own too many cars we have too much everything you know if you ever seen some of these commercials or not commercials these television the news stories where when they foreclose on houses they send these companies in and they got to you know clean the places out and get them ready you know and it's amazing to me but they would go to these houses that people abandon and they're full of stuff I mean the TV sets are there the stereos are there there's clothes in the closet why didn't these people take that stuff didn't even want it I mean we got all this stuff and nobody I mean it doesn't even matter they just didn't even care about it and all this stuff of course was bought with borrowed money we did we didn't make any of it we didn't have any money to pay for any of it the last thing Americans need is to buy more stuff but the government part of the economic stimulus right in addition to the bailouts and of course they want to bail out Wall Street investment banks why let them fail what do we need them for you think why do we need goldman sachs why do we need morgan stanley you know let them fail you know the government tries to blame all the economic problems that we have today on the fact that they let Lehman Brothers go out of business meanwhile they bailed out everybody else that we're in this gigantic mess maybe it's not because they let Lehman fail maybe it's because the other bailouts but no they now they want to make us believe that since Lehman Brothers failed they can't let anybody feel we don't need all these investment banks and if they go away it's not going to mean that brokerage is going to stop that investment banking is going to stop is this going to be done by somebody else there are a lot of small firms out there like mine that are expanding that will expand even more if the government gets out of the way but instead the government is rewarding the incompetent people and keeping them in business and they're punishing all the competent people meanwhile look at the bonuses look at the amount of money that is being paid to Wall Street executives using bailout money I mean how can these guys be entitled to make multi-million dollar a year salaries when their companies are losing a fortune based on what they're doing I mean the let up let up let them fail let them go out of business but this stimulus what is it that the government is trying to do with the stimulus the government is trying to recreate the conditions that led to the crisis because when they talk about stimulating the economy they're not talking about stimulating economic growth they're talking about stimulating spending they want us going back to the auto show rooms back to the malls and buying more stuff and they want us going deeper into debt to pay for it and if we're not willing to accumulate the debt on our own well then the governor I'll do it for us as if this is the secret if they could just spend enough money then the economy is just going to magically grow again and that's all nonsense the only reason it worked before and it really didn't work was because we were able to borrow the money from the rest of the world and spend it and they were and we were able to live in the delusion that we were getting richer even as we were getting poorer because we looked at our asset prices right we were looking at real estate and stock prices going up and we said hey we're actually getting wealthier even as we were getting poorer because we were spending money instead of instead of saving money but and as we spent money we counted that spending as GDP and so as long as our GDP was rising we thought our economy was growing but the whole time our GDP was actually going up we weren't measuring really kamek growth we were measuring how much wealth we had been destroying or dissipating this we were simply spending and we thought we were okay because some appraisers said that our house was worth more or the stock market was still going up but all that was an illusion and now that those bubbles have burst there's no way to go back to it how I mean stock prices I don't care you know you're going to have ups and downs but stocks in the United States are still expensive you know based on any kind of historic measure of value the pease are high and the yields are low stocks are overpriced houses are overpriced our assets are still overpriced despite the fact that they've fallen meanwhile our whole economy is phony the malinvestments that we have now is this entire service sector economy we built an economy based on the idea that we can borrow and spend money in perpetuity and that was just as phony as the idea that real estate prices would always rise so we have a lot of Americans that are working in jobs that they really shouldn't be in we've got a lot of Americans that work in retail that work in shopping centers that work in restaurants that work in financial services there are a whole host of Americans employed doing things that they really shouldn't do because you know what we're too broke to patronize their businesses we need more Americans making stuff producing things and in order to have American labor available for productive capacity have to leave where they are right now that somebody has to lose their job in the service sector in order to get a job in goods production and of course in order to get a job in goods production we need capital I mean you can't produce anything without machines without tools where's that stuff going to come from you just can't wave a wand somebody's you're going to have to have savings somebody is going to have to be able to borrow the money to make those investments which means Americans are gonna have to save their money or we're going to have to convince somebody in another country to take their savings and invest it in America not just lend it to us you know I had a debate on CNBC one time with art Laffer and it's about a ten-minute debate the clip is on YouTube but and part of it you know where he bet me that penny went into that that Peter Schiff video but in that whole debate you know when I tried to point out that we were borrowing too much money art Laffer said that it why nervousness about all the debt was was wrong and he said historically America borrowed a lot of money in the 1800s and and it was not a problem we ran huge current account or deficits or we borrowed a lot of money and the economy was in great shape so therefore my criticism of our debt was wrong well what art didn't understand who didn't appreciate was the difference between what we did with the money back then we borrowed money to make investments to build infrastructure to build factories to build farms to build a productive economy we we invested the money we didn't just spend it on stuff and and when you borrow money and you in and you invest in productive capacity you have a real asset and the asset can generate revenue if we built a factory that manufactured widgets we can sell the widgets to the British and to the French and earn enough money to pay back the money they loaned us and the interest and we became the world's wealthiest economy because we borrowed to produce what we've done recently is we've borrowed to consume we to produce anything we borrow money and bought trinkets we bought depreciating consumer goods so how can we possibly pay the money back we don't have it we didn't acquire any income producing assets to pay the money back so if we're going to rebuild a viable economy and if we don't have our own savings we're going to have to convince the Chinese of the Japanese to build factories here well why would they want to do that with the high regulations that we have right now with the high taxes that we have right now which is not competitive so the only way that we're going to rebuild a sound economy in the United States is number one we're going to have to stop all the stimulus and stop the bailouts and let the free market work we have to understand that what's happening right now is not the problem it's the solution the problem was the bubble inflate blowing up not the deflation we have to we have to allow the pain no matter how unpleasant it is we have to understand that anything we do to delay this is going to make it worse you know when you have President Obama is talking about how everything is different than George Bush how his administration is change we're doing it differently he hasn't changed anything he's doing exactly what Bush did he inherited the same situation only worse and he's doing the same thing only worse his fiscal policy is worse than Bush's and it's funny as he's you know getting ready to sign a budget or proposing a budget with near a two trillion dollar deficit in one year he's criticizing Bush for deficit spending and and what Bernanke is doing the things that Bernanke is doing now dwarf what Greenspan did in irresponsibility I mean I still say that you know it's a tough race I said that you know there's a race to see who's going to go down in history as the worst Fed Chairman ever and Greenspan is probably still in the lead but Bernanke is hot on his tail and in the only reason that Bernanke is still dream span is still winning is because he was there longer but as far as for how many years he's been at the helm I it's got to happen go to Bernanke but so the combination of Obama Bernanke is way worse than Bush Greenspan as far as whether but it's the same philosophy nothing has changed this might as well be the third bush term he is doing the same exact stuff I mean the rhetoric is a little bit different but the policies are all the same the ideas are all the same that economic growth is a function of people spending money and that we need more government to stimulate the economy that we should bail out the people who fail and and punish the people who succeed and and that we should have you know no interest rate we should have the Fred defense should be cranking out money I mean what we need not only do we need to allow the companies to fail and allow Americans to stop spending the credit crunch is a good thing the fact that credit is being denied to American consumers is a good thing because credit is scarce it's not unlimited it's a function of savings and if we want to have a real economy if we want to have production then savings need to go to producers well they're not going to go to producers if they're squandered by consumers they're not going to go to producers if the government is borrowing all the money so what do we need we need the government to eliminate the deficit and go to a surplus we aren't you know we need the governor to stop spending money and depleting our savings we need consumers to stop spending money and rebuild their savings we need a recession we need us we need one badly and and what the government has to do is fess up and let us know yes this is the price we pay for years of indulgence and reckless spending now comes the sacrifice now comes the penance we're going to have to take this recession and there's nothing the government can do about it the only thing the government can do about it is to acknowledge to the American public that the government is a burden on the economy and in good times maybe we can tolerate that burden but in bad times there's no way and that the only way we're going to rebuild this economy is with a smaller government not with a bigger government and we need sound money unfortunately we need high interest rates we're getting the opposite instead of getting higher interest rates and smaller government we're getting lower interest rates and bigger government we're getting inflation and we're getting deficit spending and we're getting stimulus and we're not going to have any different results this time around so if if you liked what Bush Greenspan did to the economy right then you're you'll love with this pair does but it's not going to be any better it's going to be a bigger disaster what is the crisis that they're setting up because we are right now suffering the consequences of the economic stimulus and the bailouts of 2001 and 2002 and 2003 if we would have had a more severe recession we would not be in this mess today so the question is what are going to be the consequences of what we're doing now and what I think is going to happen is that ultimately people like the Chinese and the rest of the world the Saudis and the Japanese everybody else they're going to figure this out and they're not going to want to play this game anymore you know we've got them con right now you know in my book and crash-proof III compared it to Tom Sawyer you know there was that passage in Tom Sawyer where Tom gets everybody all the kids in the neighborhood to whitewash his fence and he gets him to pay for the privilege of doing his chores and you know when Mark Twain wrote that passage I mean he probably had no idea that it would one day form the basis for the entire global economy but we've got the world painting our fences you know like they don't have their own fences that need painting but the world is not going to accept this this is common you had Hillary Clinton or when she went over to China a couple weeks ago to get them to beg them to buy our bonds right she tell them we're all in this together all right and basically this is what she tells the Chinese you need to take money away from your citizens and loan it to us so we can give it to our citizens so they can use it to buy products made in your company to keep your people employed that's the deal that we're making with them now I don't what the Chinese should say to Clinton is you know what I got a better idea why don't we just leave our money with our own people and then they can use the money to buy their own products that way we get to keep our stuff you know the way weight is now we get all the stuff and all they get is the jobs what could our jobs without stop that's that's slavery so they're going to figure it out and what's going to happen is they're not going to buy our bonds and the Fed is going to start buying all the bonds and the dollar is going to plunge and this crisis is going to end up being a currency crisis and when it becomes a currency crisis then you're going to have higher consumer prices and you're going to have higher interest rates right now you know we're creating a lot of inflation a lot of people are talking about although it's not inflation it's deflation right that's all nonsense real estate prices are falling cuz they're too high stock prices are falling that's not deflation that's just falling prices there is no contraction of the money supply it's growing like crazy but the money the expansion of the money supply is not immediately showing up in rising prices for commodities or consumer goods because there are other temporary factors that are pushing prices down at the same time inflation is pushing prices up you've got the leveraging you got bankruptcies going out of business sales you got a lot of companies liquidating their inventory and you have the dollars strong and what happened was paradoxically when this crisis began money flowed into America instead of fleeing America which it will do ultimately can you imagine as a giant you know explosion everybody's running towards the blast that's what's going on and when people look around the world they say well people are coming to America because as bad as it is every place else it's so much worse here that's nonsense that's just what they're saying to explain it just like they tried to justify the real estate bubble or the internet bubble that's all nonsense I mean the reason is so bad in the rest of the world is because they loaned us so much money and we can't pay them back and now they're losing based on their bad loans and what's really causing the global credit crunch is that we're borrowing so much money right now we're crowding out everybody else the fact that people are loaning us so much money means that private businesses around the world can't get capital why because it's all going to the US government that's why so the world is suffering not because our economy is collapsing but because they're foolishly trying to prop it up and when they figure this out then we're going to get a really gummy crisis because when the dollar start to plunge and it will then we're going to see prices rising sharply for consumer goods and interest rates rising and if we think we have problems now wait till we see how much worse they get when we throw rising consumer prices and rising interest rates into the mix and there's nothing that governs we all do about it you know right now unemployed people are getting the benefit of lower prices imagine when you're out of work and your prices are going up because that's what's going to happen and then and then this is going to be a really common crisis and then we're going to be in for very very difficult choices and unfortunately the worst case scenario is one that is looking increasingly more likely which is hyperinflation and if we get that right that's where nobody will lend us money and so the Fed buys all the bonds in order to keep interest rates down and to maintain deficit spending and then the velocity of money really starts to pick up nobody is going to want our money not even American citizens will want our money and they will try to spend it as quickly as they can I mean the government might try to keep it together a little bit longer with regulation maybe we'll have capital controls maybe they'll make it illegal for American citizens to do what I'm doing with my clients right now buying foreign currencies foreign stocks maybe it'll make it illegal to buy gold you know as prices really start to contract you know just to escalate private parties will try to make contracts with payment and gold or other currencies maybe the government will make that illegal there might be a stores or people that actually don't want to accept dollars because their value is dropping too rapidly the government will make that illegal and that means it will have a black market that means if you want to buy something you'll have to buy it on the black market just like they did in the Soviet Union the only reason you can buy anything there was because you guess you bought it illegally a lot of these things are going to happen I think I think early on probably even in Barack Obama's first term of office I think we're going to have price controls I think prices will be rising so rapidly maybe even by next year that they're going to impose price controls on a number of products probably energy probably gasoline probably milk you know Brett you know and we're repeating all the mistakes in the 1930s we might as well repeat the mistakes in 1970s and so when they put on price controls what that's what's that could be shortages power black power blackouts long lines for gas long lines for food Sybil I mean a lot of things are going to happen you know I just mentioned that I mean everybody now of course is talking about the 1930s and saying oh no we can't repeat the mistakes of the 30s well that's exactly what we're doing I mean the popular notion is that we had a depression because Hoover was so irresponsible they trusted the free market he did nothing and because he did nothing we had a depression and then Roosevelt rode to the rescue and saved the day with big government well the reality of course is that we had a depression because a we had a Federal Reserve that was too easy in the 1920s and created a boom and then when the boom bust Hoover ignored the good advice of his secretary of the Treasury which maybe is the last time the Secretary of Treasury ever gave anybody any good advice and and instead of allowing the free market to work he came up with all kinds of crazy things to bail people out and to prop things up and to distort crises and fix wages and all kinds of things that created the depression and then Roosevelt came in and proceeded to make it worse and everything that Roosevelt did exacerbated it and made the depression great and we eventually got out of it after the Second World War but how can anybody say that we got out of because of Roosevelt we got out of it despite Roosevelt we would have got out of it a lot faster had Roosevelt not just expanded the failed policies of Hoover and that's very similar to what's happening now you got Bush who is the Hoover now of this generation who is now associated with the free market who is nothing but anything like the free market and now we have Barack Obama like Roosevelt coming in to save the economy with big government of course the government is already huge maybe he hasn't figured that out when when when Hoover left office I think the federal budget was about four billion dollars that was the whole thing and Roosevelt doubled it to about eight billion now we're three trillion three trillion I mean the government is huge and of course when when Roosevelt came in we had a sound economy beneath the surface I mean we had a productive economy we saved we made stuff we exported we didn't have a huge social welfare state nobody got checks from the government we're in much better shape if they did that much damage to a sound economy imagine what they can do with the one we got now plus back then we had we had real money we were on the gold standard now look at us I mean look at all the look at the problems we had in 1970s right still we had as fundamentally sound economy then we we had a bubble in the 60s same thing - nifty fit the same stock market bubble we printed too much money we went to Vietnam I mean we fought the war in Vietnam we went to the moon we had the war on poverty the government created too much money and they gave us the 1970s that was the payback for the 1960s but when when Reagan came in and when Volker came in we actually got some sensible policies we shrank government and we raised interest rates we went for sound money and smaller government you know when Reagan came in it was the government is the problem now Barack Obama is the government solution we're not gonna I mean we're it's night and day and you know there's a lot of other people that say we can't we can't repeat the mistakes of Japan well again we're doing exactly what Japan did Japan had a bubble in the 1980s why they have a bubble same reason we had a bubble they kept their interest rates too low why did they do that to keep the yen artificially low because they didn't want the dollar to collapse kind of like what we did with Great Britain in 1920 it's very much similar so the Japanese kept interest rates too low and they're still too low but they kept them too low and they had a bubble two bubbles stocks and real estate it's pretty familiar stock market bubble burst first real estate bubble two or three years later and of course real estate prices are still falling in Japan when was it 15 20 years later they've fallen 70 R 80 % and that's in the country where you lose face if you don't pay your debts you know they didn't you know so I mean if you can and they have high savings but the problem in Japan was the government in Japan refused to allow the market to function didn't want to take the pain of the deleveraging and the unwinding of the bubble so they intervened and intervened and intervened and ran up the deficits and postponed this thing and dragged it out but the main difference between Japan and America is Japan was a wealthy nation that could afford all that big government I mean they would have been better off without it but the Econo the davines economy beneath the surface was so competitive and so fundamentally sound that they survived anyway they had enough domestic savings to fund the growth of government the Japanese didn't borrow any money from anybody else nobody would lend it to it the Japanese citizens financed that gigantic government but they still have a high savings rate they're still the world's biggest a current account nation they're the world's charges creditor nation even still bigger than China so they were a wealthy country yet the Japanese government managed to create so much damage to an economy that was fundamentally sound weren't the exact opposite there's no way that we can get off as easy as Japan because we're mess we're the world's biggest debtor we have a huge trade deficit we have no domestic savings and we're already loaded up with debt and the only hope we have of artificially stimulating our economy is that we borrow the money from the rest of the world we don't have it on our own so when the world uhm stops financing this and you know it's going to come to an end we're going to have to make these hard choices is going to be hyperinflation or is it all we're going to are we going to do the right thing but the rest of the world and a lot of people think and this is I have had a lot of arguments and people call it decoupling I think well we know this is never going to happen or when America stops consuming the whole world is finished they're not finished you know we're not the engine of the world's economy or the caboose and if you decouple the caboose the cars move faster you know I mean we're not doing the world any favours consuming their stuff you know I mean they're it's just it's vendor financing but people say wherever we're the best customer we're not we're the worst customer because we don't pay you're good customer pays you and in in the world of trade you pay for imports with exports and if you don't have anything to export you can't pay and that's what we have we issue an IOU and when the world finally lets the dollar collapse and they will our purchasing power isn't going to vanish it's just going to be redistributed other currencies are going to rise and people in other countries people that are working in factories right now in China that are producing products and just you know shipping them abroad and just kind of waving goodbye you know all of a sudden they'll be able to afford them the Chinese will be able to turn in their bicycles and buy automobiles because steel will be cheaper because cars will be cheaper because the value of their wages will rise because their currency will purchasing power it's the Americans who are going to be buying the bicycles because all of a sudden cars will be too expensive for us gasoline will be too expensive for us because we'll be bidding with currency of much less value and that's what's going to happen and the world is not going to suffer because we don't we don't buy their stuff they're going to benefit because now there's going to be more stuff for them I mean right now because the world lends us so much money there's a capital shortage wouldn't the world be better off investing their savings productively in their own countries rather than just giving them their savings to us wouldn't they be better off enjoying the fruits of their own labor rather than labouring while we'd enjoy the fruits it's obvious and it's going to happen anyway I don't know how long I've been talking huh but anyway did I have any time for any questions Oh anyway well that's it

Channel: misesmedia

Views: 485,409

Rating: 4.9094062 out of 5

Keywords: Peter, Schiff, Recession, Depression, Meltdown, Austrian, Economics, Henry, Hazlitt, Ludwig, von, Mises, Institute

Id: EgMclXX5msc

Length: 76min 26sec (4586 seconds)

Published: Mon Mar 16 2009

Reddit Comments

[u/[deleted]]

Wonderful guy. I wish we had people like him as politicians. There's a lot of good meat in that lecture. He seems, however, to be ignoring the elephant in the room - which is this very big imbalance in the foreign exchange rates. The rest of the world outside the West is developing their industries - this is the course they're on, and it's a good course. And it seems to me that the exchange rates (although I don't understand all the forces involved there) are created by the interested parties in order to facilitate this development. When a dollar buys so much more in China or India, we in the states are given our lot - an ever growing mountain of material wealth we can pick and choose from. And those people in their industrializing countries are given their lot - growing employment opportunities and a lot of money going into their pockets simply because of the wild disparity in the exchange rate. Now, they won't be able to buy imports from us, but they can live well within the confines of their domestic economy.

So... the problem is not a result of a lack of hard work or ingenuity in the usa or in the West. I, as a north american, could invent the most amazing new thing tomorrow, and what would happen to it? Some company would contract with me, and it would be made in a factory in China and sold in the states. Those are the market forces which are at work.

If the currency exchange rates were pegged to a reasonable cost of living index in the various countries, then certainly the usa and every Western country would have a big advantage, and our countries would become big exporters. As long as the exchange rates are as they are, however, we will continue be consumers, and there will be people in China, India, Canada, and New Zealand rubbing their hands with glee because they've found a big market for their goods in the usa.