Speaker Panel

0:00Ladies and gentlemen, we can start this. You can ask a question of an individual or of the panel. So I apologize for this light. I hope I see everybody. First question? Yes, stand up and ask your question. So in Austrian business cycle theory, it says that the central bank causes the boom by inflating, lowering interest rates. and, you know, like Pavlovian dogs, we go out. Consumers spend, business managers invest, bankers lend and so here we are in quantitative easing number N to infinity and beyond. And is this the boom that we're gonna get out of it or is that massive pile of money in excess reserves some kind of evidence that, you know, There are a lot of excess reserves in the banking system, but there has been a rapid run-up in the money supply, both M2 and MZM, two of the official Fed measurements.

1:15You certainly see a boom in commodities and you're going to see it intensify in the future. At some point, there's talk that the Fed may withdraw that 0.25% interest that they're paying on unused reserves, so that will flood the economy even more with reserves. And just one point, the Austrian business cycle doesn't say that the central bank lowers interest rates. I mean, the central bank doesn't control interest rates. What it does do is create reserves out of thin air, and in the process of lending them out, there's an excess supply of excess reserves on the market, and interest rates fall as Well, my take is that we've really, you know, we've done this for so long that I think the ability of the government to create an artificial boom has been diminished and now requires so much stimulus because we're so addicted to it and, you know, the bigger the economy gets, at least, or the phony economy, the more stimulus that you need to give it another shot. It's just like any other addiction. I guess you build up a tolerance.

2:20And if you're a drug addict and if you keep taking the same drug, you need more and more of it. I mean, if you look at how muted the phony recovery we got as a result of the bailouts this time, we had record amounts of stimulus. We had more stimulus under Bernanke than we had under Greenspan, yet we barely moved the needle. I mean, we didn't even get the unemployment rate to come below 8%. In fact, it's really 15%. Economic growth, the GDP numbers couldn't even really pierce two for very long. and we're already on the cusp of another recession I mean the Fed knew that if it didn't come up with even more stimulus we would be back in recession but now since you know the problem is so much bigger the debt is so much larger you need that much of a dose and again you know you get a smaller and smaller reaction and I think we're at the point of overdose I'm at the point where we're

3:10gonna die from all this stimulus it's just not gonna work anymore the world's Well, it's not going to hold our paper, and it's just that we've reached the end of the road. I mean, I don't know how many feet we got left, but I think it falls apart within the next several years, maybe within the next several months. I mean, you can't pinpoint these things, but I think the world is going through these sovereign debt crises, and we're probably next on the list. Well, and I think you can make a case that another bubble has been created. All the time we talk about record number of people on food stamps while we've had unemployment rates from 10 to maybe down to 8. The real economy hadn't done anything. Stock markets more than doubled since March of 2009.

3:57Junk bond funds have record inflows. House prices, as Peter mentioned in his speech, have not been allowed to correct for a number of reasons,

4:37up, what pops that bubble in an Austrian sense, I don't know what it will be, but this has been bubble after bubble after bubble. For mainstream economists, the boom is good and the bust is bad. For Austrian economists, it's just about the reverse. The boom is bad because it's misallocating resources and the bust is good because it's reallocating resources, liquidating investments that never should have been made in the higher The problem that I think both Peters especially is stressed and others of us also mention is that what we're now doing is keeping, it's too big to fail, Detroit should have been busted, the financial sector should have been busted in the bust, and we're not allowing it to go.

5:26So we're just continuing the process of the bust, and it's not being solved. It's just continuing and continuing and continuing. Next question. Hi, Sam Baker. I work with Transnational Research in New Jersey. My question has to do with the issue of what potentially replaces a central bank Federal Reserve system, if we do have a crack-up, and the idea of sound money and market money where you don't have a government monopoly. I'm wondering, is such a system realistic or is this just an idealized concept that we can think about All right, I'll take this, but if I screw it up badly, I got Joe waiting in reserve here, whom I just volunteered for this, and he smiles nervously as I say that.

6:45Well, the Austrian view of money is that it always emerges on the market to begin with. So it's not like we're imagining some scenario that's some wild speculation that could never occur in reality. Money always emerges originally on the market because the money that's chosen, the thing that's chosen, is the most highly marketable or saleable commodity. for other reasons, people like gold for whatever reason, whatever the thing happens to be, and that becomes the most saleable commodity. Now the paper money that the government issues is not a saleable commodity period, so it couldn't possibly be the most marketable commodity, so it couldn't come about in this way whereby through barter gradually a common medium of exchange emerges. It would never come out that way because no one has any previous use value for pieces of paper with politicians on them.

7:42So it could not emerge that way. So the money emerges on the market, out of the barter system, and there are other reasons too it couldn't emerge. What we have now, the government version of money couldn't emerge because you couldn't do any reckoning with paper money that was just forced on you out of nothing. The gold that comes out of a barter system brings with it a previously existing array of barter prices. You remember that one unit of gold bought you ten hats, and five pounds of bananas, and so you know what it's worth. But if I just say, here are five woods, now go use them in exchange, how would you know? Is five woods worth a fur coat? Is it worth a gumball? You wouldn't know. You couldn't use it. So it has to emerge this way. Now, when we realize that, then suddenly it doesn't seem like something out of Mars to suggest that it's possible to imagine a monetary system without the government involved in it

8:33because the government is the latecomer in the process. The government will then come along and with a beautiful contribution of What Has Government Done to Our Money by Murray Rothbard is that in a short little book, he goes through step by step exactly how the government takes this and then first it'll, you know, it monopolizes the mint or it gives the money a particular national name so you begin to think of it as really a dollar rather than as a unit of gold and little by little then it will finally take the gold backing away. It's this whole process. What we sort of want to do is reverse that process. Just take these steps back. Now whether that's possible to do politically is a separate question. But theoretically there's nothing wrong with this model.

9:20Yeah, I like to turn that kind of question around a little bit and suggest that everything we know both from economic theory and from history is You know, the belief that we could have a government controlled fiat paper money standard that would be managed in a way that gives us economic prosperity. That is completely naive, it's fanciful, it's pie in the sky, it's unrealistic. Instead, the view that given the gold standard isn't perfect, there are resource costs and so on, as was mentioned by Tom, but these are trivial compared to the costs of a fiat system. I have to disagree with Tom Woods in a very limited sense. Murray used the same example. He said who would take 10 Rothbards? And I used to raise my hand and say, I'll take them, I'll take them. I tell you, if I had 10 Rothbards right now, they'd be worth $30,000.

10:15Murray used the same example. He said, who would take 10 Rothbards? And I used to raise my hand and say, I'll take them, I'll take them. I tell you, if I had 10 Rothbards right now, they'd be worth thousands of dollars. And one day, if you're lucky enough to get 10 Woods's out of Tom, on a piece of paper, it'll be worth thousands of dollars. But obviously I agree with the substance of what Tom was saying. I just had to add that in. I interpreted this question a little bit differently. The way I interpret it was not how the money would work, but how would banking work. And the way I would see how banking would work is there'd be two kinds of banks, or each bank would have two kinds of businesses. One would be demand deposits. So you deposit a demand deposit of $100 in the bank, and it just keeps it. It doesn't lend it out to anyone else.

11:01Somebody during the break was saying, how would you like a fractional reserve parking lot where they use your car when you're not using it? Okay, so one thing would be a demand deposit, and they just keep it. The other would be a time deposit, and here what Joe Salerno said is actually perfectly correct, namely you would have this time dimension, in other words, if somebody wants to lend the bank a time deposit for one year, well then you find someone who wants to borrow it for one year, so the bank is sort of an intermediary, sort of a tailor, I mean a tailor cuts cloth to suit or makes a big cloth out of small cloth, so what the time deposit bank would be is just a tailorivid to tailor borrowers and lenders, and there, it wouldn't be a demand deposit, you just can't come back to the bank and say, I want my money now, because you lent it to them for, you know, six years or 20 years or whatever it was in the case of a mortgage.

11:53Next question. Yes. Brian Greenberg, WNJC Radio New Jersey. Peter was a guest on my show during his quest for a Senate in Connecticut. Unfortunately, I couldn't get my listeners to vote for you due to voter ID, but we did support you. Anyway, I want to talk about the $64 trillion derivative question, two-part. One is, how does that impact in what's coming down the pike? And two, in the Dodd-Frank bill, I understand there are regulations that are going to require the big banks to increase their collateral on the next year, which will require them to buy U.S. Treasuries, which I sense will Well, first of all, I mean, you know, more regulation is the last thing that the financial service industry needs.

12:47I mean, I run a regulated broker-dealer and asset management firm, and my regulatory costs have skyrocketed over the last decade, including during the years where the housing bubble was inflating. So the problem in finance is too much government, not too little. And Dodd-Frank is not going to prevent the next crisis from happening. It's going to happen anyway. In fact, maybe Dodd-Frank only makes the next crisis worse. In fact, I think really it codifies too big to fail. I mean, all the too big to fail banks are now much, much bigger than they were before we labeled them too big to fail. And in fact, that's why they got bigger. It's the moral I mean banks that should have failed now grew instead and banks that should have grown and attracted deposits maybe went out of business and maybe they ended up getting bought out by the too big to fail banks because they couldn't compete and so it's kind of like a reverse Darwinism where we get the survival of the unfittest because it's the unfit, they get the government guarantees and now the more solvent banks can't compete because they're not on a level footing anymore. Who's going to put money in a bank that's too small, that could

13:57I want to put my money in the bank that can't fail. But the banks that can't fail are the ones that have the worst balance sheets, the ones that are making the worst loans. That's not going to stop the next crisis at all. Are there any mandates in there that banks buy treasuries? I know a lot of banks are buying treasuries. A lot of the regulators are looking at their collateral, and a lot of them have no choice but to buy treasuries. And the way it works is they borrow the money from the Fed and they loan it back to the Treasury and they make the spread and they lever themselves up. And when people say, well, you know, the banks aren't lending any money, sure they are. They're lending it all to the government. You know, it's crowding out and the government just blows the money. It doesn't go into increasing our productive capacity.

14:45And, you know, so small businesses can't get credit. I mean, big corporations, they can access the bond market or the bank, you know, they can go to the discount window. But when they get money, they don't use it productively. They just gamble with it. They speculate with it, you know. And as far as your first question on derivatives, I mean, yeah, I mean, the problem with derivatives is all the counterparty risk. And that so many people are buying insurance and the counterparty is not going to be able to pay when the policies are cashed in. That's what happened with the credit default swap. That's what happened to a lot of people that were buying these mortgages. Well, they just bought insurance, so they thought they had it covered, but they didn't bother to look at the insurance company. How are they going to pay? You know, the idea is that, well, the insurance company just assumed that the mortgages wouldn't default, so it was great business, right? You just, you collect money selling insurance, so you think no one's ever going to put in a claim.

15:38So the problem with derivatives is the counterparty, and I think that is going to happen. I think that there's probably a lot of derivatives in the bond market. I think a lot of people in bonds think they have their positions hedged. Well, what happens when the other side of the transaction has all these claims, it doesn't have the capital to pay. You probably have a lot of portfolios, a lot of people have insurance, so there is tremendous counterparty risk. It's there. It's all part of the problem. And if the government wasn't there with the moral hazard and the Bernanke put, we wouldn't have these risks. People would be more worried. But no one cares now. Everybody figures the government has their back. So this crisis is coming and I don't think it necessarily starts in derivatives but the derivatives will exacerbate it as it unfolds.

16:26Thanks. Just a follow up to that question on the derivatives market and a subsequent related point. There's definitely a shortage of collateral in the markets when you have a blowing out of credit spreads and the acceptable collateral in the derivatives markets are treasuries in cash, right? So what we saw in 2008 was in part a knee-jerk reaction of buying of treasuries to satisfy exactly what you're talking about, which is the counterparty risk. That hasn't been solved. But secondarily, when you look at the forecast that interest rates are going to go up, leaving aside the derivatives question, the Fed itself is levered 51 to 1 with a duration of 8. If interest rates go up even a little bit, the Fed becomes insolvent.

17:11How do you think, structurally, they can let interest rates go up? Well, you know, one of the interesting things that was done recently at the Fed is they had a change in the law. And basically, the Fed put the Treasury on the hook for any losses. So basically, when interest rates go up and all these 30-year mortgages and bonds that the Fed is holding collapse, the Treasury has to reimburse the Fed. But of course, where are they going to get the money? Well, I guess they'll get it from the Fed. So, the whole thing is just a shell game to hide the fact that there's absolutely nothing behind our money. It's all a big Ponzi scheme, but that's also why the Fed can never shrink their balance sheet. The Fed keeps saying, you know, we can shrink the balance sheet. In fact, in Ben Bernanke's press conference, Ben Bernanke denied that when the Fed prints money and buys bonds, it's the same thing as it's spending.

18:01He said, it's not like spending because we're not buying stuff, we're buying bonds. Well, you're still spending, you're buying something, you're spending. But the fact that they choose to buy bonds doesn't mean they're not spending, but then Bernanke said, because whatever we buy, we're going to turn around and sell. To who? I mean, you need a buyer. The Fed's the only buyer. Who else would be dumb enough to buy? I mean, the Fed doesn't care, because it just creates the money. So, you know, the Fed is, it's an illusion that there's an exit strategy. There is no exit strategy. They just have to buy forever. Because the minute they stop buying, the price of what they buy is going to implode. And then that's it. And then they have these huge losses. That's why the balance sheet has to grow and grow and grow, especially when you figure, look at all the mortgages. What are they buying now? They're going to buy mortgages. Who's going to want those mortgages? Nobody's going to want them. Because the minute the Fed stops buying them, the real estate prices are going to fall, and the mortgages are worthless. And then, of course, they're at super low rates. Who's going to want these low mortgages when interest rates go up? So the whole thing is just this gigantic shell game.

19:05I hope that we don't notice what's going on, and, you know, when they write the history books about, you know, this period of time, I mean, you know, elementary school kids are going to look back on disbelief, like, how could this, how could people have been so stupid? It's almost like if somebody wrote a fiction novel about this, nobody would believe it, right? Who could believe that this could happen? Yeah, I wanted to paint a little picture to ask a question. So in the context that I have a question about banking reform and with well over half the world's assets held in offshore entities and offshore zero tax jurisdictions and things and with the, like in the US to start a bank you need $100 million and jump through all these hoops and there's a lot of regulations like you guys are talking about but you could go to a little island and start a bank with a million dollars and often times you see these banks

19:56banks create all these derivative complex products like in their offshore branches. So my question is how do you approach banking reform in that kind of environment of the world financial system as it is like that? I think the core problem, as I said, was fractional reserve banking. Who cares if people take risks and come up with these financial innovations that may May or May Not be Viable on the Market. If you don't have fractional reserve banking involved, the collapse and losses that will result from taking these bad and prudent risks and so on won't affect the money supply. In other words, you'll have demand deposits that are fully backed. The people that will get involved in these types of financial innovations will be people that are pretty savvy, with no bailout guarantee from the Fed, with no This is for Professor Block. You said that increased inflation of money supply would result in more unemployment. But as far as I can see, because all the jobs which currently do not exist, because of all the unemployment caused by the minimum wage laws, wouldn't they create more unemployment?

21:13But as far as I can see, because all the jobs which currently do not exist, because all the unemployment caused by the minimum wage laws, wouldn't they clear up if you increase the money supply? If you have inflation, wouldn't there be more jobs, at least in short run, which were earlier not feasible because of minimum wage laws? Because minimum wage laws remain, minimum wages remain as they are, wouldn't increasing Money Supply Result and More Employment? Well yes, I think if I said the opposite I must have misspoke. Certainly during the boom times we get more employment, we get less leisure and more employment, we get more productivity.

21:58The problem is that it's not in, it's not sustainable, it's not in the right places. With a lower interest rate than the optimal or the market or the originary interest rate, We get investments in heavy industry that are not justified by the saving and savings decisions of the people. So if I said that, I misspoke, I apologize for it. Certainly there will be more jobs. But as Henry Hazlitt is always telling us, we don't want more jobs. What we want is more productivity. Jobs are a pain in the neck. Jobs are a cost. We waste labor resources on jobs. The ideal situation, someone was talking about post-scarcity, I forget who was talking about that, but the ideal situation is to have no scarcity and no jobs and just have stuff like you want a 16-ounce drink, take that Mayor Bloomberg and it just sort of starts dripping in the mouth, so I think I agree with you and certainly I agree with you about the minimum wage law, you know the reductio there is if it's such a great thing why don't we raise it a bit to a thousand an hour or something and then only Peter Schiff will be employed.

23:08If I'm understanding the question correctly, what I think he means is that given that the minimum wage is not a market phenomenon, right, it's a statutory thing and all employers have to abide by it, is there one silver lining to inflation, namely that given that the minimum wage is expressed in dollar terms, if we create all this money, then it's like having no minimum wage anymore and wouldn't that at least, this would create real jobs that we would want to create. Obviously there'd be other problems, I think that's... I was having a little debate with my professor at Columbia at the time, Gary Becker, and Gary Becker was saying one of the benefits of inflation is that it reduces the real value of the minimum wage. And I said, yes, yes, you're right, but can't we do better than that? Namely, can't we get rid of the minimum wage?

23:54And then I started saying, well, we ought to put people in jail who were responsible for passing the minimum wage in the first place. And then he started looking at me as if I was a little weird, but I was under the influence of Murray Rothbard, so that was my...

24:10Yeah, whenever you have a surplus of anything, it means the price is too high, right? I mean, you have a lot of people who can't find jobs because the price is too high. Nobody wants to buy their labor. And one of the reasons for that is the minimum wage. But of course, it's not just the minimum wage, because that's not all you have to pay. When you hire somebody, you gotta pay payroll taxes, workman's comp, you also take on other legal liabilities like maybe your employee's gonna sue you if they're not happy one day because maybe they don't feel they have the right work environment or maybe somebody made an off-color comment and they took offense to it or maybe you just have to fire them and then they wanna sue you because they claim. So there's a lot of risks associated with hiring people beyond what you actually pay the worker. But yeah, I mean, people look at this idea, the Phillips Curve, that there's some kind

24:59of trade-off between inflation and unemployment. There's not. But since wages because of government regulations tend to be sticky coming down, and they don't adjust going down when there's a surplus of unemployed people, that you can lower wages by creating inflation. And it's not the inflation that creates the jobs, it's the fact that the price of labor is coming

25:52and New Taxes and Health Care and things like that. So the cost of becoming an employer is rising. And just because you can get the employee a little bit cheaper doesn't mean that your labor costs are actually falling. Your labor costs are actually rising. And you also have to compete with the government benefits. And even if the minimum wage is lower, will somebody take the job if they have a better deal from the Government because they're not going to make them do anything for the money, they just collect it, and so, I mean, maybe you can hire somebody off the books, but I guess if you're hiring them off the books, then the minimum wage probably doesn't matter, if it's all cash under the table, but what's more likely going to happen is that they're going to end up raising the minimum wage, you know, oh, there's a lot of inflation, we've got to raise the minimum wage, and so they'll end up doing that, but yeah, it's amazing that people can look at this massive amount of unemployment,

26:51not figure out that it means that the price of labor is too high and you know I got this argument on my radio show with some left-wing labor guy you know trying to say that you know about the teacher strike that we need higher wages and you know I tried to put him in a position of an employee of an employer because he's probably never hired anybody but I said look you know where do you get your haircut you know do you do it yourself or do you go to a barber he said why go to a barber that's okay what do you pay for What if the barber wants to raise his price to $50 a haircut? Are you going to stay there? Or are you going to go someplace else? I said, because you're employing him to cut your hair. And he tries to say, well, I'm not really his employer, I'm his customer. Well, you're hiring. You know, when I buy my employees' labor, I'm the customer. They're selling me labor.

27:38If they want to charge too much, I'm not going to pay them. He was like, well, you should just pay whatever the union wants. Just a small footnote to that. This very kind of argument was offered by John Maynard Keynes in The General Theory. Part of his reasoning that market participants are generally not clever enough to understand the difference between nominal prices and wages and real prices and wages. I think you have his reasoning that market participants are generally not clever enough to understand the difference between nominal prices and wages and real prices and wages. Kane said in a period of high unemployment, if it would improve the labor market, not just for minimum wage workers, but for all types of other types of labor too, to have real wages go down, but yet unions will not agree to nominal wage cuts, then you just inflate the problem away.

28:30We effectively reduce real wages through inflation and somehow the unions are, you know, not able to see through this and will perfectly go along with this inflation. Same thing with the minimum wage. I mean, of course, interest groups would lobby for an increase in the minimum wage and it wouldn't be long before it would keep up with inflation. One more thing I didn't mention too is, you know, labor is not the only cost the business have. You create inflation, your raw material costs go up. go up. Ultimately, if there's more inflation, the cost of capital goes up. A lot of American companies that maybe make things, they import all the components. All your imported components cost more money. So, inflation can actually undermine the competitors. There's a business. In fact, there are probably a lot of businesses that say, look, I'd like to hire more people, but my fuel bills are too high. I can't afford it.

29:16All right. One more thing on this. I'm sorry. I just can't resist. But on the wages being

29:52So all of you who came to the conference today, thanks to our wonderful donors, thanks to our wonderful speakers, and we hope to be back in New York again, so thank you.