Current Market Conditions: 22 Oct. 2008

0:00Frank, it's good of you to call and give us a market update. You saw what was happening in the markets today. Is it too depressing to talk about? I think that it's too depressing. It really is. But the interesting thing is that the In this case, policies don't work. Now it's trying to support the money market mutual funds, money market funds. It tries to expand it everywhere now, the money pumping, and it's not working. It is a little bit of a problem when the markets fall purely on questions of corporate profitability or whatever the press is citing today. What can the Fed do about corporate profitability?

0:53It's just an indication that the economy is falling, obviously one would expect profitability to fall also and what the Fed is doing is just counterproductive, not only counterproductive it's damaging, Bernanke is really doing a demolishing job right now, destroying the So the official theory is that by injecting more money and loosening up credit markets then corporations start to borrow, production expands and the economy goes back into recovery.

1:39What's wrong with that scenario? Well, you know, this is the typical Keynesian scenario, in other words, they're paying attention to boosting demand. They believe that there is the multiplier that will boost the consumption. Through the Keynesian Multiplot, things will just amplify and everything will be okay. The problem is that we are confronted with a real issue, a real issue that real savings have been destroyed over many decades now. There's probably very little left of the real Well, how does market psychology play into this? Why is it that just good feelings all around don't repair the damage?

2:39How the market psychology enters? I personally believe that psychology is just a result. If things are good, then psychology is good. But if things are bad, then psychology is going to be bad. But it's not an independent entity by itself. I wish it would have been. Then the solution would have been to employ psychologists or psychiatrists and talk to people and say, It seems like we need a psychiatrist employed to find out why it is that Cain seems to have made such a big comeback these days. I've seen him cited as providing the answer to all the problems.

3:24This is a misguided view, but it derives credibility, because after the Second World War supposedly things started to move strongly, and everybody said, well, Keynes was vindicated, but we know that in the 70s the whole thing collapsed, like we had stagflation and all those things, and so Keynes in economics has been discredited for several decades now, Yeah, for absence of an alternative. And also, I guess, Keynes provides a rationale for the state to do what it wants to do anyway. I think that's what Murray Rothbard used to write. Absolutely right. Keynes provided the endorsement, the rationale, the legitimacy for politicians to do what they love to do, to spend and show that they can really control the economy.

4:20Economy, and what we see right now that actually it's all bankrupt. Bernanke has been pumping now money since September last year, I mean he was doing all those things lowering interest rates and pushing money and doing all sorts of crazy things and so far there's no results. I mean even if you want to last for a certain time lags, whatever, you know, but it starts not working. How, after this whole crisis is over and presumably we'll go through a recessionary period, what is going to be the effect on the willingness of institutions to borrow and lend in the future? Do you think that a certain lesson has been learned here? Well, I basically think that, I mean, at the moment we will have some certain conservatives and that people for some period of time will be very cautious, banks will be cautious, Everybody will get more cautious because they burned their fingers badly right now with all the excesses, all the crazy type of lending they were pursuing and buying long-term assets

5:29with very short-term money and all the mismatched policies. This probably will stop for a while, but once things will go back to normal, normal and valid commerce and central banks will start pushing yen money the way in the past, I'm You like to make predictions both short-term and long-term, and I know your long-term prediction concerns the rise of inflation as a result of all the injection of new reserves into the banking system. But what about short-term? Do you expect days like today to continue? Well, I basically see that the way the stock market works, the way I see it, for example, that it responds to what happens on the company's levels. And the companies, corporates today, they're misallocated in a big way, so now they're trying to adjust themselves. And we don't know exactly how much they have to adjust.

6:36And that's really why the stock market is still sort of a completely uncertain. Once we'll reach a certain level of adjustment, then we'll know that we hit the bottom, and then because we've got so much money being pumped, this will just move the market strongly. My view is that if we have already reached the level of good adjustment, then maybe the turnaround is not far from now. But I'm a bit cautious on this because I don't believe the companies have made the adjustment because the Fed didn't allow it and all the pumping of money prevents the proper adjustment to take place. There is also the hope, probably on the part of some other big institutions, that more bailouts are still forthcoming, which would prevent the adjustment.

7:29That's right, exactly right. Large institutions seem to be protected. They don't adjust anything. They keep all the structures intact. And that's going to be a serious problem, like in Japan, like previously we discussed, they have left all the inefficiency there and that's why they couldn't recover. What's happening to the dollar on international exchange and what do you expect to happen? Well, at present, I believe that the American dollar is strengthening on account of its previous The delayed effect, if you want, from the past money rate of increase, I would say, coupled with other factors, of course, that the American economy seemed to be slightly better than the European economy, let's say.

8:20But on balance, I suspect that, you know, maybe in six months' time or whatever, things may reverse and could be in favor of Euro again. It's quite possible. A lot of it depends on the willingness of the European Central Bank to inflate at the same level as the third, right? That's right. I mean, the rumors now in the market that the European Central Bank is probably going to lower interest rates very soon. Until a few months ago, Mr. Trichet, the chairman of the European Central Bank, was resisting the idea of lowering rates. Now it looks like he's under pressure to do it.

9:07And we know that the Fed is also going to aggressively lower interest rates at the end of this month now. The rumor is now in the market about half a percent at least. So, we will end up in a situation that we had in 2001 when we had a 1% interest rate again in the United States and we know what this 1% has created after the dot-com crash, you know, the Greenspan got very nervous and lowered the rates, now we got the same repetition with Benanke. So on one hand they complain about the effects of loose credit, and on the other hand they can see no way out other than more loose credit.

9:55That's right. The only remedy they have got is pumping money, whether they need it or not, that's what they're doing. If in doubt, print money. That's their formula, it looks like to me. It's unbelievable. And they're covering it up with insurance. They say, we're buying insurance, buying insurance. It's crazy. But in the process, they're creating all sorts of side effects. And then they're complaining about those side effects. In 2001, they laid foundation for CDOs and all the financial engineering. So now they'll lay foundation for something else. Yeah, and it's just purely for a lack of other options or at least unwillingness to pursue the option that they have to pursue, which is to tolerate the losses and tolerate the correction.

10:50Absolutely right. Even the interesting thing that Anna Schwartz, right, which, you know, like, of all people who probably wouldn't call her an Austrian, right, she basically agreed with us. She says, well, the experience shows that if you do very little, if you don't touch the market, the results are the best. That's what she said in the last interview on Wall Street Journal. And she basically criticized, in a subtle way, Mr. Bernanke. She said, Mr. Bernanke fights the previous wars, not today's war. That's what you said. That's significant because Bernanke is always citing the Schwartz Friedman book as a justification for his current policy. Exactly. I mean, he basically said that, in fact, you know, you remember in this, Friedman's birthday, 90th anniversary, 90th party, he basically said, I apologize on behalf of the Fed. He said, we're sorry for what we did in 1930s, but we're not going to repeat this error again, because we learned it from you. We know now you showed us what to do, and we'll never do it again. And now Anna Schwartz says, hey,

12:04you didn't read it properly. You made a mistake. Yeah, that's what she said to me. She was I was saying that then she said banks were collapsing because there was a run on banks. So she said the Fed was standing and doing nothing, so therefore we recommended to push money. But then she said today it's not the case, today she said the balance sheets are not right, therefore the Fed shouldn't really pump money just like that, but must look at the balance sheets and perhaps buy assets. The initial plan of Paulson was correct she said, obviously we don't agree with it, but At least she's critical of Bernanke's indiscriminate money printing. Well Frank, despite all the market trends, it's still good to hear you laugh and making jokes.

12:53No, I mean it is, but Mr. Bernanke, sooner or later, if things won't work, he will have to give up and say, If we have the guts to say, look, my theories are wrong, let's concede our defeat to Mr. Mises and let's start reading Human Action. Maybe people will say it. That's a good idea. So we take just a year off to do nothing but read Human Action and let the markets go their own way. Yeah, well, let them start. Maybe Mises Institute will sponsor and send them a copy of Human Action to read. We'll see if we can raise money for that. Maybe he'll pay some money to pay for it. Thank you so much Frank.

13:38Okay, no problem. Bye.