Creating the Next Great Depression

0:00Thank you all for coming and for supporting the Mises Institute, and what I'm going to have to say is I'm going to repeat something Murray Rothbard wrote in quite a few of his writings, that he always reminded us that the power of the state ultimately rests on ideas, even a totalitarian state like the Soviet Union was a situation where there really were a few thousand people in control of the state apparatus and they're outnumbered by millions, an important tool for for keeping the millions subdued is propaganda and ideas, myths and superstitions about the grandiosity of the state, the benevolence of the state, and the evils of the civil society at the same time.

0:45And the one myth that really is one of the underpinning myths of the American state is the FDR myth. and in one of my books I quote Newt Gingrich is saying that the FDR was the greatest political figure of the 20th century because he got us out of the Great Depression and of course that's totally wrong as far as getting us out of the Great Depression but that's the myth so even Newt Gingrich said this when he was the Speaker of the House of Representatives And so this FDR myth lives on. And as David Gordon mentioned briefly a minute ago, the reason it's a myth is even the government's official statistics show us that in 1939, the unemployment rate was still 19%. And so in 1929, the year of the stock market crash, the unemployment rate was 2.9%. And so after an entire decade of the so-called New Deal, we still have We all had unemployment that was about six times higher than what the unemployment rate was going into that situation.

1:51And of course, as David said, World War II didn't get us out of the Great Depression. The number of Americans unemployed at that time was about five million, and the government drafted 11 million men. And so, of course, you can eliminate unemployment if you stick everybody into a foxhole somewhere in Europe. Yeah, they're not going to be looking for jobs in Chicago and California, they're in a foxhole in Germany or someplace. And not only that, but the Great Depression didn't end by World War II, but what finally did end it was the end of Roosevelt and the end of the war. During the end of the war the government budget was reduced from 1945 to 1947 from $95 billion to about $35 billion, so about almost a two-thirds absolute reduction in the federal budget because of the demobilization of the military.

2:55And what that meant was the year 1946 was the most robust year for economic growth by far in all of American history, in all of American history. The private sector of the economy grew by 30% in that one year and has never grown anywhere near 15% in any other year. And this was totally the opposite of what all the Keynesians were predicting at the time because of the massive cut in government spending while of course John Maynard Keynes Unions would have predicted another Great Depression. But no, it was the severe cutback in government, and not only that, but the anti-business, anti-capitalist Roosevelt regime was gone. What replaced it was not that much better.

3:40But it was better, and that helped a lot. But nevertheless, these are the facts. The FDR never did get us, the New Deal never did get America out of the Great Depression. In fact, it made things a lot worse, especially the big government spending programs, taxing programs, the laws favoring labor unions that allowed them to push wages up during the Depression, priced even more workers out of jobs, and our friends Richard Vedder and Lowell Galloway who wrote a book some years ago, a very good book called Out of Work, A History of Unemployment in America, they estimated with an econometric model that the New Deal programs probably made unemployment in America, at least 7 or 8 percentage points higher than they otherwise would have been.

4:28So the New Deal made the Great Depression longer and more severe, is what it did. And so, but we haven't, our policymakers haven't learned those lessons because they believe in a myth. They don't believe in the truth, they believe in a myth, the FDR myth. And so the rest of what I'm going to have to say is an illustration of how today the The response to the current, the majority of the responses to the current depression created by the government has been to repeat many of the same old failed programs that have actually made things worse rather than better during the Great Depression and are making things worse today also and there's another book that I would mention in addition to David Gordon's list is FDR's Folly by Jim Powell I think it was published in 03 or 04 And Jim Powell takes a look at a lot of these lessons. He surveys a lot of this economic literature that I've been alluding to.

5:26And he says there are a number of lessons we should have learned, but policymakers haven't. And the first one is that the basic problem with central banks is that they're based on what Hayek called the pretense of knowledge. The idea that some central planner could possibly possess all the knowledge that's in the minds of all the participants in markets and centrally plan the economy through monetary policy and other regulatory policies somehow. Well, of course, that's impossible. It's a delusion that we could centrally plan our economy through monetary policy or any other means. And so now that the Fed has created the bubble, which has burst, what is the Fed's response?

6:12Well, of course, to give itself even more essential planning powers. One of the things they're working on is creating a whole new bureaucracy that Ben Bernanke calls the systemic risk authority. He wants the government to regulate all risk-taking in America. in America. If you want to destroy capitalism once and for all, put a bullet in its head, that's what I would recommend. If you wanted to sabotage American capitalism, I can think of no better way than putting government bureaucrats in charge of regulating all risk-taking. And at a hearing that I watched on C-SPAN, the debate between Bernanke and the other bozos that were standing on the podium above him, some people call them senators, I call them was, should the Fed be given this authority or should some new bureaucracy be created?

7:06And that was the whole debate in Washington D.C. That was the domain of acceptable debate, was who should do this stupid thing? And so that's lesson number one, that it's the pretense of knowledge to pretend that the Fed could centrally plan the economy Lesson 2. Deposit insurance must be priced to reflect the risks of the banks that buy it. Having the federal government provide deposit insurance inevitably introduces political pressures to offer deposit insurance at the same price for all banks, regardless of risk taking by the banks. And that's exactly what happened. And if you remember the savings and loan crisis of the 1980s, one of the causes of the crisis was a government regulation called Regulation Q.

8:00The bureaucrats are very innovative with their language, aren't they? Wasn't that an imaginative name? Regulation Q, Regulation R. But Regulation Q put a limit of 5% on what savings and loans could pay on interest and savings accounts. and savings accounts, and with the inflation created by the Fed of 13% or more, interest rates, mortgage rates were around 20%, mutual funds were paying a lot more than 5%, and so there was massive disintermediation, money was just flying out of the SNLs because of regulation Q, And so part of the way of saving the SNLs, they increased the limit on deposit insurance from $40,000 per account to $100,000 per account.

8:50So you had a lot of these banks that were in trouble. And in order to try to make a profit, they knew they had to take a bigger risk to get potentially a bigger reward, bigger profit. And now here comes the government saying, go ahead and take that bigger risk and we'll cover you. Now your deposits are covered for $100,000 for every account, not $40,000. And so they encourage much greater risk taking on the part of the SNLs, building housing developments in the middle of the Arizona desert, under the idea that if you build it, they will come, they being the customers, and of course a great many of these, no one came. And so it was a classic case of moral hazard, of trying to, the government proclaiming to to reduce the risk of being in a savings and loan business, they inevitably increase the risk taking by SNLs and this created a huge bust and of course another bailout. It was said to be a $500 billion bailout at that time in the Bush administration in the 1980s.

9:55And so what did we do in response to the current dilemma? Well, we raised deposit insurance from 100,000 to 250,000, the exact same thing that caused the bust during the S&L crisis. So lesson number two obviously hasn't been learned, and that was, that of course was another of FDR's brilliant ideas. Lesson number three, since taxes are the biggest burden that millions of people face today, it's crucial to cut taxes. Well, that's a big joke, isn't it? The thing the government has done has been raising taxes, and as most economists, free market economists will tell you, that government spending is a much more reliable measure of tax than just tax, because one way or another the government is going to take money out of the private sector to pay for whatever amount of spending it intends to do.

10:46It's going to print money, it's going to borrow money, and no matter how it finances it, it's It's going to be diverting resources out of the domain of private control by consumers, entrepreneurs, investors and so forth to political control. I was on a PBS show, television show a while back. They wanted to talk about the stimulus bill and the host thought that he was being exceptionally clever by saying, but they're going to finance it by borrowing, therefore it's not going to cost us anything. They're going to borrow the money from China. And that's going to be cost-free. They're not going to raise taxes. How can you say money will be taken out of the private sector? Well, I guess to this crowd, I probably don't have to explain the lunacy to that, but he thought I was out of my mind and absolutely crazy by saying that there's a cost involved in spending a trillion dollars and financing if you're borrowing it. Of course there isn't. And so I was never invited back, to be sure.

11:46And he said, gee, all the other commentators I've seen on TV today said nothing at all like that. And they're all supporting this sort of thing. And so everything the government has been doing has been aimed at raising taxes, even the trial balloons for a value-added tax. I just learned two days ago that part of the Obama so-called stimulus bill involves the phasing out of the indexing of income taxes to inflation. That's something a lot of people probably haven't heard, because who has read this? I don't know how long it is, 2,000 pages long or something like that. But that's part of it. They want to phase out the indexing of income taxes to inflation so that the entire middle class will be pushed up into the Ted Kennedy tax bracket.

12:34And so at that point, the argument will be made that, well, this is unfair, that middle The middle class people are paying 39.6% income tax rates, therefore we must raise the top rate to maybe 60 or 70% and put the millionaires there and keep the middle class at the 39% rate. That's what I see coming if we keep going down the same road that we're going down. And so, and of course, no tax increase of any kind is good for the economy, but that's all and of course state and local governments have been trying to raise taxes on everything Lesson number four, efforts to soak the rich will backfire because investments of the rich are needed to create jobs.

13:32The whole philosophy of life of the current administration is income redistribution through through the tax system. Friedrich Hayek in the 1976 edition of The Road to Serfdom, his famous book The Road to Serfdom, in the preface he wrote that at the beginning of the 20th century socialism meant government ownership of the means of production. But by the time you get to the mid-century it really meant income redistribution through the welfare state and the progressive income tax. That's what socialism really came to mean because the underlying purpose, the ostensible The whole purpose of all of it was always egalitarianism, income redistribution, whether it was government ownership, government control, income redistribution, that's always the goal of the socialist, and of course the Obama administration, Obama as a socialist, before the election I wrote an article for lewrockwell.com entitled, Fascism or Socialism, Take Your Pick, about the ideology of McCain, which was country first, which is very creepy to me, I've studied European history and I knew that the slogan or the philosophy of fascism was

14:44common good comes before the private interest and so here's John McCain saying I'm running for president on common good comes before the public interest or private interest come vote for me and then what was our alternative, the senator from Acorn and so I need to say Lesson 5. Public works and other jobs programs must be avoided because they increase the cost and burden of government. Roosevelt actually employed about 10 million people and Public Works jobs by the end of the 1930s, and yet the unemployment rate was still 19%, as I said.

15:40And this is because of the law of opportunity cost, or what some, what Henry Hazlitt called the broken window fallacy. You can't create jobs by taking a billion dollars out of the private sector through taxes, for example, and letting the politicians spend that billion dollars. You destroy jobs in the private sector and you, by giving out political jobs in the government Sector. And that's what we're doing, of course. And economists have studied the FDR era stimulus program and Hoover had one. Of course, Hoover had a stimulus bill as soon as he got into office and it accounted for 13% of the entire federal budget and about twice the size of Obama's so-called stimulus as a proportion of the federal budget. And of course, it didn't

16:57and the Great Depression economically, but the Southerners didn't vote for a Republican until Ronald Reagan, because the Republican Party was the party of Lincoln, and so that was a safe Democrat seat for generations in Mississippi and all the other southern states. And so, there's a book by William Shugart called The Political Economy of the New Deal that lays all this out about how politics was the main criterion for spending the New Deal money. What a surprise, what a shocker that politics determines how government money is spent. Milton Friedman once said on this topic that to expect politics to not be the overriding motive for how government money is spent, is like expecting to hear a cat bark like a dog it's just it's just not going to happen and of course the so-called stimulus bill you probably have read that most of it the big majority of it is scheduled to be spent next year with just by sheer coincidence is an election year and so so that's what's going to

18:03happen it's a giant vote-buying scheme and it won't revive the economy it'll just solidify the political power of the politicians who are handing out our Lesson number six is that especially during a recession or depression, the government must not enact laws preventing prices from adjusting to circumstances. Well, that's the whole purpose of the Fed printing up a trillion dollars, isn't it? To try to prevent prices from falling and adjusting to market levels, especially in real estate, as far as that goes. And so, once again, we're doing everything we can. In Roosevelt's day, they passed a lot of labor legislation that stopped wages, the price of labor, from falling to free market levels and created a lot more unemployment by pricing people out of jobs.

18:49But now it's primarily real estate and a few other markets that the government is trying to prop up in terms of prices and to keep the free market from working. and Working. Lesson number seven, government must not enact laws preventing wages from adjusting. I already read that. In lesson number seven, I guess an auxiliary lesson to what I just said is that what's going on also now is there's legislation proposed that may pass that will eliminate secret ballot elections for labor unions. And this will enable the union thugs to intimidate workers, make sure they vote for the union. And they're They're hoping it will revive union power, at least in some industries, and allow them to push wages up, again, in a depression, which we're in now, which will create more unemployment, inevitably, if you understand the laws of economics.

19:41So that's not going to be a good thing, if that passes. The final lesson I want to mention is, only if investors feel private property is secure, will they be willing to make long-term financial commitments needed to spur recovery and boost and Used Employment. This is what our friend Bob Higgs, the economist Bob Higgs called Regime Uncertainty. During the Great Depression, there was so much anti-capitalist language and threats of more regulation and more taxes and windfall profits taxes that it created such uncertainty that long-term investing just was impossible. And so as a result, the capital The Federal Stock of the United States declined by about $3 billion during the Great Depression years. And it wasn't until Higgs argues that this uncertainty was lifted after World War II that investment took off.

20:35And of course, it's hard to imagine more uncertainty being created in the minds of long-term investors than what's been happening over the last couple of years with the threats of new taxes,

21:18is a little more contemporary, it's not an analogy to the Great Depression, but one of the things that did not help in terms of the current crisis is the fact that for some 30 years the U.S. government has had a policy of forcing, extorting, pressuring mortgage lenders to make bad loans to unqualified borrowers under the Community Reinvestment Act. And And this was greatly strengthened in the 1990s during the Clinton administration and also the Congress required, that's when the Congress required Fannie Mae and Freddie Mac to buy up trillions of dollars of these bad loans because they wanted to give the bad loans to unqualified borrowers who were low income borrowers. It was just a veiled expansion of the welfare state that was financed not by tax dollars but by forcing banks to make bad loans.

22:11And so, you know, that bubble, that didn't help. The Fed is the main culprit in creating the bubble, but certainly forcing banks to make trillions of dollars in bad real estate loans to not help things out at all. One of my articles on lewrockwell.com, I quoted a Fed publication that was sent out to zillions of mortgage lenders instructing them that if you want to avoid being sued for housing Discrimination, you will forget about income requirements to low income and minority borrowers, you'll forget about down payments, you'll forget about credit history, and they even said if you get an appraisal of a house that doesn't give you the right number, get in touch with us and we will get you another appraiser.

22:56I've bought and sold quite a few houses in my lifetime and I know if I tried to do that I could probably get in big trouble and maybe even go to jail, so that's fraud, that's real and State Fraud, but here's the Fed instructing people to go ahead, it's okay as long as the Fed is supervising the fraud and so they gave mortgage lenders these instructions on how to make bad loans and then threatened them that you could be fined 1% of your net value as a minimum if you don't comply with this stuff. And so what are they doing now? Well Congress is busy preparing legislation to expand the Community Reinvestment Act to to apply to credit unions, insurance companies, and all mortgage lenders, not just banks, certain banks, not just national banks, but all mortgage lenders of all kind. They want to expand it. And so that's why I said the FDR myth is so powerful and must be destroyed because it's used to justify this by the politicians in Washington, especially the Democrats. But

23:58as I said, Newt Gingrich, she had Newt Gingrich saying FDR was the greatest political figure in the 20th Century. So it's not just the Democrats who believe in this myth. I can remember some years ago when someone from the Cato Institute wrote an article criticizing FDR in the Wall Street Journal. One of the editorial board members of the Wall Street Journal wrote a letter to the editor excoriating this person for daring to criticize FDR. So apparently even in the past anyway, the editorial pages of the Wall Street Journal are sort with FDR Worshippers. It wasn't always like this. Politicians didn't always respond to depressions, of course, by expanding government. And I want to close with a couple of examples in American history of presidents who did the right thing in response to economic crises.

24:51David mentioned briefly that the Depression of 1920 was worse than the first year of the Great Depression, and it was, but it only lasted one year. And so what did President Warren Harding do to miraculously end a depression in one year? He did nothing but cut spending. That's all he did. He cut government expenditures and that's it. And the government ended, the depression ended in one year. Another example is Grover Cleveland, his second term in 1893. He took office right when there was a depression. By the way, the word depression was made up by the government. They used to call it panics.

25:38And then after a panic, I think I believe it was Herbert Hoover who thought that was a little too extreme. You don't want to call these panics. People might panic. So let's call it depression. That's better. And so it was Hoover who called it. And then it was was whittled down to be a recession, and so next it will be slowdown, something like, who knows, Bob Murphy has a number of suggestions, I've heard him give a talk before, it might be called a pineapple next week, who knows, something really that you can't figure out what it is. Well anyway, Grover Cleveland took power, the presidency, right at the time there was a bad recession, depression, whatever you want to call it, what did he do? He got tariffs, he opposed the income tax, he vetoed a bill for it to give $10,000 in welfare to farmers, and he said this, it will weaken the national character, he said, so he can't spend $10,000 on farm welfare.

26:41He also vetoed over 300 spending bills, and that depression ended in two years. He did that. And finally, going back even further in American history, President Martin Van Buren had the bad luck to take office right as a depression, in those days it was called a panic, was in the middle of it. And so, and he basically did nothing, but I'm going to close with a statement that he said. This is a speech that Martin Van Buren made in 1838 is when he took office. And he said to justify, well what he was doing, to justify cutting spending, cutting taxes and cutting tariffs as a response to depression, he said this, all former attempts on the part of government to assume the management of domestic or foreign exchange have proved injurious.

27:36What is needed is a system founded on private interest, enterprise and competition without The Aid of Legislative Grants or Regulations by Law." And that's what Martin Van Buren said to justify cutting back on government in order to enlarge the sphere of private activity, private action, entrepreneurship, and capitalism. And we're headed in exactly the opposite direction now, and I guess Ron Paul could be our Martin Van Buren. I've called him our Thomas Jefferson in one of my articles today, but no one seems to be listening to Ron in Washington these days. And so I tried to depress you even more than the previous speakers have, but now we have the very enlightening man, George Reisman, coming up next who Doug will introduce, and he's gonna tell us how to get out of this mess, once and for all.

28:28Thank you very much.