Why the Meltdown Should Have Surprised No One

0:00You 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 that people didn't see this coming, or should people have known that this meltdown was coming? I don't know, is there anyone in this room that was surprised by the economic meltdown? I mean, does anybody think it's over? Anybody raise your hand if you think it's over? And does anybody think that the government's solutions are going to work or that they're going to help? Is there anybody? All right, so I guess there's really no reason for me to speak here. I don't know that I'm going to tell anybody anything they don't know.

0:46But anybody, if you want to indulge me, I guess I can talk about it a little bit anyway. But, you know, I don't know why so few people seemed 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 live through two of them because I, you know, I'm a stockbroker, and, you know, I 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 of the prices that people were paying, yet nobody seemed to be able to figure that out back then.

1:33I mean, everybody seemed to be living in this new era, and the Internet had captured everybody's imagination. I mean, to me, I couldn't see the difference between 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, well, 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 it didn't seem that it was any different and I knew that the valuations they were putting on a lot of these companies I knew they'd come out with a company you know maybe it'd be doorknobs.com 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

2:27The most 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, I mean, 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 were getting rich because suckers were buying their stock. I mean, the guy that started E-Toys, Department Building in downtown Los Angeles. And I started my company, Euro 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. But he made a lot of money because he found people to buy into his idea.

3:15And at one point, E-Toys was worth more than Toys R Us. I remember when I was trying to get clients back when I was starting out at Euro Pacific Capital. And 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 stock they had, all the real estate. And I said, what would you rather own, this entire country? I mean, the dividend yield on the New Zealand stock market was over a billion dollars a year. That was the dividend yield.

4:02Yet Yahoo was trading for more than twice the value 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 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. And we saw it. Of course, after the internet bubble burst, everybody was talking about how crazy it 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 similarities. I mean, there's one, I actually, somebody recently put together another one of those Peter Schiff videos.

4:47There was one that somebody made, this Peter Schiff was right video that was on YouTube that I know about a million three point three million three hundred thousand people have seen. But someone else put together like a CNBC version of that recently and I happened to watch it and there was one particular clip he put out with me and Mark Haynes And I'm talking to him about, you know, this impending collapse in the economy and the real estate market, and Mark Haynes just says to me, he 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.

5:36Because we never really had the fallout from the bursting 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 economic rabbit they can pull out of their hat at this point. I think that it's, we're just gonna 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.

6:21And that fed the investments in the stock market. And 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 investors 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 be, they lose money on every sale, but they make it up on volume.

7:09But as long as they can raise money, and I used to get, I used to, when I was working at Europe Pacific Capital, I would see deals and people would send me, you know, prospectuses on new companies they wanted to fund. I remember one I got from a small internet company that was, I don't know, they were I don't know if it was like a browser or whatever they were or like a service where you go like a provider. I don't even remember what they did, but it was a small startup and they had their prospectus and they were coming around looking to raise money and they were trying to raise, I don't know, $5 or $10 million. They weren't public yet, but they were selling a little small piece of their company. So they were valuing their company at about $50 million.

7:56Now, these guys were, you know, the guys were in their 20s, they probably started the company less than a year ago. And they're saying, well, how could you possibly think your business is worth $50 million? Said, you have no assets, you've got no revenues, you've 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. And yet, you want me to pay you $5 million to get 5% of this thing? I mean, why would I do that? And all they kept telling me was, well, you don't understand. We're going to go public, and you're going to make a lot of money. And I'm like, well, how am I going to go? I mean, you think you're going to find people that pay even more than this in a public offering?

8:43How are you ever going to make any money? But that was the concept. And he said, well, you don't understand how the stock market works. I'm like, well, I understand how business works. I understand that you're not worth, you guys are not worth $50 million because you started an Internet company last week. But this is how it was working for a while, it was crazy. But I got the same things during the real estate bubble. I remember I was renting houses and so I would go and I'm still renting my house now in Connecticut. And I would go and I would go to houses for rent and I remember one time I went and there was a house for rent and I looked at it and the realtor was there. And apparently, the person who was renting it out was an investor who just bought the place.

9:29And I asked him, you know, what was the 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 did the guy pay for this? What did he pay? And I said, well, I said, how can he make any money renting it out to me? I mean, isn't this going to lose money? I mean, doesn't he have negative cash flow? And he said, well, yeah, I mean, you know, you lose, he loses a couple thousand dollars a month. And I said, well, and I said to him, but, but you recommended this as an investment? I mean, this was, he says, yeah, I said, well, 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 don't understand. This property is going to appreciate. This property can double in the next couple of years. And I said, why? Why would it double?

10:15I 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, you know, I said real estate is a function of rents and then the guy said to me the same thing. He 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 the same thing when I rented my apartment. I was renting an apartment. After I got divorced, I was renting an apartment in Stanford. Department in Stanford, and beautiful apartment, right on the water, I had my boat there, beautiful views of the sound, right on the corner, great unit, beautiful building, had a concierge, it had a pool, it had covered parking, it was a security building, it had racquetball courts, had a gym with a trainer on staff, a lot of amenities, right next door there were maybe 20-year-old townhomes for sale, and I went to one of the

11:20and Human Housing, 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 as 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 were like a thousand dollars a month, and by the time I would have paid 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 places than this really nice apartment that I was renting right next door. And I asked the realtor, I said, why would anybody buy this place? You could just rent right next door, there's more units available.

12:05I know, I just rented. And the lady says to me, well, you know, but when you rent, when you move out, you're not going to have any equity. I said, well, what do you mean? She says, well, when you buy this property, you know, then, you know, it appreciates, and then when you can sell it, when you move out and you make money. I said, well, why the hell should it appreciate? I mean, didn't 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 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 or two for now and overpay by even more.

12:52And so, you know, 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 is a place to live. But everybody thought it was going to go up, so they were all crazed. Getting back to where I was before I went off on all these tangents. So we had the stock market bubble because 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 said something negative so he shut up going forward. But eventually he started raising interest rates and he burst the bubble. He burst the stock market bubble. And of course, when the stock market bubble burst, a lot of the malinvestments were exposed.

13:41A lot of people that were working at these dot-coms, well, they needed to find real jobs because they were wasting their time, because they were destroying wealth. 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 and worked off those malinvestments and allowed capital to be reallocated to where it could 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.

14:29So people were going to have to come to terms with the fact that they lost money and they were going to have to try to save and replace it. So there was going to be a big recession when George Bush came in. But rather than being honest and admitting that the Clinton era 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 repudiate what had happened under Clinton and say, look, Clinton didn't give us a good economy, we had a bubble economy. And now the bubble has burst and we've got to clean up the Clinton mess and it's not is not going to be fun, but instead of doing that, he was like, well, 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%.

15:28And 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, where'd Americans get all the money for all these car sales and all these homes? Well, 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 did we do with the money?

16:16Spent it. We built houses. We remodeled our houses. We bought cars, appliances, furniture, gadgets, 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 a 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 were calculating the savings rate the way they did 10 or 15 years ago, it would have been minus maybe 5 or 6 percent but they changed it and they decided to count certain things as savings that 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 whether we saved any money or not no one thought that we hadn't saved any money so we had this huge bubble that was much bigger than the stock market bubble and of course the major difference and something that I pointed out repeatedly was the leverage

17:19The leverage involved. When people bought stocks, they pretty much bought it with their own money. And if they got a margin account, maybe they had to put 50% down. And many of the brokerage firms were requiring higher margins 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, 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. None of the brokerage firms failed. Nobody failed because they had loaned money to people to buy real estate, to buy stocks.

18:04No. This time around, of course, everybody who bought real estate did it with somebody else's money. Very few people were paying 100%. Many people were buying real estate with none of their own money. Real Estate was nothing down. Is it any surprise that people gambled when they had nothing to lose? Especially when they had so much to gain. Real estate prices were rising. 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 20% a year for the next 10 years. That was what was expected. Now, at the time, the average California home was selling for about $500,000, which was about 10 times what the average household actually earned.

19:00But these guys actually believed that if they bought that house, they would make $3 million over the next 10 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 now? They didn't care what the reset was. They were going to be rich. All they had to do was 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, So it was like it used to be that you 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 like in California if you lost your job you just bought a vacation house because you got the extra the extra income

20:10You know, houses were not expenses. They just, you know, they were free. Because if you had a $500,000 house, I mean, it's appreciating $100,000, $200,000 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 gain. 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? They just kept going up. And you can buy another house with nothing. So, I mean, nobody wanted to sell, everybody wanted to buy. Of course, I knew at the time that this was all gonna change. I was renting and I was watching all the nonsense. I mean, I rented a house in California. In the first, I rented a place and I first moved in,

20:58I think they were selling for about a million, a million one, these little town homes. And I rented it for about 4,200 or 4,700. And at the time I rented it, it's like, well, it's no-brainer. I mean, the rent, I mean, compared to the property tax, 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 a piece. So obviously, I could have made a lot of money had 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 million. I mean, so obviously, the prices had absolutely nothing to do with the rents. In fact, the place I rent now, I mean, people still always ask me, you know, why are you throwing your money away on rent?

21:46Well, I'm not throwing my money away. I need to live. I mean, 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 the real truth. If you're renting, you're throwing your money away, as if buying a house, you get to live for free. I'm asking, well, why are you throwing your money away on mortgage, on insurance, on maintenance, on taxes? You know, I'm not worried about any of that. I mean, I live in a huge house now and I pay first and last and the 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've got to fix it, which is going to destroy their 1%.

22:37So 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's the good deal there? But the realtors were able to redefine the American dream. 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 royal family, you don't have to be an aristocrat. Anybody of modest means can grow up to be a captain of industry, can be president of the United States. That was the American dream. Somehow the realtors turned 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 dream is now dying.

23:22And if you want to see a very good presentation, because I don't want to 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 inviting me, so maybe they don't have a conference anymore. I don't know if 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 2006, because a lot of things did happen. The 2006 presentation is on YouTube. It's eight clips. It's a lot of really good stuff on the real estate market. It's a lot better to watch what I said back then because none of it had happened yet. Talking about it now, I don't look as smart.

24:08We had this gigantic bubble. The bigger problem here was the lenders. I knew that when the 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, 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 by looking at it that Fannie and Freddie were going to have to go bankrupt. I knew they guaranteed 50% of the mortgages and I knew that those mortgages were not worth anywhere near what Fannie and Freddie thinks.

24:55I knew what people were borrowing to buy these houses, so I knew that ultimately when people didn't pay, the companies would have to go under. 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 securitization industry and I knew that there are a lot of people that owned 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, it first had started with Freddie and Fannie, right? If it wasn't for Freddie May and Freddie Mac, Americans couldn't have borrowed all this money to buy houses. The only reason they did it was because the U.S. government was co-signing their mortgages.

25:43And people knew, well, if you lend somebody money to 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 co-signing it. But there were some mortgages that the government wouldn't co-sign. These were the ones known as the subprime mortgages. But Wall Street figured out that, well, we can securitize these mortgages. The government won't guarantee them, 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, are in prison, whatever it was.

26:32These mortgages, two thirds of them are rated triple A. AAA. I mean, how can that be? I said, how can you take all these lousy mortgages and they're rated AAA? Well, I mean, but it was because Wall Street was able to securitize all these bonds and sell them to the Japanese and sell them to the Chinese and sell them to 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 Where did all these foreign central banks get all this money that they recycle back into these bonds? Because of our trade deficits, because rates were too low. So you have the government perpetuating this crisis and you have the attitude that real estate prices couldn't fall.

27:20I remember I had a booth. I had a booth in Phoenix, Arizona at an investment conference. This is probably back in 2004, 2005. There's a guy right in the booth next to me and 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 or whatever it was. But there was one flaw in this whole argument. And I said to myself, well, what if the guy, this deadbeat person that can't get a loan, What if your client is co-signing? What if that guy doesn't pay?

28:05What happens to your client? Then you 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 Mars. He said, this is Phoenix. Real estate prices don't go down in Phoenix. And I imagine how many people lost a ton of money, because that's probably one of the worst housing markets in the country. But this kind of stuff. So Wall Street, everybody had this idea that housing prices couldn't go down, so nobody questioned these AAA ratings. It didn't matter, because if somebody defaulted, you had the house to sell. But I knew that housing prices were going to fall. I mean, 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.

28:51But people would ignore everything that had happened in the last five years. They would see, here was housing prices. I said, well, they can't, because they've never fallen, they can't fall. I said, 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. And I said, look, I said, there's no way. And of course, everybody now, in hindsight, everybody wants to criticize the lax lending standards, the lack of a down payment. Everybody knows all these things that we did that we did wrong, right, 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 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. How can we, nobody can afford to pay these high home prices

29:48without these gimmicks. But the reality is of course, you know, the best thing that can happen The real estate market is that prices come down. You know, it used to be that the mission of Freddy 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 prices but low mortgage payments subsidized by the government. The free market solution is low prices, because if 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.

30:34That's the solution. The problem is that they went up. So the problem 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've 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, President Bush, in one of his speeches, said that Wall Street got drunk.

31:20And he was right, they were drunk. So was Main Street. The whole country was drunk. But what he doesn't point out is, where do they get the alcohol? Why were they drunk? 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 incentives and disincentives they put in all the various ways that they interfered with the free market and removed 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 I mean, normally, when people are greedy, they're also fearful of loss.

32:18And 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. to speculate and then they created the the idea or the you know the the green span 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 What has the government created? I mean, 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?

33:13People would have looked at their balance sheet and said, hey, you don't have any capital. You can't guarantee these mortgages. Who are you kidding? Right? And they never could have expanded the way they did. It was only because the government stood behind them that people didn't care. People said, oh, the government will never let Fannie and Freddie go bankrupt. and they were right. They didn't. That was the 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 going to let them fail or is the government going to stand behind them? And I knew the worst thing was 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 prospectuses, when you bought the securities, on the front page it said, They said, these securities are not guaranteed by the U.S. government.

34:01So the U.S. government could have said, you know, we told you we didn't guarantee them. And we don't. Now, a lot of people would have been pissed. A lot of people would 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 realistically, holders of U.S. dollars. But, where was I? No one cared that their balance sheet was small because the government guaranteed it.

34:47The one place that the government needed to regulate was Franny and Freddie, and that's where they didn't regulate it. Every attempt to regulate them was thwarted by Congress. I mean, they were, Freddy and Fanny gave huge amounts of money to both Democrats and Republicans, anybody that tried to regulate them. But the reason they needed to be regulated was because they operated with a 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. For normal lenders, we don't need any government regulation. The government can stay out, but in that circumstance. Now, part of people could say, well, what about Wall Street? I mean, the subprime. There was a situation where there was no government guarantee.

35:33That'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 the mentality there, is responsible for 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 the brokers. They're rating these bonds AAA. I mean, they have to know that they can't possibly be that secure, but you know, they're just like the real estate appraisers.

36:18The rating agencies want jobs and they get jobs by coming out with good ratings, just like the appraisers. I mean, the appraisers just kept appraising houses high because they knew if they didn't appraise them high, they would never get another job. And again, the whole reason, 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's getting the mortgage done, the mortgage broker, He couldn't care less whether that loan is ever going to 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 will appraise the house high enough to fund the mortgage. That's all he cared about.

37:03In 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 if the collateral was any good for the loan because that loan was going to 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 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 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.

37:51I 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 has created a 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 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 consumer's report,

38:43Where 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 is 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, given him a stamp of approval or without 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.

39:34Because, you know, the Chinese just mentioned yesterday that they were getting a little concerned about all... about all the money they loaned us, and that just maybe we won't pay them back. You know, I'm sure they're a lot more than just a little concerned, because that's what they said publicly. Imagine what they're saying privately. Because they know we're not going to pay them back. 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, can you imagine if President Obama, you know, given the following type of speech to the American citizens, to say, give a 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.

40:24Any American that still has a job is going to have to pay much higher income taxes. As a matter of fact, we're going to have to cut Social Security across the board. If you're getting a Social Security check, we're going to have to reduce it. And remember all my plans about more education and health care for everybody and, you know, energy independence? We've got to put all those plans on hold, because the Chinese need their money. We need it. We borrowed a lot of money from the Chinese, and we're good for our debts. You know, they worked hard for that money and they loaned it to us and we're going to pay it back. Now that's going to require a big sacrifice on our part.

41:12Does anyone think that we're going to do that? Are they kidding me? You know what 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 a cram down on this. You never should have lent us all this money. I know we can't pay it back. It's not our fault. The Chinese know this. The Chinese, they can't even vote in our elections. Why are we going to care what they think? We're going to tax voters to pay non-voters? So the Chinese know they're in this box. The US government, we don't pay our bills. We're like Bernie Madoff. People loan us money. How do we pay it back?

42:00If 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 thing the U.S. 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. The Free Market was getting the blame for a problem that was created by the government. 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 going to pay the debt. The Chinese have to know that and we're going to figure that out. But anyway, let me get back to it. I keep going off on too many tangents.

42:49Alright, so 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 listened 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 The Sound Foundation, that central government planning can replace the market, that resources

43:56can be allocated efficiently by politicians who want to get votes, as opposed to entrepreneurs who are looking for profits. He wants to replace the invisible hand 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 of Capacity, undermined our ability to save, undermined our ability to manufacture and nurtured and cultivated the consumer bubble, the service sector economy that we had that's now collapsed. And it's not government that's going to restore it. We need free market forces. The government right now, everything that they're doing, what is the government trying to do right now? They want to bail people out and they want to stimulate. Well, the 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

44:54market 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. Right now they're being held hostage. We need to The Theory of Money and Credit

45:41We try to outlaw those gadgets, because it would create a lot of unemployment, but who would care, 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 just 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 autoworkers would want to preserve their jobs if they're being overpaid, I certainly can 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 bankrupt, and I, of course, I was predicting that they would go bankrupt five or six years ago. I knew they couldn't survive. But if we let them go bankrupt, does that mean it's an end to the automobile industry?

46:29Does that mean that all those plants in Detroit or in the Detroit area are just going 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 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.

47:17And we'd probably end up with a lot more people working in the automobile industry than we have today. 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 cars. We have too many cars. We have two or three cars per household at this point. 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. You can look at the United States and say, what's wrong with our economy? We don't have enough cars. We need more cars. That's the last thing we need. Now, we need to make cars. We know we need to make cars because there's a lot of people in China that are still on bicycles.

48:06They 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've 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 abandoned, and they're full of stuff. I mean, the TV sets are there, the stereos are there, there's clothes in the closets. Why didn't these people take that stuff? They didn't even want it. I mean, we got all this stuff, and 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 didn't make any of it.

48:53We 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? 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, and we're in this gigantic mess. Maybe it's not because they let Lehman fail, maybe it's because the other bailouts. But no, now they want to make us believe that since Lehman Brothers failed, they can't let anybody fail. 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.

49:41It's just 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, let them fail, let them go out of business. But the 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.

50:26Because 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 showrooms, 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 government will 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 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?

51:16We 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 saving money. 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 real economic growth. We were measuring how much wealth we had been destroying or dissipating, because we were simply spending. and we thought we were okay because some appraiser 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. 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.

52:05You know, based on any kind of historic measure of value, the PEs 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.

52:58We need more Americans making stuff, producing things. And in order to have American labor available for productive combat, they 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's going to have to be able to borrow the money to make those investments which means Americans are going to have to save their money or we're going to have to convince somebody in another country to take their savings and invested in America, not just lend it to us. You know, I had a debate on CNBC one time with Art Laffer.

53:48And it's about a 10-minute debate. I think the clip is on YouTube. And part of it, where he bet me that penny, went into that Peter Schiff video. But in that whole debate, when I tried to point out that we were borrowing too much money, Art Laffer said that my nervousness about all the debt was wrong and he said historically America borrowed a lot of money in the 1800s 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 or didn't appreciate was the difference between what we did with the money.

54:33Back then, we borrowed money to make investments, to build infrastructure, to build factories, to build farms, to build a productive economy. We invested the money. We didn't just spend it on stuff. And when you borrow money 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 could 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 didn't produce anything. We borrowed money and bought trinkets.

55:21We bought depreciating consumer goods. So how can we possibly pay the money back? 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 and 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, we're just not competitive. So the only way that we're ever 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 allow the pain, no matter how unpleasant it is, we have to understand that anything we do to delay

56:17this 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 has changed, we're and 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 getting ready to sign a budget or proposing a budget with near a $2 trillion deficit in one year, he's criticizing and Bush for Deficit Spending, and what Bernanke is doing, the things that Bernanke is doing now, dwarf what Greenspan did in irresponsibility.

57:03I 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 then the only reason that Bernanke is still with dreamspan is still winning is because he was there longer but as far as for how many years he's been at the helmet it's got to have to go to Bernanke but so the combination of Obama Bernanke is way worse than Bush Greenspan as far as what 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 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,

57:55that we should bail out the people who fail and punish the people who succeed, and that we should have no interest rate, we should have, the Fed 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.

58:41We need the government 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 one badly. 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

59:37and 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 you liked what Bush, Greenspan did to the economy, then you'll love what 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? The question is, 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 and everybody else, they're going to figure this out, and they're not going to want to play this game anymore.

1:00:36We've got them conned right now. In my book, in Crash Proof, I compared it to Tom Sawyer. There was a passage in Tom Sawyer where Tom gets everybody, all the kids in the neighborhood, to whitewash his fence. and he gets them 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 economy. You had Hillary Clinton, when she went over to China a couple of weeks ago, to get them, to beg them to buy our bonds. She'd tell them, we're all in this together.

1:01:32And 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, what the Chinese should say to Clinton is, you know what, I've 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 it is now, we get all the stuff and all they get is the jobs. What good are jobs without stuff? 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's going to start buying all the bonds and the dollar is going to plunge.

1:02:21And 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, well, there's not inflation, it's deflation, right? That's all nonsense. Real estate prices are falling because they're too high. Stock prices are falling, but that's not deflation. That's just falling prices. There is no contraction of the money supply. It's growing like crazy. But 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 deleveraging, you've got bankruptcies going out of business sales,

1:03:40The Theory of Money and Credit

1:04:10Because 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 real economic crisis. Because when the dollar starts 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 the government's going to 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 this is going to be a real economic crisis.

1:04:55And 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.

1:05:44Maybe they'll make it illegal to buy gold. You know, as prices really start to contract, you know, to escalate, private parties will try to make contracts with payment in gold or other currencies. Maybe the government will make that illegal. There might be 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 they will have a black market. That means if you want to buy something, you'll have to buy it on a black market, just like they did in the Soviet Union. The only reason you could buy anything there was because you bought it illegally. A lot of these things are going to happen. 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, The Theory of Money and Credit

1:06:59I 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 that he trusted the free market and 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 The Federal Reserve was too easy in the 1920s and created a boom. Hoover ignored the good advice of the Secretary of the Treasury, which maybe is the last time the Secretary of the Treasury ever gave anybody any good advice.

1:07:45Instead 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 prices and fix wages and all kinds of things The Theory of Money and Credit

1:08:28Bush, 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 Hoover left office, I think the federal budget was about $4 billion. 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 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.

1:09:14We 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 could do with the one we got now. Plus, back then, we had real money. We were on the gold standard. Now, look at us. I mean, look at the problems we had in the 1970s, right? Still, we had a fundamentally sound economy then. We had a bubble in the 60s, same thing, the nifty 50s, 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 Reagan came in and when Volcker came in, we actually got some sensible policies.

1:10:03We 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's solution. We're not going to, I mean, it's night and day. and you know there's a lot of other people that say 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 did 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 similar. So the Japanese kept interest rates too low and they're still too low but they kept them

1:11:19to allow the market to function, didn't want to take the pain of the de-leveraging 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 Japanese 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 them. The Japanese citizens financed that gigantic government, but they still have a high savings rate.

1:12:06They're still the world's biggest current account nation. They're the world's largest 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. We're the exact opposite. There's no way that we can get off as easy as Japan. Because we're a 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 stops financing this, and it's going to come to an end, and we're going to have to make these hard choices.

1:12:56Is it going to be hyperinflation, or are we going to do the right thing? But the rest of the world, and a lot of people think, and this is what I have, I've had a lot of arguments, and people call it decoupling. They think, well, this is never going to happen, or when America stops consuming, the whole world is finished. They're not finished. We're not the engine of the world's economy. We're the caboose. And if you decouple the caboose, the cars move faster. We're not doing the world any favors consuming their stuff. It's vendor financing. But people say, we're the best customer. We're the worst customer, because we don't pay. A good customer pays you. And in the world of trade, you pay for imports with exports.

1:13:44And 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 shipping them abroad 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 gain 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.

1:14:31And that's what's going to happen. The World is not going to suffer because 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 their savings to us? Wouldn't they be better off enjoying the fruits of their own labor rather than laboring on the fruits of their own labor? Enjoying the fruits of their own labor, rather than laboring while we 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.

1:15:29Thank you very much.