1 00:00:01,760 --> 00:00:06,160 Everybody, Tom Woods here. It's episode 25158 of The Tom 2 00:00:06,160 --> 00:00:09,000 Wood Show, and we have the distinct pleasure of being 3 00:00:09,000 --> 00:00:11,320 joined once again by the great Keith Knight. 4 00:00:11,840 --> 00:00:14,960 Keith Knight, long after all Woods is dead and buried. 5 00:00:14,960 --> 00:00:18,320 Keith Knight is going to be holding this 'cause that the the 6 00:00:18,520 --> 00:00:21,720 the flame of this cause aloft for all of you. 7 00:00:21,720 --> 00:00:24,920 He is managing editor at the Libertarian Institute. 8 00:00:25,600 --> 00:00:29,760 He's the author of Domestic Imperialism, Is It 9 Reasons I 9 00:00:29,760 --> 00:00:31,720 Left Progressivism. Yes, Sir. 10 00:00:32,080 --> 00:00:35,080 All right. And I'm that was unnecessarily 11 00:00:35,080 --> 00:00:37,880 morbid, my introduction of you, but welcome all the same. 12 00:00:38,080 --> 00:00:40,280 Keith Knight. Tom, thank you so much for 13 00:00:40,280 --> 00:00:42,880 having me. Well, you're kind of, I don't 14 00:00:42,880 --> 00:00:44,920 know if I would say you're doing me a favor, but you're doing 15 00:00:44,920 --> 00:00:46,280 something kind of interesting today. 16 00:00:46,560 --> 00:00:52,360 We've done this before. This year, it turns out, is is 17 00:00:52,360 --> 00:00:54,920 the anniversary year for two of my books. 18 00:00:54,920 --> 00:00:59,080 So we did a 20 year retrospective on the Politically 19 00:00:59,080 --> 00:01:00,440 Incorrect Guide to American History. 20 00:01:00,440 --> 00:01:03,440 Keith and I did. And Keith reminded me at the 21 00:01:03,440 --> 00:01:06,840 Mises Institute Supporters Summit over the weekend in 22 00:01:06,840 --> 00:01:11,520 Hilton Head that it's the 15th anniversary of Meltdown, my book 23 00:01:11,520 --> 00:01:13,600 on the financial crisis. And I'm just sick and tired of 24 00:01:13,600 --> 00:01:18,040 all these, all, all these, these anniversaries because it makes 25 00:01:18,040 --> 00:01:19,480 me feel old. But you know what? 26 00:01:19,480 --> 00:01:22,520 I'm going to, I'm going to get a visual aid to reward those of 27 00:01:22,520 --> 00:01:24,000 you watching on video. So hang on. 28 00:01:24,200 --> 00:01:27,640 All right, Here we are. This is the paperback edition. 29 00:01:27,960 --> 00:01:29,520 Oh, since you've got your hardcore. 30 00:01:29,680 --> 00:01:31,560 The hardback. You got the hardback. 31 00:01:31,840 --> 00:01:34,160 Yeah, that's good. This is the paperback that 32 00:01:34,160 --> 00:01:37,400 includes a new introduction by the author. 33 00:01:38,440 --> 00:01:42,040 And you will note also that it used to say New York Times 34 00:01:42,040 --> 00:01:44,080 bestseller on a little strip here in the corner. 35 00:01:44,080 --> 00:01:45,600 There's a thing only I would notice. 36 00:01:45,920 --> 00:01:49,600 Now it says national bestseller, which is very lame sounding. 37 00:01:49,960 --> 00:01:53,120 But that's because my publisher got into a dispute with the New 38 00:01:53,120 --> 00:01:56,080 York Times. They believe that the Times, in 39 00:01:56,080 --> 00:02:00,960 its weird undisclosed algorithm for determining bestsellers was 40 00:02:00,960 --> 00:02:06,360 unfairly excluding very, very big selling conservative books. 41 00:02:06,640 --> 00:02:09,639 And so they said, well, to punish the New York Times, we 42 00:02:09,639 --> 00:02:12,480 don't ever want to be considered for New York Times bestseller 43 00:02:12,480 --> 00:02:14,880 status ever again. And I thought, well, that's a 44 00:02:14,880 --> 00:02:16,280 weird way of sticking it to them. 45 00:02:17,480 --> 00:02:19,400 You're screwing all your authors. 46 00:02:19,880 --> 00:02:23,200 Anyway, enough of that, Keith. Let's talk here. 47 00:02:23,400 --> 00:02:25,320 So what? How do you want to do this? 48 00:02:25,680 --> 00:02:27,920 You want more gossip about my publisher or what? 49 00:02:27,920 --> 00:02:29,280 What? What else should we talk? 50 00:02:29,320 --> 00:02:31,720 About, yes, but that's got to be just for the supporting 51 00:02:31,720 --> 00:02:34,280 listeners. Let's get they get the inside 52 00:02:34,280 --> 00:02:37,120 scoop. What I wanted to do was give 53 00:02:37,120 --> 00:02:42,600 people a general overview of the mainstream idea as to why there 54 00:02:42,600 --> 00:02:47,120 was a financial crisis in 2008, and then I want to discuss your 55 00:02:47,120 --> 00:02:49,520 book. Here is Paul Krugman's book 56 00:02:49,520 --> 00:02:54,800 Arguing with Zombies, where Krugman says by 2005 or so, I 57 00:02:55,000 --> 00:02:58,480 and many but not enough others, had grown concerned about what 58 00:02:58,480 --> 00:03:00,480 looked like an immense housing bubble. 59 00:03:00,720 --> 00:03:03,280 It seemed obvious that bad things would happen when that 60 00:03:03,280 --> 00:03:05,840 bubble burst. As it turns out, it was far 61 00:03:05,840 --> 00:03:07,440 worse than almost anyone realized. 62 00:03:07,760 --> 00:03:12,040 Years of financial deregulation and financial innovation, which 63 00:03:12,040 --> 00:03:16,040 often amounted to finding ways to evade regulation, had created 64 00:03:16,040 --> 00:03:20,280 a banking system that was, in a modern high tech way, just as 65 00:03:20,280 --> 00:03:24,400 vulnerable to panics as the banking system on the eve of the 66 00:03:24,400 --> 00:03:28,000 Great Depression. That is Krugman summarizing how 67 00:03:28,000 --> 00:03:30,200 he saw it coming. And he knew what the cause was. 68 00:03:30,440 --> 00:03:33,200 Deregulation and financial speculation. 69 00:03:33,200 --> 00:03:36,080 So I want to go through your book Meltdown. 70 00:03:36,160 --> 00:03:40,960 You list 6 culprits as to what caused the financial crisis of 71 00:03:40,960 --> 00:03:44,480 2008 where you say the median home price across all U.S. 72 00:03:44,480 --> 00:03:50,280 cities increased by 150% from August 98 to August of 2006. 73 00:03:50,520 --> 00:03:54,280 Your first culprit they are the GS ES government sponsored 74 00:03:54,280 --> 00:03:56,520 enterprises, Fannie Mae and Freddie Mac. 75 00:03:56,640 --> 00:03:58,680 What do we need to know about culprit #1? 76 00:03:59,800 --> 00:04:02,920 Oh, I, I, I instead, I want to attack Krugman and, and what he 77 00:04:02,920 --> 00:04:04,320 said. Let me just say a couple quick 78 00:04:04,320 --> 00:04:07,240 sentences about Krugman. I I'm sure we'll probably get 79 00:04:07,240 --> 00:04:10,480 into that at some point, but I have to now that just said it 80 00:04:11,160 --> 00:04:15,240 there, there. Everything that the various 81 00:04:15,240 --> 00:04:19,320 institutions did leading up to this crisis they could have done 82 00:04:19,320 --> 00:04:21,720 at any time. There was no special 83 00:04:21,720 --> 00:04:26,280 deregulation that allowed them, that allowed banks to to hold 84 00:04:26,520 --> 00:04:29,800 securitized mortgages, securitization itself. 85 00:04:30,400 --> 00:04:32,640 None of these things were allowed because of quote UN 86 00:04:32,640 --> 00:04:35,480 quote deregulation. There is no relevant 87 00:04:35,480 --> 00:04:38,040 deregulation that had anything to do with this crisis. 88 00:04:38,160 --> 00:04:41,240 Even the Washington Post admitted that there is no 89 00:04:41,440 --> 00:04:44,480 relevant deregulation that is involved here. 90 00:04:44,480 --> 00:04:48,360 But when you're Krugman it, it has to be that because your 91 00:04:48,360 --> 00:04:52,520 faith is in the idea that if wise people would only be given 92 00:04:52,520 --> 00:04:56,280 the scope they need to manage the economy properly, we 93 00:04:56,280 --> 00:04:58,280 wouldn't have these catastrophes. 94 00:04:58,480 --> 00:05:02,280 So therefore there must have been something somewhere that 95 00:05:02,280 --> 00:05:06,200 would have prevented this. But the stupid rubes repealed it 96 00:05:06,200 --> 00:05:09,520 that, well, that would be nice to believe, but there is no such 97 00:05:09,520 --> 00:05:11,440 thing. And not to mention Greenspan 98 00:05:11,440 --> 00:05:15,520 himself was cheering on lowering interest rates to make housing 99 00:05:15,520 --> 00:05:19,120 more appealing. He cheered that on at the time 100 00:05:19,120 --> 00:05:22,120 it was being done. And so Oh my goodness, he 101 00:05:22,120 --> 00:05:25,520 congratulates himself on realizing that wait a minute, 102 00:05:25,680 --> 00:05:28,640 housing prices might be going up a bit much and this, this could 103 00:05:28,640 --> 00:05:31,040 be a problem. Well, what a surprise. 104 00:05:31,040 --> 00:05:34,560 The guy who calls for the very policy that causes the problem 105 00:05:35,000 --> 00:05:37,080 is now a forecaster of the problem. 106 00:05:37,080 --> 00:05:39,520 I mean, yay, this guy is just hopeless. 107 00:05:39,520 --> 00:05:42,440 All right, so you asked me about the GSE. 108 00:05:42,440 --> 00:05:46,040 So we're talking, in this case, we're talking about Fannie Mae 109 00:05:46,040 --> 00:05:50,640 and Freddie Mac. So these are institutions that 110 00:05:51,200 --> 00:05:54,360 they're like, you know, like the worst of a, they're technically 111 00:05:54,360 --> 00:05:57,160 private, but private, wink, wink. 112 00:05:57,560 --> 00:06:00,880 You know, everybody knows that. Well, first of all, their 113 00:06:00,880 --> 00:06:05,600 purpose was to make home ownership more attainable for 114 00:06:05,600 --> 00:06:08,880 Americans and they were private institution. 115 00:06:08,880 --> 00:06:11,600 But they're private, you know, kind of like the way the Fed is 116 00:06:11,600 --> 00:06:14,040 private. Like, you know, the no really 117 00:06:14,040 --> 00:06:19,280 private institution, you know, has its chairman selected by the 118 00:06:19,440 --> 00:06:21,840 US government. You know, like, can they vote on 119 00:06:21,840 --> 00:06:24,040 them? I mean, there's no company in 120 00:06:24,040 --> 00:06:26,400 the economy that's like that. Well, likewise Fannie and 121 00:06:26,400 --> 00:06:31,160 Freddie, everybody knew and they themselves, I have quotations in 122 00:06:31,160 --> 00:06:32,520 one or two of my books about this. 123 00:06:32,760 --> 00:06:35,880 They themselves knew that if Fannie and Freddie ever got into 124 00:06:35,880 --> 00:06:39,320 any trouble as they supposedly helped Americans become 125 00:06:39,320 --> 00:06:43,080 homeowners, that they had a more or less infinite line of credit 126 00:06:43,080 --> 00:06:44,920 to the Treasury. And that is exactly what 127 00:06:44,920 --> 00:06:47,200 happened. That is exactly what happened on 128 00:06:47,200 --> 00:06:52,120 on Christmas Eve as this was all happening it, it's the the, the 129 00:06:52,400 --> 00:06:55,880 infinite line of credit with the Treasury was officially 130 00:06:55,880 --> 00:06:58,520 established at at a moment when nobody's paying attention, it's 131 00:06:58,520 --> 00:07:03,120 Christmas Eve. But Fannie and Freddie would buy 132 00:07:03,120 --> 00:07:07,480 mortgages from banks. That is to say, once, let's say 133 00:07:08,040 --> 00:07:11,760 an institution like Countrywide makes a mortgage loan to some 134 00:07:11,760 --> 00:07:14,640 family, Fannie, you could get a, you would get a letter in the 135 00:07:14,640 --> 00:07:18,840 mail saying from now on, this mortgage will be serviced by 136 00:07:19,360 --> 00:07:22,880 Fannie Mae. And so therefore you're going to 137 00:07:22,880 --> 00:07:26,160 make the payments accordingly. And so that means that Fannie 138 00:07:26,160 --> 00:07:31,680 Mae by buying this mortgage from the originating bank is buying 139 00:07:31,680 --> 00:07:35,600 the right to get the flow of mortgage payments over time. 140 00:07:36,040 --> 00:07:39,360 And the existence of Fannie and Freddie that we're willing to 141 00:07:39,360 --> 00:07:42,520 buy mortgages and we're willing to buy risky mortgages. 142 00:07:42,520 --> 00:07:47,840 And we know this again, from in from internal documents and we 143 00:07:47,840 --> 00:07:51,760 know what the what directors of the company were telling people 144 00:07:52,040 --> 00:07:55,120 that you got to be you if you get out of this company, if 145 00:07:55,120 --> 00:07:59,400 you're not ready to take risks. So it meant that even though 146 00:07:59,520 --> 00:08:02,440 it's true the private sector made a lot of bad mortgage 147 00:08:02,440 --> 00:08:05,800 loans, they knew they could sell them to Fannie and Freddie. 148 00:08:05,800 --> 00:08:08,040 That's the point. That's the point that somebody 149 00:08:08,040 --> 00:08:09,400 like a Krugman is going to ignore. 150 00:08:09,640 --> 00:08:12,880 So I didn't choose Countrywide at random. 151 00:08:13,080 --> 00:08:17,720 Countrywide sold about 90% of its loans to Fannie and Freddie. 152 00:08:18,640 --> 00:08:22,080 They were Fannie and Freddie or Fannie Mae executives were 153 00:08:22,080 --> 00:08:25,440 caught in counting scandals in 2004. 154 00:08:25,760 --> 00:08:28,920 They were cooking their books to justify bigger bonuses for 155 00:08:28,920 --> 00:08:31,240 themselves. If a private firm had done that, 156 00:08:31,240 --> 00:08:32,440 there would have been consequences. 157 00:08:32,440 --> 00:08:35,200 But everybody loved Fannie and Freddie because politicians 158 00:08:35,200 --> 00:08:36,720 could say, look at these institutions. 159 00:08:36,919 --> 00:08:42,600 They're helping you, Joe Taxpayer and Joe Voter, get the 160 00:08:42,919 --> 00:08:46,200 the home that you want. And so, yes, it's true, there 161 00:08:46,200 --> 00:08:48,640 was no explicit bailout guarantee. 162 00:08:48,640 --> 00:08:52,400 There was a chance that Fannie and Freddie would be allowed to 163 00:08:52,400 --> 00:08:54,800 go bankrupt. But the point is the markets 164 00:08:54,800 --> 00:08:58,560 didn't think so. So even in September 2008, 165 00:08:58,560 --> 00:09:00,400 Fannie and Freddie are on death's door. 166 00:09:00,920 --> 00:09:04,400 They've got all these. They've got all these assets of 167 00:09:04,400 --> 00:09:07,600 their books that are not worth nearly what they were supposed 168 00:09:07,600 --> 00:09:11,160 to be worth. They were still able to borrow 169 00:09:11,480 --> 00:09:14,800 at rates only one percentage point higher than the federal 170 00:09:14,800 --> 00:09:17,880 government itself could could borrow at. 171 00:09:18,120 --> 00:09:21,880 And investors obviously believe the federal government would 172 00:09:21,880 --> 00:09:24,040 would come to the rescue. We have plenty of evidence for 173 00:09:24,040 --> 00:09:27,360 that. So, yeah, So Fannie and Freddie 174 00:09:27,360 --> 00:09:32,080 were creating moral hazard. And there's a lot of moral 175 00:09:32,080 --> 00:09:35,000 hazard in this crisis. Moral hazard refers to the 176 00:09:35,000 --> 00:09:39,840 phenomenon whereby you don't where, where, whereby somebody 177 00:09:39,840 --> 00:09:45,480 else is going to absorb the risk or is going to absorb the cost 178 00:09:46,040 --> 00:09:48,920 of your behavior. So there's a kind of moral 179 00:09:48,920 --> 00:09:51,760 hazard. Let's say when you rent a car, 180 00:09:52,440 --> 00:09:54,640 you're not going to, you're not going to get an oil change for 181 00:09:54,640 --> 00:09:56,520 that rented car. You're not going to wash it. 182 00:09:57,240 --> 00:10:00,720 Maybe you might go 5 miles an hour faster over a, a speed bump 183 00:10:00,720 --> 00:10:03,680 because you don't own the long term value of that car. 184 00:10:03,920 --> 00:10:06,640 You know, the, the, the rental agency does well. 185 00:10:06,640 --> 00:10:12,320 Likewise, moral hazard is present when, for example, there 186 00:10:12,320 --> 00:10:15,120 is an implicit or explicit bailout guarantee from the 187 00:10:15,120 --> 00:10:17,080 federal government. Because, you know, well, if I 188 00:10:17,080 --> 00:10:20,880 take a lot of risk, I could wind up with very high profits. 189 00:10:21,080 --> 00:10:23,000 I also could wind up with losses. 190 00:10:23,000 --> 00:10:26,120 But I I have it on pretty good authority that the losses will 191 00:10:26,120 --> 00:10:30,160 be absorbed by the suckers who make up the tax paying 192 00:10:30,160 --> 00:10:32,920 population of the US. And so that what does that 193 00:10:32,920 --> 00:10:35,400 encourage? Obviously more risk taking than 194 00:10:35,400 --> 00:10:38,600 than would have been taken in the past, you know, in the in 195 00:10:38,600 --> 00:10:44,600 the absence of the moral hazard. Culprit #2 The CRA or Community 196 00:10:44,600 --> 00:10:46,600 Reinvestment Act? What do we need to know about 197 00:10:46,600 --> 00:10:49,480 the Community Reinvestment Act? Well, here's the problem. 198 00:10:49,480 --> 00:10:53,000 I mean, the Community Reinvestment Act had to do with 199 00:10:53,400 --> 00:10:56,160 making sure it was a kind of affirmative action lending, 200 00:10:56,160 --> 00:11:01,800 making sure that banks were issuing mortgages in what the 201 00:11:01,800 --> 00:11:04,440 government considered to be sufficient numbers in the 202 00:11:04,440 --> 00:11:06,600 neighborhood where the bank itself was located. 203 00:11:07,200 --> 00:11:10,400 And a lot of people on the political right pointed to the 204 00:11:10,400 --> 00:11:15,240 Community Reinvestment Act as an example of the kind of thing 205 00:11:15,680 --> 00:11:19,240 that led to the crisis. Because obviously these banks, 206 00:11:19,240 --> 00:11:23,440 if you, if you have to force a bank to make loans, that means 207 00:11:23,440 --> 00:11:27,280 that those loans were unattractive for some reason, or 208 00:11:27,560 --> 00:11:28,760 they would have made them already. 209 00:11:29,600 --> 00:11:34,480 So people would say that legislation like our law, a law 210 00:11:34,480 --> 00:11:38,880 like that, a requirement like that requires banks to make 211 00:11:38,880 --> 00:11:40,080 loans they wouldn't make otherwise. 212 00:11:40,080 --> 00:11:41,480 Why wouldn't they make them otherwise? 213 00:11:41,560 --> 00:11:45,280 Because they're not good loans. And of course, what, what the, 214 00:11:45,360 --> 00:11:48,240 you know, getting past all the stuff about deregulation or this 215 00:11:48,240 --> 00:11:52,120 or that, the fact is this, the crisis occurred because the 216 00:11:52,120 --> 00:11:54,000 banks just made a lot of bad loans. 217 00:11:54,200 --> 00:11:56,600 You know, that's not a sexy explanation. 218 00:11:57,480 --> 00:11:59,360 You know, that's, but that's the reality. 219 00:11:59,360 --> 00:12:03,760 Banks made a lot of bad loans. The, the reason I, I'm not 220 00:12:03,760 --> 00:12:09,840 particularly taken by this explanation is that it is true. 221 00:12:09,840 --> 00:12:11,880 The Community Reinvestment Act goes all the way back to the 222 00:12:11,880 --> 00:12:15,640 1970s. So given that the crisis occurs 223 00:12:15,920 --> 00:12:21,560 2007 into 2008, that's an awfully long incubation period, 224 00:12:21,760 --> 00:12:24,280 You know, for, to, for that to be an explanatory factor. 225 00:12:24,280 --> 00:12:28,760 It didn't help, but it was carrying more of a burden than 226 00:12:28,760 --> 00:12:32,600 it should have by right wingers who didn't know what else to to 227 00:12:32,600 --> 00:12:33,840 say. They they don't want to blame 228 00:12:33,840 --> 00:12:37,400 capitalism because they feel invested in that, but they 229 00:12:37,400 --> 00:12:40,320 haven't learned anything about the Federal Reserve because 230 00:12:40,320 --> 00:12:42,880 National Review wasn't talking about the Federal Reserve. 231 00:12:43,200 --> 00:12:45,520 Neoconservatism wasn't talking about the Federal Reserve. 232 00:12:45,520 --> 00:12:51,120 They had no explanation at hand. Whereas we as Austrian 233 00:12:51,120 --> 00:12:54,680 economists, you know of, of the Austrian school, we can say that 234 00:12:54,680 --> 00:12:56,640 the central bank plays a role here. 235 00:12:57,040 --> 00:13:00,040 And the central bank is not a creation of the free market. 236 00:13:00,040 --> 00:13:03,560 It is just the opposite. But they didn't have that read 237 00:13:03,640 --> 00:13:06,920 readily at hand. So they were forced to to search 238 00:13:06,920 --> 00:13:11,840 around for not very convincing explanations like this one. 239 00:13:13,600 --> 00:13:18,120 And you explain, look, instead of taking a very volatile 240 00:13:18,120 --> 00:13:21,760 example that people know about, could you walk us through why we 241 00:13:21,760 --> 00:13:25,680 might see a disparity between whites and Asians getting 242 00:13:25,680 --> 00:13:28,960 approved for banking loans? Oh, yeah. 243 00:13:28,960 --> 00:13:31,800 So there was a there was some amid. 244 00:13:31,800 --> 00:13:35,520 For all I know, there's still some talk about discrimination 245 00:13:35,520 --> 00:13:40,680 in lending that there were, there are racial disparities in 246 00:13:41,440 --> 00:13:43,560 the, you know, the being awarded mortgage loans. 247 00:13:44,280 --> 00:13:47,760 And because of these disparities, the, the allegation 248 00:13:47,760 --> 00:13:49,400 was the banks are discriminating. 249 00:13:49,400 --> 00:13:53,280 So the banks, on the one hand, we're told that the banks are 250 00:13:53,640 --> 00:13:56,720 selfish and evil and whatever. And look, that this banking 251 00:13:56,720 --> 00:14:01,080 system, you know, a lot of them are, but but this is the, you 252 00:14:01,080 --> 00:14:03,480 know, these kind of woke accusations are never that they 253 00:14:03,480 --> 00:14:05,200 never make the right accusations. 254 00:14:05,600 --> 00:14:07,720 You know, I think that their criticism of the Pentagon is 255 00:14:07,720 --> 00:14:09,800 that it's not bringing on enough trans people. 256 00:14:09,880 --> 00:14:12,720 That's not the correct criticism of the Pentagon. 257 00:14:13,200 --> 00:14:16,400 And likewise, these are not the correct criticisms of our 258 00:14:16,560 --> 00:14:19,360 current banking system. Well, one way you can 259 00:14:19,560 --> 00:14:24,600 definitively determine that these banks are not engaged in 260 00:14:24,600 --> 00:14:26,880 discrimination is simply to look at default rates. 261 00:14:27,440 --> 00:14:30,840 So if it were true that for some reason, even though they're 262 00:14:30,840 --> 00:14:33,520 dying, they're selfish and they want all the profits in the 263 00:14:33,520 --> 00:14:36,920 world, they would rather be racist against blacks than make 264 00:14:36,920 --> 00:14:42,360 profits. OK, well, that seems kind of 265 00:14:42,560 --> 00:14:45,600 unconvincing given that you've all you do all day long is tell 266 00:14:45,600 --> 00:14:47,840 us how selfish they are. Why wouldn't they want to make 267 00:14:47,840 --> 00:14:50,240 money off black borrowers? You know? 268 00:14:50,600 --> 00:14:52,400 So the answer is you look at default rates. 269 00:14:52,400 --> 00:14:55,200 The default is rate is the rate at which people default on the 270 00:14:55,200 --> 00:14:56,480 loan. They don't make the payments. 271 00:14:57,000 --> 00:15:01,280 So if black applicants were being held to an artificially 272 00:15:01,280 --> 00:15:05,200 high racist standard, they should have lower default rates. 273 00:15:06,080 --> 00:15:09,840 But they don't. So it turns out that the default 274 00:15:09,840 --> 00:15:14,600 rates are about the same, and that's because the loans were 275 00:15:14,600 --> 00:15:18,600 being made correctly in terms of of risk assessment. 276 00:15:19,080 --> 00:15:22,400 And so, yeah, it's true that Asians were getting mortgage 277 00:15:22,400 --> 00:15:25,440 loans at an even higher rate than whites were. 278 00:15:25,480 --> 00:15:28,240 Why? Because apparently they were 279 00:15:28,240 --> 00:15:31,680 more credit worthy or whatever factors you want to talk about. 280 00:15:31,680 --> 00:15:34,600 But the default rates are the same, and that's what the bank 281 00:15:34,600 --> 00:15:38,640 cares about. Culprit #3 government artificial 282 00:15:38,640 --> 00:15:43,240 stimulus to speculation walk us through why this is a culprit in 283 00:15:43,400 --> 00:15:46,240 the financial. Crisis OK, so there's there's 284 00:15:46,240 --> 00:15:49,960 actually a lot to say on this. So I'll just pick a little, a 285 00:15:49,960 --> 00:15:55,160 little bit of the story, which is the, and we need to talk 286 00:15:55,160 --> 00:15:57,600 about the Federal Reserve, which is coming up, I think might be 287 00:15:57,600 --> 00:16:00,400 the next one after this one. And that will actually help us 288 00:16:00,400 --> 00:16:01,640 understand this a little bit better. 289 00:16:02,160 --> 00:16:09,240 But we started to see lending standards go way down during 290 00:16:09,240 --> 00:16:12,720 this period because there's there's a, a very, very heavy 291 00:16:12,720 --> 00:16:16,200 push at the Department of Housing and Urban Development, 292 00:16:16,360 --> 00:16:20,320 the FHA, the Fed itself is also pushing this. 293 00:16:20,840 --> 00:16:24,120 Fannie and Freddie are also pushing it to get people into 294 00:16:24,120 --> 00:16:28,400 houses. And that meant all kinds of 295 00:16:28,400 --> 00:16:31,800 novel ways of getting people into mortgages who wouldn't 296 00:16:31,800 --> 00:16:35,080 otherwise be qualified. So that would be, that would 297 00:16:35,080 --> 00:16:37,400 mean things like no doc mortgages, like you don't even 298 00:16:37,400 --> 00:16:41,720 have to show your employment so you don't have to convince us 299 00:16:41,720 --> 00:16:44,200 that you're creditworthy. It was wild the way they were 300 00:16:44,440 --> 00:16:48,240 giving away mortgages, but there was no way to keep these kind of 301 00:16:48,240 --> 00:16:54,440 creative instruments confined just to lower income kind of 302 00:16:54,440 --> 00:16:56,480 mortgages. Everybody wound up getting these 303 00:16:56,480 --> 00:17:02,280 sorts of things. And what's more, the one thing, 304 00:17:03,320 --> 00:17:07,880 the one interesting Alan Greenspan move that is relevant 305 00:17:07,880 --> 00:17:14,280 to this discussion is that when the.com boom fizzled out, he 306 00:17:14,839 --> 00:17:19,560 pushed interest rates down further to try to stimulate 307 00:17:19,560 --> 00:17:23,000 things. And this was the first time in 308 00:17:23,000 --> 00:17:28,319 recorded history in the US that housing prices did not fall in a 309 00:17:28,319 --> 00:17:30,920 recession. They actually went up. 310 00:17:31,800 --> 00:17:35,280 And this LED people to this false idea that was spread by 311 00:17:35,280 --> 00:17:39,160 all kinds of financial gurus that housing prices never fall, 312 00:17:39,280 --> 00:17:41,080 that you can't go wrong in real estate. 313 00:17:41,320 --> 00:17:42,960 Housing prices just go up and up. 314 00:17:43,640 --> 00:17:48,000 And this mentality in turn, coupled with all the various 315 00:17:48,000 --> 00:17:53,920 creative financing schemes, LED people to to get far, far 316 00:17:53,920 --> 00:17:56,720 further into flipping houses than they would otherwise have 317 00:17:56,720 --> 00:17:58,800 done. I'm going to buy this one, this 318 00:17:58,800 --> 00:18:02,200 one, this one. And I just know that I can just 319 00:18:02,200 --> 00:18:04,520 turn this thing around and get a higher price. 320 00:18:04,520 --> 00:18:09,200 And everybody had been a customer or acclimated to that 321 00:18:09,200 --> 00:18:14,640 idea by all these voices they're hearing, and also by Greenspan 322 00:18:14,880 --> 00:18:20,760 continuing trying to continue the party from the.com boom by 323 00:18:20,760 --> 00:18:23,720 not letting the economy just kind of sort itself out 324 00:18:24,080 --> 00:18:29,200 afterthe.com bubble burst. And in fact, Ron Paul on the 325 00:18:29,360 --> 00:18:33,800 floor of the US House in 2001 described exactly what was going 326 00:18:33,800 --> 00:18:36,680 on. Hesaidthis.com bubble has burst 327 00:18:37,000 --> 00:18:42,560 and now Greenspan is pumping up housing bubble. 328 00:18:43,040 --> 00:18:45,160 But get now we'll we'll say more about that when we get to the 329 00:18:45,160 --> 00:18:47,440 Federal Reserve thing. In fact, why don't we do that 330 00:18:47,440 --> 00:18:49,240 now? Fair enough. 331 00:18:50,600 --> 00:18:53,080 Culprit 4 is the pro ownership tax code. 332 00:18:53,080 --> 00:18:55,080 Anything we need to know about that before going? 333 00:18:55,080 --> 00:18:57,520 Into I mean, I mean, you can read that in the book that I'll, 334 00:18:57,560 --> 00:19:00,880 I'll leave one of the six for people to be required to go buy 335 00:19:00,880 --> 00:19:02,840 the book. So we'll have a link to the book 336 00:19:02,840 --> 00:19:05,560 in the description and on the show notes page, by the way. 337 00:19:06,080 --> 00:19:09,640 So culprit #5 specifically is the Federal Reserve and 338 00:19:09,640 --> 00:19:12,000 artificially cheap credit. Yeah. 339 00:19:12,400 --> 00:19:16,760 So during this time, we have the Federal Reserve increasing 340 00:19:17,200 --> 00:19:21,400 credit substantially and then we have all these incentives again 341 00:19:21,400 --> 00:19:24,400 coming from all these federal departments and from the GS, ES 342 00:19:24,800 --> 00:19:29,600 tending to steer that new money into into housing. 343 00:19:29,840 --> 00:19:34,160 And so, you know, there are, we've had the Great Depression, 344 00:19:34,160 --> 00:19:37,120 we've had financial panics, we've had recessions during 345 00:19:37,120 --> 00:19:39,440 various years. And they all have their own 346 00:19:39,440 --> 00:19:43,760 individual characteristics. This particular one happened to 347 00:19:43,760 --> 00:19:46,560 have a major emphasis on housing. 348 00:19:47,080 --> 00:19:53,120 And we can understand why, given all the pressure on the part of 349 00:19:53,120 --> 00:19:57,240 these institutions to just to make these loans to to to build 350 00:19:57,240 --> 00:20:00,680 up the home ownership numbers. Democrats wanted that, 351 00:20:00,680 --> 00:20:03,560 Republicans wanted that, the Fed wanted it, the federal 352 00:20:03,560 --> 00:20:05,480 departments, all of these things. 353 00:20:06,000 --> 00:20:10,040 And so the existence of this Federal Reserve credit makes it 354 00:20:10,040 --> 00:20:15,040 possible. For house prices to just 355 00:20:15,040 --> 00:20:17,520 continually rise away, where would people be getting the 356 00:20:17,520 --> 00:20:19,040 money to keep buying these houses? 357 00:20:19,480 --> 00:20:23,840 Eventually they'd be tapped out, but there's this enormous, vast 358 00:20:23,840 --> 00:20:25,320 amount of credit that's available. 359 00:20:25,560 --> 00:20:28,120 And so it just keeps going and going and going. 360 00:20:28,520 --> 00:20:33,480 And this is something that also, I mean, yeah, we have laws 361 00:20:33,480 --> 00:20:39,200 saying you got to make this proportion of, of, of, of let's 362 00:20:39,200 --> 00:20:42,000 say subprime mortgage loans or you, you've got to make mortgage 363 00:20:42,000 --> 00:20:43,480 loans in the community or whatever. 364 00:20:44,120 --> 00:20:48,000 But we also have the incentive created by Fed credit. 365 00:20:48,480 --> 00:20:50,520 And that incentive kind of runs like this. 366 00:20:50,520 --> 00:20:53,400 And there's a, an analogy in the in the book to a basketball 367 00:20:53,400 --> 00:20:58,200 team. Let's suppose you, you have to 368 00:20:58,200 --> 00:21:01,880 pick five people from your gym class to be on your basketball 369 00:21:01,880 --> 00:21:03,560 team. You're going to pick the five 370 00:21:03,560 --> 00:21:06,080 best you can. But then suppose I changed my 371 00:21:06,080 --> 00:21:07,800 mind and I said, well, you know what, you probably should have a 372 00:21:07,800 --> 00:21:09,440 bench of at least a couple of people. 373 00:21:09,720 --> 00:21:13,640 Pick two more. Well, those two more are going 374 00:21:13,640 --> 00:21:15,360 to be not as good as the first 5, right? 375 00:21:15,360 --> 00:21:17,360 Because you chose the best ones already. 376 00:21:18,160 --> 00:21:22,200 Well, likewise, when the Fed comes along, it increases 377 00:21:22,280 --> 00:21:24,880 credit, pushes interest rates down. 378 00:21:25,440 --> 00:21:27,840 Now the banks are going to be making loans to, I mean, the 379 00:21:27,840 --> 00:21:30,880 banks are going to be loaned up to the extent possible at all 380 00:21:30,880 --> 00:21:32,760 times because they want to maximize their profits. 381 00:21:33,040 --> 00:21:35,760 So that means they've surveyed the market and they've found the 382 00:21:35,760 --> 00:21:38,960 most creditworthy people. But now suddenly there's 383 00:21:38,960 --> 00:21:41,400 increased credit in the marketplace and they have more 384 00:21:41,400 --> 00:21:44,080 to play with. So now when they go back into 385 00:21:44,080 --> 00:21:47,240 the market to try to entice more people into getting mortgages, 386 00:21:47,880 --> 00:21:50,280 we know those people are going to be less creditworthy than the 387 00:21:50,280 --> 00:21:54,120 ones they already attracted. The same reason you already 388 00:21:54,120 --> 00:21:56,520 picked the best 5 basketball players for your team. 389 00:21:56,680 --> 00:21:58,720 So this is another factor contributing to this. 390 00:21:59,400 --> 00:22:02,640 In you walk me through the difference between what you call 391 00:22:02,720 --> 00:22:06,920 artificially low interest rates and interest rates that rise and 392 00:22:06,920 --> 00:22:11,320 fall based on market demand. What makes the Fed interest 393 00:22:11,320 --> 00:22:15,240 rates intervention artificial, and why is that a problem? 394 00:22:16,920 --> 00:22:21,560 Interest rates fall when, when, when we as a society decide to 395 00:22:21,560 --> 00:22:25,200 save more of our resources that that pushes interest rates down. 396 00:22:25,840 --> 00:22:29,320 And when we decide to save more of our resources, we are 397 00:22:29,320 --> 00:22:32,400 basically saying we're not going to go into the economy and claim 398 00:22:32,400 --> 00:22:36,920 a lot of these, these kinds of things that that entrepreneurs 399 00:22:36,920 --> 00:22:42,720 might need for their projects. So if I, let's say, say, you 400 00:22:42,720 --> 00:22:45,640 know, I'm going to save, I don't know, some wild amount. 401 00:22:45,640 --> 00:22:48,560 I mean, this would be considered a wild amount these days, 10% of 402 00:22:48,560 --> 00:22:51,840 my income. That means that I'm not going to 403 00:22:51,840 --> 00:22:54,680 go buying a whole lot. I'm not going to go buying 404 00:22:54,680 --> 00:22:57,480 consumer goods with that 10% for a while. 405 00:22:58,320 --> 00:23:01,560 And so during that time, that's exactly the time when we've all 406 00:23:01,560 --> 00:23:04,200 decided we're going to put a, a little bit of a halt on our 407 00:23:04,200 --> 00:23:07,160 purchase of consumer goods. That's when entrepreneurs think, 408 00:23:07,200 --> 00:23:10,800 OK, well then now's the time for us to do long term projects like 409 00:23:10,800 --> 00:23:15,320 expand our physical plant or do research and development for 410 00:23:15,760 --> 00:23:17,400 future products people might want. 411 00:23:17,400 --> 00:23:20,240 In other words, longer term things because they've got the 412 00:23:20,240 --> 00:23:23,320 time we're saving right now and they've got the time and, and 413 00:23:23,320 --> 00:23:27,000 they have the resources, you know, the, the trucks that might 414 00:23:27,000 --> 00:23:30,280 have been driving retail products to the stores. 415 00:23:30,560 --> 00:23:33,080 Well, if we're saving, they don't need as many trucks for 416 00:23:33,080 --> 00:23:34,680 that. So those trucks are now 417 00:23:34,680 --> 00:23:36,280 available for entrepreneurs to use. 418 00:23:36,280 --> 00:23:38,720 Like we're not stuck in a tug of war with each other. 419 00:23:38,720 --> 00:23:42,760 Like we want the trucks for, for bringing retail products to the 420 00:23:42,760 --> 00:23:46,320 stores, but you want the trucks for your long term investments 421 00:23:46,320 --> 00:23:49,920 that are going to result in consumer products only way, way 422 00:23:49,920 --> 00:23:51,600 down the line. We're not in a tug of war. 423 00:23:51,760 --> 00:23:54,960 It's a natural flow of the allocation of resources. 424 00:23:54,960 --> 00:23:58,880 But if interest rates are pushed down artificially by the Fed, 425 00:23:59,680 --> 00:24:02,000 well, it looks like the general public has saved. 426 00:24:02,240 --> 00:24:04,760 But now when you go to start these long term projects, you're 427 00:24:04,760 --> 00:24:08,040 going to find that you're actually in a, in a, in a tug of 428 00:24:08,040 --> 00:24:11,160 war with consumers. You're going to find that those 429 00:24:11,360 --> 00:24:15,120 complementary products you need to complete your big long term 430 00:24:15,120 --> 00:24:17,800 projects, they're going to turn out to be more expensive than 431 00:24:17,800 --> 00:24:20,600 you thought because they're actually being bid away from you 432 00:24:21,200 --> 00:24:24,200 by people lower in the production process, people 433 00:24:24,200 --> 00:24:27,360 closer to the consumer markets who want them for immediate 434 00:24:27,360 --> 00:24:29,800 consumption. And so now some of these 435 00:24:29,800 --> 00:24:31,040 products are not going to pan out. 436 00:24:31,040 --> 00:24:33,360 Some of these investments are not going to pan out. 437 00:24:33,920 --> 00:24:36,440 And the result is a bust. The result is a waste of 438 00:24:36,440 --> 00:24:40,800 resources, half finished things, unprofitable investments that 439 00:24:40,800 --> 00:24:43,600 should never been begun. And then the recession period is 440 00:24:43,600 --> 00:24:47,480 when we sort this all out, reallocate resources into 441 00:24:47,480 --> 00:24:50,600 channels that are sustainable in the long run, and then we get a 442 00:24:50,600 --> 00:24:54,400 healthy economy again. Walk me through what you mean in 443 00:24:54,400 --> 00:24:58,400 the section Cluster of errors. Why is this significant when it 444 00:24:58,400 --> 00:25:00,280 comes to the Austrian explanation? 445 00:25:00,960 --> 00:25:04,000 OK, so most people listening will know that there's something 446 00:25:04,000 --> 00:25:06,720 called an Austrian School of Economics, which is of course 447 00:25:06,720 --> 00:25:10,480 not a literal building but rather a school of thought, and 448 00:25:10,480 --> 00:25:13,840 that it's main proponents are people. 449 00:25:13,960 --> 00:25:18,160 I mean, from the beginning, Karl Menger, Wigan von Baumbauer, 450 00:25:18,160 --> 00:25:21,920 Ludwig von Mises, FA Hayek, and then many others after that, 451 00:25:21,920 --> 00:25:24,400 Israel Kerzner, Murray Rothbard, many others. 452 00:25:25,080 --> 00:25:29,520 And they have a distinct way of looking at how to do economics, 453 00:25:29,960 --> 00:25:32,280 which is kind of a more old fashioned way, which does not 454 00:25:32,280 --> 00:25:34,400 make it wrong. That makes it much more likely 455 00:25:34,400 --> 00:25:37,760 to be right, actually. And among many other things, 456 00:25:37,760 --> 00:25:41,400 they have a distinct explanation for why the economy moves in a 457 00:25:41,400 --> 00:25:44,840 cyclical pattern. Now, we know that in a market 458 00:25:44,840 --> 00:25:49,400 economy, if you are very bad at pleasing consumers, if you 459 00:25:49,400 --> 00:25:52,960 produce all the wrong things or you produce the right things but 460 00:25:52,960 --> 00:25:55,800 at prices nobody can afford, you are going to suffer. 461 00:25:55,800 --> 00:25:58,760 You're going to suffer losses and potential bankruptcy. 462 00:26:00,160 --> 00:26:03,600 But if you are very good at anticipating consumer demand and 463 00:26:03,600 --> 00:26:07,160 you come up with products people want at prices they can afford, 464 00:26:07,160 --> 00:26:10,720 you're going to be rewarded with profits, which means you'll have 465 00:26:10,720 --> 00:26:12,880 now more resources at your command. 466 00:26:13,160 --> 00:26:16,960 And therefore the people who are the best at anticipating 467 00:26:16,960 --> 00:26:20,880 consumer desires will now be able to command more resources 468 00:26:21,040 --> 00:26:27,280 to continue their good work. So if that's true, that the best 469 00:26:27,280 --> 00:26:32,360 anticipators of consumer preferences are rewarded and 470 00:26:32,360 --> 00:26:35,280 they get more and more resources, and people who are 471 00:26:35,280 --> 00:26:39,240 the poorest at it get punished and wind up being stewards of 472 00:26:39,240 --> 00:26:43,000 fewer and fewer resources, then the question becomes why doesn't 473 00:26:43,000 --> 00:26:46,480 the economy then move essentially in an upward 474 00:26:46,480 --> 00:26:49,080 trajectory? Because the best, the best 475 00:26:49,080 --> 00:26:52,080 entrepreneurs get rewarded and they're controlling more and 476 00:26:52,080 --> 00:26:54,200 more resources, and they're really good at this. 477 00:26:54,560 --> 00:26:57,080 And so the economy should get better and better as this 478 00:26:57,080 --> 00:26:59,680 process continues. But you notice the economy 479 00:26:59,680 --> 00:27:02,480 instead moves in like a sine wave. 480 00:27:02,880 --> 00:27:04,400 It goes up and then it goes down. 481 00:27:04,400 --> 00:27:05,800 It goes that way. You know, we're doing well, then 482 00:27:05,800 --> 00:27:07,720 we're doing badly, then we're doing well, then we're doing 483 00:27:07,720 --> 00:27:09,720 badly. That doesn't seem to be the 484 00:27:09,720 --> 00:27:14,320 story that we're telling here about the the most skilled 485 00:27:14,320 --> 00:27:16,880 entrepreneurs getting more and more resources under their 486 00:27:16,880 --> 00:27:19,000 control. Shouldn't that lead to better 487 00:27:19,000 --> 00:27:21,920 and better and better outcomes rather than up and down and up 488 00:27:21,920 --> 00:27:24,320 and down? So what is the source of this up 489 00:27:24,320 --> 00:27:26,840 and down? What is the explanation for this 490 00:27:26,840 --> 00:27:29,440 up and down? And we're sometimes inclined to 491 00:27:29,440 --> 00:27:33,560 think that maybe there's some localized problem, you know, 492 00:27:33,560 --> 00:27:37,360 like, or or maybe there's some some localized, for example, not 493 00:27:37,360 --> 00:27:39,800 necessarily just to a physical location, but to a particular 494 00:27:39,800 --> 00:27:43,440 industry. Like let's say oil prices go up 495 00:27:44,720 --> 00:27:48,920 very suddenly or there are very suddenly shortages of oil and 496 00:27:48,920 --> 00:27:51,160 that has economy wide consequences. 497 00:27:51,400 --> 00:27:52,920 Well, OK, something like that happens. 498 00:27:52,920 --> 00:27:57,760 Or let's say Martians came and they like to drink oil and they 499 00:27:57,760 --> 00:28:00,680 drank like 9/10 of the supply in one day. 500 00:28:00,960 --> 00:28:04,600 Well, that would of course be a shock to the economy, but that's 501 00:28:04,600 --> 00:28:05,560 not what we're really looking for. 502 00:28:05,560 --> 00:28:08,760 That would be 1 localized, one time shock. 503 00:28:09,160 --> 00:28:11,640 We're looking for the explanation of a consistent 504 00:28:11,640 --> 00:28:15,560 cyclical pattern. And so where Austrians look for 505 00:28:15,560 --> 00:28:20,920 that is in money and banking, because money is half of every 506 00:28:20,920 --> 00:28:23,320 transaction. You know, it's money for a 507 00:28:23,320 --> 00:28:28,040 winter hat or money for some bottled water or, you know, or 508 00:28:28,040 --> 00:28:31,320 money for a new car. Money is always half of every 509 00:28:31,320 --> 00:28:33,920 one of those transactions. So if we're talking about a 510 00:28:33,920 --> 00:28:38,480 systemic problem that seems to affect all markets in the 511 00:28:38,480 --> 00:28:44,320 economy all at once, and it's it turns out that so many 512 00:28:44,320 --> 00:28:48,160 entrepreneurs will have been found to have made errors all at 513 00:28:48,160 --> 00:28:52,080 once in their entrepreneurial calculations, we need an 514 00:28:52,080 --> 00:28:55,360 explanation for this. And the explanation would seem 515 00:28:55,360 --> 00:28:59,360 to be something that affects the entire economy. 516 00:28:59,480 --> 00:29:02,800 If it's a phenomenon that we see in the entire economy, we should 517 00:29:02,800 --> 00:29:06,040 look for the explanation in some phenomenon that affects the 518 00:29:06,040 --> 00:29:07,600 entire economy, and that's money. 519 00:29:08,240 --> 00:29:13,080 And so the the Austrians say now strictly speaking, the the, 520 00:29:13,440 --> 00:29:17,920 their theory of the business cycle can in fact exist even 521 00:29:17,920 --> 00:29:19,840 without the presence of a central bank. 522 00:29:20,280 --> 00:29:23,160 But in our case, we have the Federal Reserve System that 523 00:29:23,160 --> 00:29:26,600 pushes interest rates lower than they would be normally. 524 00:29:26,960 --> 00:29:31,800 And the idea here is that is that entrepreneurs will be 525 00:29:31,800 --> 00:29:36,320 misled into making investments in the light of an interest rate 526 00:29:36,320 --> 00:29:39,680 that's telling them a lie, that's not giving them the full 527 00:29:39,680 --> 00:29:42,240 picture of the availability of resources. 528 00:29:42,240 --> 00:29:44,440 And so this will get entrepreneurs on the wrong 529 00:29:44,440 --> 00:29:46,720 track. And therefore we'll see this 530 00:29:46,720 --> 00:29:51,240 cluster of error that has this institutional explanation the 531 00:29:51,280 --> 00:29:55,520 the Federal Reserve. So that's, and, and not to 532 00:29:55,520 --> 00:30:00,840 mention, it's not just that entrepreneurs become foolish. 533 00:30:01,080 --> 00:30:05,040 It's also, as our friend Lucas Engelhart points out, that fools 534 00:30:05,040 --> 00:30:08,440 become entrepreneurs When it looks like, hey, everybody's 535 00:30:08,440 --> 00:30:12,400 succeeding and there's all this money that's so easy to get on 536 00:30:12,400 --> 00:30:16,040 easy terms and low interest rates, then you fools become 537 00:30:16,040 --> 00:30:19,600 entrepreneurs and they wind up making a lot of mistakes. 538 00:30:20,280 --> 00:30:23,800 And so that is the thing. What is the explanation for that 539 00:30:23,800 --> 00:30:28,440 cluster of error? And the answer is the artificial 540 00:30:28,760 --> 00:30:31,480 interference with interest rates on the part of the Fed. 541 00:30:32,080 --> 00:30:36,280 And on top of sending a poor signal, I guess the chairman of 542 00:30:36,280 --> 00:30:39,240 the Fed could just come out and say there's not as much savings, 543 00:30:39,240 --> 00:30:40,880 so just ignore the interest rate. 544 00:30:40,880 --> 00:30:44,320 They create the incentive on top of it for people to actually 545 00:30:44,520 --> 00:30:47,400 take these loans out. You mean there's also the 546 00:30:47,400 --> 00:30:52,760 concern that if, if my firm doesn't take advantage of the 547 00:30:52,760 --> 00:30:57,640 cheap credit, all my competitors will and they'll use this moment 548 00:30:58,080 --> 00:31:03,040 to expand their capacity. And it's not that every single 549 00:31:03,040 --> 00:31:06,200 person who starts a project during a boom is going to fail. 550 00:31:06,840 --> 00:31:09,800 Some of them will succeed. Some of them will roll the dice 551 00:31:10,120 --> 00:31:12,600 and they'll they'll get their project finished and everything 552 00:31:12,600 --> 00:31:16,320 will be fine. And So what you'll sometimes see 553 00:31:16,320 --> 00:31:21,160 is that there'll be this thought that if we don't also get while 554 00:31:21,160 --> 00:31:23,120 the gettin's good, we're going to come out worse. 555 00:31:23,680 --> 00:31:26,200 So we have to go out and be speculative. 556 00:31:26,200 --> 00:31:29,280 And so in the, it's, it's analogous to what happens with 557 00:31:29,280 --> 00:31:33,360 the money supply and the ordinary person in an 558 00:31:33,360 --> 00:31:38,160 inflationary world, the ordinary person sees his money losing its 559 00:31:38,160 --> 00:31:41,360 value. And so he feels like, OK, I 560 00:31:41,360 --> 00:31:43,240 guess I have to go out and speculate too. 561 00:31:43,240 --> 00:31:46,440 I guess I better get in the stock market or, or something. 562 00:31:46,640 --> 00:31:50,120 It encourages speculative behavior so that people can just 563 00:31:50,120 --> 00:31:53,360 break even. In the book, you differentiate 564 00:31:53,480 --> 00:31:56,760 higher order stages of production and what you call 565 00:31:56,760 --> 00:32:01,080 lower stages of production. So this is differentiating me 566 00:32:01,080 --> 00:32:04,600 going to the store and buying retail versus a construction 567 00:32:04,600 --> 00:32:08,240 company who is looking for places to mine lithium or 568 00:32:08,240 --> 00:32:10,480 whatever. Can you walk me through what 569 00:32:10,480 --> 00:32:14,000 differentiates higher order stages of production from lower 570 00:32:14,160 --> 00:32:18,360 and why that's significant? Now I can, I can give you as I 571 00:32:18,360 --> 00:32:22,280 just did, a, a, a very, very elementary overview of the 572 00:32:22,280 --> 00:32:25,280 Austrian theory of the business cycle without talking about 573 00:32:25,280 --> 00:32:29,200 stages of production. But for people who want a, a 574 00:32:29,200 --> 00:32:36,520 bigger picture here, the idea of stages of production is runs as 575 00:32:36,520 --> 00:32:40,360 follows, that the highest order stages are the ones that are the 576 00:32:40,360 --> 00:32:43,600 farthest from consumers. And so that is to say research 577 00:32:43,600 --> 00:32:48,240 and development or mining, that's very, very far from let's 578 00:32:48,240 --> 00:32:52,080 say a wristwatch in a jewelry store, because that's going to 579 00:32:52,080 --> 00:32:54,560 take a long time. Like research and development, 580 00:32:54,560 --> 00:32:56,320 we don't even know what the product is going to be. 581 00:32:56,520 --> 00:33:00,600 So that these are stages that are that are going to be that 582 00:33:00,600 --> 00:33:04,880 the fruits of those stages will not be consumer goods for a long 583 00:33:04,880 --> 00:33:07,480 time. So we have a stage like that. 584 00:33:07,600 --> 00:33:11,640 We, we might have, you know, we'll have like manufacturing, 585 00:33:11,640 --> 00:33:17,400 we'll have distribution. We're OK now we've so, so 586 00:33:17,400 --> 00:33:19,960 manufacturing itself is going to be a series of stages. 587 00:33:19,960 --> 00:33:23,440 Maybe, maybe the first stage is the production of, you know, 588 00:33:23,440 --> 00:33:28,000 widget A, but widget A isn't useful to people without being 589 00:33:28,000 --> 00:33:30,880 combined with widget B, which is then another stage. 590 00:33:31,120 --> 00:33:34,000 But then once the product is created over the course of 591 00:33:34,000 --> 00:33:37,080 stages, then we have to distribute it. 592 00:33:37,080 --> 00:33:39,720 So we've got to physically transport it. 593 00:33:40,000 --> 00:33:42,720 We have to market it so that people know that it exists. 594 00:33:42,840 --> 00:33:44,880 We have to get it into that retail store. 595 00:33:45,160 --> 00:33:50,960 And so if you think about a bagel in a in a deli, you have 596 00:33:50,960 --> 00:33:53,440 to think about, OK, we're going to, we're going to plant grain 597 00:33:53,440 --> 00:33:56,360 now that's very, very far away from your bagel. 598 00:33:56,880 --> 00:34:00,520 You know, then we have various stages that that grain goes 599 00:34:00,520 --> 00:34:04,280 through to become a bagel that is heated up and handed to you 600 00:34:04,640 --> 00:34:08,960 in a retail store. And the idea of this, this idea 601 00:34:08,960 --> 00:34:13,000 of, of stage of production helps us to conceptualize what's 602 00:34:13,000 --> 00:34:17,080 happening in the business cycle in, in, in a, you know, an 603 00:34:17,080 --> 00:34:22,000 artificially induced boom is that you've got entrepreneurs 604 00:34:22,000 --> 00:34:26,040 now with the lower interest rates, these long term projects 605 00:34:26,040 --> 00:34:29,239 become very, very attractive, very much more attractive. 606 00:34:29,719 --> 00:34:33,639 In the same way that if, if the 30 year mortgage rate for your 607 00:34:33,639 --> 00:34:38,600 house was cut in half, you would go out and buy, you might very 608 00:34:38,600 --> 00:34:41,120 well go out and buy a nicer house, you know, because, 609 00:34:41,920 --> 00:34:45,960 because that that slash in half, let's say, or even buy, you 610 00:34:46,760 --> 00:34:50,719 know, a percentage point or two makes a big, big difference in 611 00:34:50,719 --> 00:34:54,480 the, the payments you're going to be making over time, your 612 00:34:54,480 --> 00:34:58,160 mortgage payment will be way lower because of that. 613 00:34:58,920 --> 00:35:02,200 And so likewise, these long term projects become much, much more 614 00:35:02,200 --> 00:35:04,200 attractive. So you've got entrepreneurs 615 00:35:04,200 --> 00:35:08,720 working up here on the higher order stages, But at the same 616 00:35:08,720 --> 00:35:12,120 time, consumers are just demanding their same pattern of 617 00:35:12,320 --> 00:35:14,440 consumption and saving that they had before. 618 00:35:14,640 --> 00:35:18,880 And so they want resources down here more of existing products. 619 00:35:19,480 --> 00:35:22,880 And meanwhile, because of the mismatch of the, because that we 620 00:35:22,880 --> 00:35:26,240 have artificially low interest rates and not the interest rates 621 00:35:26,240 --> 00:35:29,560 that emerge from the natural patterns of saving and 622 00:35:29,560 --> 00:35:31,240 consumption on the part of consumers. 623 00:35:32,040 --> 00:35:36,560 We have a kind of a competition between entrepreneurs up here 624 00:35:36,560 --> 00:35:39,840 and consumers down here instead of the cooperation that would 625 00:35:39,840 --> 00:35:42,680 ordinarily occur if the interest rates were allowed to set 626 00:35:42,680 --> 00:35:45,040 themselves. And so that's that's the 627 00:35:45,040 --> 00:35:47,000 explanation of what what, what those terms mean. 628 00:35:48,000 --> 00:35:52,520 A lot of the financial terms can make things very confusing. 629 00:35:52,680 --> 00:35:57,280 Ludwig von Mises uses the analogy of a master builder to 630 00:35:57,280 --> 00:36:01,080 close out this section and then I want to go on to the next one. 631 00:36:02,000 --> 00:36:05,520 What is Mises master construction? 632 00:36:05,520 --> 00:36:07,280 I forget what he calls it master. 633 00:36:08,040 --> 00:36:11,560 Can you either use a different analogy to explain this or walk 634 00:36:11,560 --> 00:36:14,000 us through Mises? Well, I'll walk us through the 635 00:36:14,000 --> 00:36:15,480 miserable even though we don't want to. 636 00:36:15,960 --> 00:36:18,280 It is an analogy involving a home builder. 637 00:36:18,280 --> 00:36:21,280 And unfortunately, the 2008 crisis involved housing. 638 00:36:21,720 --> 00:36:24,960 So when we use this analogy, we have to understand he's not 639 00:36:24,960 --> 00:36:28,800 literally talking about houses. He's thinking of the house as 640 00:36:28,800 --> 00:36:34,920 representing an entire economy. So his analogy is this that 641 00:36:35,280 --> 00:36:40,360 he's, he's imagining an economy or he's imagining a master 642 00:36:40,360 --> 00:36:45,240 builder trying to build a house, but he's building a house in the 643 00:36:45,240 --> 00:36:48,840 same way that we're trying to run an economy with misleading 644 00:36:48,840 --> 00:36:52,400 interest rates and mismatches and what everybody's trying to 645 00:36:52,400 --> 00:36:54,160 do. So as a home builder, I'm trying 646 00:36:54,160 --> 00:36:56,160 to build a house. So I'm going to gather resources 647 00:36:56,160 --> 00:36:58,040 together and start building that house. 648 00:36:58,040 --> 00:37:03,760 So in, in the case of, I mean, basically what's happened, the 649 00:37:03,760 --> 00:37:08,240 way I like to do the analogy is that what we have in the case of 650 00:37:08,240 --> 00:37:10,960 artificially low interest rates is a, is a home builder, a 651 00:37:10,960 --> 00:37:15,040 master builder who's become drunk and his drunkenness is 652 00:37:15,040 --> 00:37:17,000 making him sort of like see double. 653 00:37:17,440 --> 00:37:19,600 And he thinks he has more resources than he has. 654 00:37:19,600 --> 00:37:23,520 So when he draws up a blueprint for his house, he draws up a 655 00:37:23,520 --> 00:37:26,560 blueprint for a house that's much too ambitious given his 656 00:37:26,680 --> 00:37:28,680 resource constraints. There's no way you can build 657 00:37:28,680 --> 00:37:31,880 this house with the bricks and all the other supplies that he 658 00:37:31,880 --> 00:37:34,120 has. But he's looking at the supply 659 00:37:34,120 --> 00:37:37,240 and it looks bigger. It looks big enough to build 660 00:37:37,240 --> 00:37:39,840 this house. And so in effect, this is what 661 00:37:39,840 --> 00:37:42,800 we're saying is it's like the economy itself becomes too 662 00:37:42,800 --> 00:37:45,320 ambitious. It's trying to do more than it 663 00:37:45,320 --> 00:37:48,520 actually can do. So the master builder goes about 664 00:37:48,520 --> 00:37:51,560 me, he can build some of it. And he starts building. 665 00:37:51,560 --> 00:37:54,760 And then he realizes, wait a minute, I, I can't finish this 666 00:37:54,760 --> 00:37:57,480 house, though the one in, in the blueprint. 667 00:37:57,480 --> 00:38:02,440 So he starts thinking, all right, well, I guess the, the 668 00:38:02,440 --> 00:38:06,480 only way to handle this is to build a more modest house. 669 00:38:07,120 --> 00:38:10,600 You know, I, I'll, I'll, I, I was too ambitious here. 670 00:38:10,840 --> 00:38:12,520 I'll try to build a more modest house. 671 00:38:12,520 --> 00:38:14,280 So let's see, we'll get rid of the gazebo. 672 00:38:14,600 --> 00:38:16,920 There's no way I have the resources for that. 673 00:38:18,120 --> 00:38:20,040 The second wing of the house, forget it. 674 00:38:20,040 --> 00:38:21,520 We're just not going to be able to build that. 675 00:38:21,520 --> 00:38:25,200 So he tries to think of with the resources I have, what can I in 676 00:38:25,200 --> 00:38:28,080 fact do? And I'll explain how the, this 677 00:38:28,520 --> 00:38:30,600 how this is in fact an analogy in just a minute. 678 00:38:31,600 --> 00:38:35,000 But if somebody said to him, well, what if you continue to 679 00:38:35,000 --> 00:38:38,440 drink, you know, just drink some more, maybe that'll help you 680 00:38:38,440 --> 00:38:40,880 because then that'll make you think there are more resources. 681 00:38:41,440 --> 00:38:43,880 Now nobody could think that's the solution to his problem. 682 00:38:44,080 --> 00:38:48,240 Fool him into thinking he has even more resources so that he 683 00:38:48,240 --> 00:38:51,880 continues to build the original house that we know he doesn't 684 00:38:51,880 --> 00:38:55,920 have the resources to build. If he did that, OK, he would 685 00:38:55,920 --> 00:38:58,560 continue building this. But then he'd realized, wait a 686 00:38:58,560 --> 00:39:02,520 minute, I just wasted even more resources and more labor time 687 00:39:03,200 --> 00:39:06,280 that I could have devoted to the building of the smaller house. 688 00:39:06,280 --> 00:39:10,400 Now this whole thing has to be demolished so that I can rebuild 689 00:39:10,400 --> 00:39:14,600 a house that is plausible given the existing resources that I 690 00:39:14,600 --> 00:39:18,920 have. So the analogy is when we have a 691 00:39:18,920 --> 00:39:22,960 recession, this is, in effect the economy saying we've been 692 00:39:22,960 --> 00:39:24,960 too ambitious. We were trying to start way too 693 00:39:24,960 --> 00:39:27,640 many things all at once. We don't have the resources for 694 00:39:27,640 --> 00:39:30,200 them all. So we got to go back to our 695 00:39:30,200 --> 00:39:32,320 blueprint. We got to figure out what things 696 00:39:32,320 --> 00:39:36,320 we really can do, what things are really sustainable, what 697 00:39:36,320 --> 00:39:40,600 kind of economy we can have that can really work, and we'll go do 698 00:39:40,600 --> 00:39:43,160 those things. But that's the recession period. 699 00:39:43,720 --> 00:39:46,680 So the recession period is actually the restoration to 700 00:39:46,680 --> 00:39:49,440 health. But during that period you have 701 00:39:49,440 --> 00:39:51,080 people saying, well, wait a minute, what if the government 702 00:39:51,080 --> 00:39:54,760 just spent a lot of money or the Fed printed up a lot more money? 703 00:39:55,480 --> 00:40:00,000 Well, OK, so again, we see that there's an analogy here that is 704 00:40:00,000 --> 00:40:04,000 like saying, let's get the the master builder even drunker than 705 00:40:04,000 --> 00:40:06,880 before, and we don't want to do that. 706 00:40:07,160 --> 00:40:09,360 What we want entrepreneurs to figure out. 707 00:40:09,360 --> 00:40:11,520 All right, look, we were misled into doing things we should have 708 00:40:11,520 --> 00:40:14,480 done. Let's step back a minute and see 709 00:40:14,480 --> 00:40:19,320 what we can in fact do now. But if the Fed is going to is 710 00:40:19,320 --> 00:40:22,360 going to push interest rates even lower, that's going to make 711 00:40:22,360 --> 00:40:24,440 it even harder to figure out what we should do. 712 00:40:25,400 --> 00:40:29,200 And that's going to encourage us to persist in the wrong things, 713 00:40:29,640 --> 00:40:32,440 the same way we would have encouraged the Master builder to 714 00:40:32,440 --> 00:40:35,120 persist in building an unbuildable house. 715 00:40:35,240 --> 00:40:37,840 And that's what Alan Greenspan did in 2001. 716 00:40:38,200 --> 00:40:42,120 People persisted in investment and spending decisions they 717 00:40:42,120 --> 00:40:46,520 shouldn't have persisted in. And so we don't want them. 718 00:40:47,040 --> 00:40:53,120 We want that master builder to see the world clearly, and when 719 00:40:53,120 --> 00:40:57,480 we hump the economy with all this artificial stuff, all it 720 00:40:57,480 --> 00:41:00,320 does is is make him fall back into his initial errors. 721 00:41:00,720 --> 00:41:03,840 And So what is true of him in the analogy is true of the 722 00:41:03,840 --> 00:41:08,800 economy and the aggregate. In the face of hundreds, dozens, 723 00:41:08,800 --> 00:41:12,200 maybe hundreds of regulatory agencies, 10s of thousands of 724 00:41:12,200 --> 00:41:16,240 codes in the pages in the Federal Register, thousands of 725 00:41:16,240 --> 00:41:21,240 bureaucrats, the progressive and will have the confidence to say 726 00:41:21,240 --> 00:41:24,440 it was actually deregulation because it's not the number that 727 00:41:24,440 --> 00:41:27,160 matters, it's the quality. And what happened was they've 728 00:41:27,160 --> 00:41:30,840 repealed glass Steagall in the 90s, allowing commercial and 729 00:41:30,840 --> 00:41:35,440 investment banks to merge. How can we falsify this thesis 730 00:41:35,440 --> 00:41:39,760 that repealing Glass Steagall was the cause of the O8 crash? 731 00:41:40,120 --> 00:41:42,640 Yeah, it's just, I didn't, I have friends who take this 732 00:41:42,640 --> 00:41:45,680 position and I think they're just not I, I don't know where 733 00:41:45,680 --> 00:41:49,800 they're coming from on this because so-called glass, there's 734 00:41:49,800 --> 00:41:53,480 the what what we had was the, the, the partial repeal of Glass 735 00:41:53,480 --> 00:41:57,920 Steagall around 1999. The so-called Glass Steagall had 736 00:41:57,920 --> 00:42:01,360 separated commercial and investment banking from each 737 00:42:01,360 --> 00:42:03,760 other. And the repeal of that simply 738 00:42:03,760 --> 00:42:06,560 said that the same holding company can own both a 739 00:42:06,560 --> 00:42:08,480 commercial bank and an investment bank. 740 00:42:08,480 --> 00:42:11,200 That was it. And all that did was make the 741 00:42:11,200 --> 00:42:13,480 United States like every other country in the world. 742 00:42:13,640 --> 00:42:17,040 No other country in the world had that restriction. 743 00:42:17,480 --> 00:42:21,520 So the idea that repealing that caused a financial crisis that 744 00:42:21,520 --> 00:42:25,800 spanned the globe when only the US had that provision in the 1st 745 00:42:25,800 --> 00:42:29,400 place is unconvincing. No other country has had any 746 00:42:29,400 --> 00:42:32,480 problem with that and and neither have we. 747 00:42:33,000 --> 00:42:35,880 And so when we look at like who are three of the major players 748 00:42:35,880 --> 00:42:39,600 that had major troubles during the financial crisis, Bear 749 00:42:39,600 --> 00:42:43,200 Stearns, Lehman Brothers and Merrill Lynch, well, those were 750 00:42:43,200 --> 00:42:45,680 pure investment banks. They never crossed over into 751 00:42:45,680 --> 00:42:48,200 commercial banking. Same with Goldman Sachs, 752 00:42:49,600 --> 00:42:53,120 Washington Mutual and Wachovia, which went under. 753 00:42:53,240 --> 00:42:55,640 They just, they lost money the old fashioned way. 754 00:42:55,640 --> 00:42:58,640 As I said at the beginning, they made bad loans to homeowners. 755 00:42:59,040 --> 00:43:02,680 And AIG is an insurance. Firm is an insurance, right? 756 00:43:02,760 --> 00:43:07,360 Yeah, AIG and, and AIGAIG wound up getting, you know, the, the 757 00:43:07,360 --> 00:43:09,520 bailout thing is the other side of all this. 758 00:43:09,520 --> 00:43:15,520 AIG wound up getting a bailout and then just months later its 759 00:43:15,520 --> 00:43:19,760 former CEO said, you know, in retrospect, probably we 760 00:43:19,760 --> 00:43:20,800 shouldn't have gotten that bailout. 761 00:43:20,800 --> 00:43:22,280 We should have been allowed to go bankrupt. 762 00:43:22,280 --> 00:43:25,720 And then the, the, the, the rest of the US wouldn't have had to 763 00:43:26,280 --> 00:43:31,000 deal with our, our problems. The whole, I mean, I'm, I'm, 764 00:43:31,000 --> 00:43:34,480 maybe I'm getting ahead of us here, but I, I don't, I don't 765 00:43:34,480 --> 00:43:36,400 want to get into all the technical details about credit 766 00:43:36,400 --> 00:43:39,760 default swaps. But the point is that with AIG, 767 00:43:39,760 --> 00:43:42,840 we were told, as with COVID, we don't have time to listen to you 768 00:43:42,840 --> 00:43:44,520 people. It's an emergency. 769 00:43:44,520 --> 00:43:48,400 We have to take action. And so we were told that AIG has 770 00:43:48,400 --> 00:43:52,160 all these toxic assets that, and so that their, their 771 00:43:52,160 --> 00:43:55,560 counterparties are going to go bankrupt if AIG goes bankrupt. 772 00:43:55,920 --> 00:43:58,720 But, and so, and you're not going to get your paycheck 773 00:43:58,720 --> 00:44:00,960 because the Main Street banks are going to get hit by this. 774 00:44:01,640 --> 00:44:05,520 Almost none of AI GS bad assets were held by Main Street banks. 775 00:44:05,520 --> 00:44:09,200 They were held by about a dozen major institutions, and those 776 00:44:09,200 --> 00:44:11,960 institutions alone would have taken a hit, and they could have 777 00:44:11,960 --> 00:44:16,200 absorbed that hit because those institutions had about $20 778 00:44:16,200 --> 00:44:22,320 trillion in assets and they were facing maybe between 60 and $80 779 00:44:22,320 --> 00:44:26,280 billion in losses, which is about the equivalent of one 780 00:44:26,280 --> 00:44:28,080 year's worth of executive bonuses. 781 00:44:28,800 --> 00:44:31,640 But sorry, no, we we have to bail them out. 782 00:44:31,840 --> 00:44:35,600 And then that leads to even more moral hazard because now 783 00:44:35,600 --> 00:44:38,560 everybody knows that if push comes to shove, the Fed will 784 00:44:38,560 --> 00:44:42,000 come along, tell everybody to shut up and make things right 785 00:44:42,000 --> 00:44:44,200 with the federal government, too, will come along and make 786 00:44:44,200 --> 00:44:46,960 things right. And that means that you're 787 00:44:46,960 --> 00:44:51,680 encouraging people to engage in all kinds of risky behavior that 788 00:44:51,680 --> 00:44:53,640 they would have been punished for. 789 00:44:54,200 --> 00:44:59,240 So the Sallie Mae deregulation, alleged deregulation like 790 00:44:59,240 --> 00:45:03,800 they're doing us so many favors. This did not apply to the most 791 00:45:03,800 --> 00:45:07,600 volatile banks who crashed during the recession. 792 00:45:07,880 --> 00:45:11,320 Therefore, to say there's a causal link is nonsensical. 793 00:45:11,320 --> 00:45:15,840 That's your general response. Yeah, It doesn't tell the story 794 00:45:15,840 --> 00:45:18,320 that we lived through. It has nothing to do with that 795 00:45:18,320 --> 00:45:20,920 story. And, and I think I've, I've 796 00:45:20,920 --> 00:45:25,440 heard several people say, but the reason people cite this, 797 00:45:25,440 --> 00:45:30,160 they think is that as with somebody like Krugman and I, by 798 00:45:30,160 --> 00:45:31,680 the way, I don't know what Krugman's opinion on this 799 00:45:31,680 --> 00:45:34,480 particular question is, but it's the same mentality. 800 00:45:34,640 --> 00:45:39,880 There must have been some repealed thing that would, if we 801 00:45:39,880 --> 00:45:42,640 had kept it, have prevented this outcome. 802 00:45:42,640 --> 00:45:46,680 They have to believe that, that the smart people, the experts 803 00:45:46,680 --> 00:45:49,480 running things must have anticipated this. 804 00:45:49,880 --> 00:45:54,320 But the stupid rubes got rid of their their wise regulation. 805 00:45:54,320 --> 00:45:57,160 They have to believe. They can't just believe that 806 00:45:57,160 --> 00:46:01,400 maybe the experts themselves might have driven us into into 807 00:46:01,400 --> 00:46:03,680 this dead end. Yeah, because I would have 808 00:46:03,680 --> 00:46:08,480 assumed that if you had a bank that was allowed to diversify 809 00:46:08,480 --> 00:46:12,760 its portfolio with commercial and investment payments or 810 00:46:12,760 --> 00:46:14,920 investments, I thought that they would be more stable. 811 00:46:14,920 --> 00:46:19,920 So that actually makes sense. All right, so now we get on to 812 00:46:20,200 --> 00:46:23,080 we're in the recession now we got to come up with a solution. 813 00:46:23,360 --> 00:46:26,840 Fortunately, Nobel Prize winning economist has the answer for us. 814 00:46:27,040 --> 00:46:31,880 He summarizes the theory of John Maynard Keynes on page 96 of 815 00:46:31,880 --> 00:46:34,000 Arguing with Zombies. Here it is. 816 00:46:34,080 --> 00:46:36,160 Get a pen, because you're going to want to jot down a few 817 00:46:36,160 --> 00:46:38,880 things. The economy isn't like an 818 00:46:38,880 --> 00:46:42,120 individual family that earns a certain amount and spends some 819 00:46:42,120 --> 00:46:44,720 other amount with no relationship between the two. 820 00:46:44,960 --> 00:46:48,080 My spending is your income and your spending is my income. 821 00:46:48,280 --> 00:46:52,280 If we both slash spending, both of our incomes fall. 822 00:46:52,600 --> 00:46:55,800 In a situation in which many people have cut spending, the 823 00:46:55,800 --> 00:46:59,880 result is depressed incomes and a depressed economy with 824 00:46:59,960 --> 00:47:03,680 millions of willing workers unable to find jobs. 825 00:47:03,880 --> 00:47:06,520 The government is not in competition with the private 826 00:47:06,520 --> 00:47:09,040 sector. Government purchases don't use 827 00:47:09,040 --> 00:47:12,480 resources that would otherwise be producing private goods. 828 00:47:12,720 --> 00:47:15,840 They put unemployed resources to work. 829 00:47:16,160 --> 00:47:20,160 Budget deficits haven't led to soaring interest rates, and the 830 00:47:20,160 --> 00:47:22,880 Fed's money printing hasn't led to inflation. 831 00:47:23,320 --> 00:47:27,720 Austerity policies have greatly deepened economic slumps almost 832 00:47:27,720 --> 00:47:31,360 everywhere they have been tried. Spending cuts and or tax 833 00:47:31,560 --> 00:47:35,720 increases should wait until the economy is no longer depressed 834 00:47:35,960 --> 00:47:38,720 and the private sector is willing to spend enough to 835 00:47:38,720 --> 00:47:42,360 produce full employment. What, if anything, is wrong with 836 00:47:42,360 --> 00:47:47,800 that response? We have come upon the old issue 837 00:47:47,800 --> 00:47:52,760 of idle resources and somebody like Krugman is, you know, I, I, 838 00:47:52,760 --> 00:47:55,440 I want to emphasize people. He's, you can't just go up to 839 00:47:55,440 --> 00:47:58,480 Paul Krugman and say, don't you know about the broken window 840 00:47:58,480 --> 00:47:59,880 fallacy? He does. 841 00:48:00,520 --> 00:48:03,960 And, and he will admit to you that in an economy with full 842 00:48:03,960 --> 00:48:07,960 employment of resources, the broken window fallacy would be a 843 00:48:07,960 --> 00:48:10,120 problem. And for the broken window 844 00:48:10,120 --> 00:48:13,920 fallacy is the boy throws a baseball through the window and 845 00:48:13,920 --> 00:48:17,120 it breaks it. And the home owner is very 846 00:48:17,120 --> 00:48:20,120 unhappy because now I have to replace the, the window. 847 00:48:20,120 --> 00:48:23,120 But the, the, the midwit economist comes along and says, 848 00:48:23,120 --> 00:48:26,720 oh, but actually the breaking of the window will be a stimulus to 849 00:48:26,720 --> 00:48:30,560 the window repair industry because he can only see one 850 00:48:30,560 --> 00:48:34,440 thing at a time. But the problem is like that, 851 00:48:35,680 --> 00:48:38,320 the resources that go into that can't go into something else. 852 00:48:38,320 --> 00:48:43,000 And so if there hadn't been a broken window, I could have had 853 00:48:43,560 --> 00:48:47,360 a nice window and a new sweater. But since I have to spend the 854 00:48:47,360 --> 00:48:49,560 sweater money on repairing the window, now I have only a 855 00:48:49,560 --> 00:48:51,600 window. So it's a, it's a, it's a loss 856 00:48:51,800 --> 00:48:54,760 as a normal person would think. Destruction is a loss. 857 00:48:55,200 --> 00:48:57,640 Krugman agrees with that. So we don't want to think he's 858 00:48:57,640 --> 00:49:01,040 just a dummy. What his, his argument is that 859 00:49:01,280 --> 00:49:05,680 when you're in a recession, the, the, the resources in question 860 00:49:05,680 --> 00:49:11,640 aren't being used by anybody. So it's not like, you know, we, 861 00:49:11,640 --> 00:49:17,120 we have to pull resources away from one thing in order to do, 862 00:49:17,120 --> 00:49:19,320 let's say some government make work jobs. 863 00:49:19,640 --> 00:49:21,560 He's saying people are just sitting there, they're not doing 864 00:49:21,560 --> 00:49:25,480 any work, you know, So he's, he's in effect saying this is a 865 00:49:25,480 --> 00:49:29,280 case where the window repair man was unemployed, you know, so 866 00:49:29,280 --> 00:49:32,520 we're not pulling him away from some other employment. 867 00:49:32,520 --> 00:49:33,840 He was just sitting there anyway. 868 00:49:34,160 --> 00:49:36,600 So we're putting him to work. And this is a net plus for the 869 00:49:36,600 --> 00:49:39,560 economy. So the, the problems with this 870 00:49:39,560 --> 00:49:43,920 are the at least two fold. Number one, when he says that 871 00:49:44,000 --> 00:49:48,280 resources are unemployed, he means like, you know, he means 872 00:49:48,640 --> 00:49:51,280 mostly labor, that people are unemployed, people are 873 00:49:51,280 --> 00:49:54,720 unemployed, but also resources, you know, there are buildings 874 00:49:54,720 --> 00:49:58,360 that aren't being used because the the factory closed or, you 875 00:49:58,360 --> 00:50:00,640 know, and all the machines in the factory are just sitting 876 00:50:00,640 --> 00:50:02,840 idle. And wouldn't it be good if we 877 00:50:02,840 --> 00:50:04,560 could do something with those things? 878 00:50:04,760 --> 00:50:07,040 So let's stimulate them into activity. 879 00:50:07,480 --> 00:50:10,160 The problem with this is they're idle for a reason. 880 00:50:10,680 --> 00:50:13,320 If, if the prices of those things like that machinery of 881 00:50:13,320 --> 00:50:16,120 that building went low enough, somebody would buy it and start 882 00:50:16,120 --> 00:50:18,920 producing something in there. But right now the economy is 883 00:50:18,920 --> 00:50:22,840 trying to price those things and trying to figure out at what 884 00:50:22,840 --> 00:50:25,160 price level is it profitable to use this thing. 885 00:50:25,600 --> 00:50:27,640 And just artificially saying we'll go in there and start 886 00:50:27,640 --> 00:50:32,080 making stuff is not helpful. We need to figure out is it 887 00:50:32,080 --> 00:50:34,800 economical to make stuff? Maybe, maybe this, this whole 888 00:50:34,800 --> 00:50:38,080 building's a total loss for all we know, but we need time to 889 00:50:38,080 --> 00:50:41,080 figure that out. And politicians can't figure 890 00:50:41,080 --> 00:50:42,160 that out. They're going to, they're just 891 00:50:42,160 --> 00:50:45,440 going to say, well, employ some of my local constituents in 892 00:50:45,440 --> 00:50:48,480 doing some random thing of that building that's not making us 893 00:50:48,480 --> 00:50:51,480 richer. So that's, that's one problem. 894 00:50:51,480 --> 00:50:54,480 The other problem is so that other problem is why are the 895 00:50:54,480 --> 00:50:58,160 resources idle in the 1st place? Krugman never wants to answer 896 00:50:58,160 --> 00:51:00,280 this question. Why did the resources suddenly 897 00:51:00,280 --> 00:51:03,160 go idle? Well, because of what we 898 00:51:03,160 --> 00:51:06,480 learned, the Austrian business cycle theory, they started on, 899 00:51:06,480 --> 00:51:10,720 on projects that were unwise and unsustainable shouldn't have 900 00:51:10,720 --> 00:51:13,240 been started. And so we don't really want to 901 00:51:13,240 --> 00:51:15,840 restart them. Why would we want to restart 902 00:51:15,840 --> 00:51:16,760 them? Maybe they shouldn't have been 903 00:51:16,760 --> 00:51:19,240 started again. Entrepreneurs need time to 904 00:51:19,240 --> 00:51:22,600 figure out how to fit these resources now into the new 905 00:51:22,600 --> 00:51:26,800 economy that we have, not the imaginary economy we thought we 906 00:51:26,800 --> 00:51:29,000 had when we were drunk, this real economy. 907 00:51:29,320 --> 00:51:31,120 So that's going to take a little bit of time. 908 00:51:31,640 --> 00:51:36,240 And then finally, when Krugman says we're not using resources, 909 00:51:36,240 --> 00:51:38,440 that the privates, we're not competing with the private 910 00:51:38,440 --> 00:51:42,440 sector, when the government directs the allocation of 911 00:51:42,440 --> 00:51:46,440 resources and employing individuals and jobs, we're just 912 00:51:46,440 --> 00:51:48,560 taking idle things. But that's impossible. 913 00:51:48,800 --> 00:51:52,240 What project could Krugman come up with that absolutely, 914 00:51:52,240 --> 00:51:57,400 precisely uses only those human and physical resources that 915 00:51:57,400 --> 00:52:00,840 happened to be idle at the time? No matter what project it is, it 916 00:52:00,840 --> 00:52:04,600 is going to be competing with real projects that have real 917 00:52:04,600 --> 00:52:07,440 consumer demand behind them. Not just politicians saying, 918 00:52:07,440 --> 00:52:10,840 hey, create these jobs so that I look like a cool guy in front of 919 00:52:10,840 --> 00:52:13,040 my constituents. That only impoverishes us. 920 00:52:13,040 --> 00:52:15,120 Those types of jobs, they don't create anything we want. 921 00:52:15,400 --> 00:52:18,440 If they did, we would voluntarily support those jobs 922 00:52:18,440 --> 00:52:21,680 with our purchases. So Krugman, no matter what he 923 00:52:21,840 --> 00:52:28,320 claims he can do, cannot create jobs and projects that precisely 924 00:52:28,320 --> 00:52:31,240 pull only the resources that are temporarily idle. 925 00:52:31,400 --> 00:52:36,240 He will be competing with the private sector that is actually 926 00:52:36,360 --> 00:52:38,920 currently in the process of trying to produce things we 927 00:52:38,920 --> 00:52:42,880 really need. He equates the involuntary 928 00:52:42,880 --> 00:52:46,600 investment of the taxpayer with things that actually reveal 929 00:52:46,600 --> 00:52:49,040 choice preference of what people actually want. 930 00:52:49,200 --> 00:52:49,920 Exactly. Right. 931 00:52:49,920 --> 00:52:53,120 Just seconding two more questions with regard to 932 00:52:53,280 --> 00:52:56,520 historical narratives. What are some lessons we can 933 00:52:56,520 --> 00:52:59,400 learn from the depression of 1927? 934 00:52:59,400 --> 00:53:02,360 Years after the Federal Reserve was established, there was a 935 00:53:02,560 --> 00:53:04,120 depression. The panics did not end. 936 00:53:04,280 --> 00:53:06,640 What are some lessons from the depression of 1920? 937 00:53:07,760 --> 00:53:11,200 Yeah, so. The that I, I wrote an article 938 00:53:11,200 --> 00:53:13,080 for the Intercollegiate Review on that. 939 00:53:13,280 --> 00:53:16,920 I don't remember the title of it, but that it, it gave my most 940 00:53:16,920 --> 00:53:20,360 thorough overview on it. I do talk about it in meltdown 941 00:53:20,720 --> 00:53:23,240 to about the degree that you know, an ordinary person would 942 00:53:23,240 --> 00:53:25,160 need. But for the nerd, you're going 943 00:53:25,160 --> 00:53:27,320 to want to look for my article in the Intercollegiate Review. 944 00:53:27,800 --> 00:53:31,240 But the long and the short of it is this Joseph Schumpeter, while 945 00:53:31,240 --> 00:53:34,080 great, not not in in the Austrian school, but a great, 946 00:53:34,080 --> 00:53:39,720 very interesting economist, said at the time that that downturn 947 00:53:39,720 --> 00:53:47,480 1920 to 21 was itself evidence that the economy reverses itself 948 00:53:47,480 --> 00:53:51,560 when after there's a downturn that you don't need outside 949 00:53:51,560 --> 00:53:54,000 help, you don't need artificial stimulus, you don't need 950 00:53:54,000 --> 00:53:58,000 anything like that, that entrepreneurs eventually sort 951 00:53:58,000 --> 00:54:00,680 things out. And so you did have a very 952 00:54:00,680 --> 00:54:05,440 severe downturn that year, like production following by the 953 00:54:05,440 --> 00:54:09,840 following, by a double digit percentage, double digit 954 00:54:09,840 --> 00:54:12,720 unemployment, a very, very substantial downturn. 955 00:54:13,360 --> 00:54:20,280 And by the middle of 2000, I'm sorry, not 2000 and 1921, Warren 956 00:54:20,280 --> 00:54:24,960 Harding had as his secretary of commerce Herbert Hoover, who was 957 00:54:24,960 --> 00:54:29,200 not the laissez faire ideologue. We've been told he was something 958 00:54:29,200 --> 00:54:32,480 of a progressive and he was urging Harding to do something. 959 00:54:32,920 --> 00:54:35,040 Oh, by the time it occurred to him to quote, UN quote, do 960 00:54:35,040 --> 00:54:39,560 something, the and the economy had already reversed itself. 961 00:54:39,560 --> 00:54:43,560 The recession was already over. So there is something to that. 962 00:54:43,560 --> 00:54:46,840 And yet we know all about the Great Depression and the phony 963 00:54:46,840 --> 00:54:48,800 story whereby the New Deal solved it. 964 00:54:48,800 --> 00:54:51,840 It obviously did not. But nobody knows about that 965 00:54:51,840 --> 00:54:54,760 depression of 1920 to 21, and it's obvious why. 966 00:54:56,440 --> 00:55:01,320 Final question, Herbert Hoover. The narrative is we had a 967 00:55:01,520 --> 00:55:03,840 depression. Unfortunately, we had this 968 00:55:03,840 --> 00:55:07,080 laissez faire obsessed Herbert Hoover who basically sat on his 969 00:55:07,080 --> 00:55:10,960 hands until we got the New Deal by Franklin Roosevelt. 970 00:55:10,960 --> 00:55:13,720 Fortunately enough, we've already gone over how the New 971 00:55:13,720 --> 00:55:16,840 Deal led to the double dip recession of 1937. 972 00:55:17,000 --> 00:55:19,000 If we just focus on this concept. 973 00:55:19,200 --> 00:55:23,840 Hoover was an economic isolationist or a free market 974 00:55:23,840 --> 00:55:25,880 thinker. What is wrong with that theory, 975 00:55:25,920 --> 00:55:28,880 if anything? Well, the New Dealers themselves 976 00:55:28,880 --> 00:55:31,640 admitted that they're the entire New Deal was just an 977 00:55:31,640 --> 00:55:33,960 extrapolation from what Hoover was already doing. 978 00:55:34,480 --> 00:55:39,160 And in fact, FDR ran against Hoover on the grounds that he 979 00:55:39,160 --> 00:55:43,200 was a big spender and FD Rs vice presidential nominee said that 980 00:55:43,200 --> 00:55:45,520 Hoover was taking us down the road to socialism. 981 00:55:46,000 --> 00:55:48,760 Now what? So how how come they didn't know 982 00:55:48,760 --> 00:55:52,800 that Hoover was a laissez faire ideologue at this point? 983 00:55:52,960 --> 00:55:57,120 The the the good sound revisionism on this has pretty 984 00:55:57,120 --> 00:56:00,080 much come through, just hasn't trickled down to the general 985 00:56:00,080 --> 00:56:02,360 public. But I even saw Apbs special 986 00:56:02,760 --> 00:56:05,920 saying that, yeah, we all know now that Hoover was an economic 987 00:56:05,920 --> 00:56:07,920 interventionist. Well, who's we? 988 00:56:07,920 --> 00:56:11,000 I mean, a few people do, but the general public typically 989 00:56:11,000 --> 00:56:13,200 doesn't. But you look at Bob Murphy's 990 00:56:13,200 --> 00:56:15,880 done great work on this. He has the politically incorrect 991 00:56:15,880 --> 00:56:18,720 Guide to the Great Depression of the New Deal, and he's gone 992 00:56:18,720 --> 00:56:22,640 through the numbers of comparing Hoover's spending and FDR 993 00:56:22,640 --> 00:56:26,120 spending. And, and because Hoover did 994 00:56:26,120 --> 00:56:30,800 spend an enormous amount on public works and not to mention 995 00:56:30,800 --> 00:56:35,480 he had agriculture policies and wage policies, which wasn't a 996 00:56:35,480 --> 00:56:40,400 policy, but it was a strong urging to major companies to 997 00:56:40,400 --> 00:56:45,720 keep, keep wages up at a time when when prices were were 998 00:56:47,000 --> 00:56:53,520 falling pretty dramatically. But to keep nominal wages up at 999 00:56:53,520 --> 00:56:55,880 a time that we know that would just encourage people to hire 1000 00:56:55,880 --> 00:56:58,400 fewer people at at that particular moment. 1001 00:56:58,960 --> 00:57:02,920 But when we when we go down the line, he raised taxes and he 1002 00:57:02,920 --> 00:57:05,880 raised taxes on all kinds of different things, not just 1003 00:57:05,880 --> 00:57:08,680 income, but all kinds of particular excise taxes on 1004 00:57:08,680 --> 00:57:13,800 particular products. He was lending money to the 1005 00:57:13,800 --> 00:57:19,880 states for their for them to do various public works types of 1006 00:57:19,880 --> 00:57:23,920 programs themselves. So he intervened over and over. 1007 00:57:23,920 --> 00:57:27,640 In fact, he says in his memoir that we might have done nothing, 1008 00:57:28,200 --> 00:57:30,360 but that would have been catastrophic. 1009 00:57:31,120 --> 00:57:34,440 So yeah, it it, it, it is not so it is. 1010 00:57:34,520 --> 00:57:38,720 It is indeed not so. Hoover was a kind of proto 1011 00:57:38,720 --> 00:57:44,080 progressive who thought that. In fact, he says repeatedly that 1012 00:57:44,080 --> 00:57:46,600 laissez faire is dead, It's over. 1013 00:57:46,680 --> 00:57:49,800 It's an old idea. We've now moved on to this new 1014 00:57:49,800 --> 00:57:54,200 modern way of of planning with cooperation between government 1015 00:57:54,200 --> 00:57:55,520 and business. It's all in there. 1016 00:57:56,320 --> 00:57:59,320 One of the great lessons I learned from Diary of a 1017 00:57:59,320 --> 00:58:02,400 Psychosis, your book published by the Libertarian Institute, is 1018 00:58:02,800 --> 00:58:05,720 ask yourself, what should we expect to see? 1019 00:58:05,720 --> 00:58:08,680 So when they tell us, well, we need a mask mandate, well, we'd 1020 00:58:08,680 --> 00:58:12,200 expect to see cases going up, mask mandate enforced, and then 1021 00:58:12,200 --> 00:58:16,160 cases going down. So when someone says Hoover was 1022 00:58:16,800 --> 00:58:20,640 a hands off free market guy, we would expect to see Hoover come 1023 00:58:20,640 --> 00:58:24,720 into office and then spending and government regulation slowly 1024 00:58:24,720 --> 00:58:28,360 decreasing on top of the Smoot Hawley tariff taxes from 1025 00:58:28,360 --> 00:58:31,840 econlib.org. Federal spending in 1929's 1026 00:58:31,840 --> 00:58:34,960 budget that Hoover inherited was $3.1 billion. 1027 00:58:35,160 --> 00:58:39,440 He increased spending to 3.3 billion in 1933, point, 6 1028 00:58:39,440 --> 00:58:46,400 billion in 1931, and 4.7 billion and 4.6 billion in 1932 and 1933 1029 00:58:46,760 --> 00:58:51,320 respectively, a 48% increase over his four years. 1030 00:58:51,480 --> 00:58:54,640 So that is just another verifiable lie that the 1031 00:58:54,640 --> 00:58:57,240 progressives and neocons are constantly shoving down our 1032 00:58:57,240 --> 00:59:00,360 throat, ushering in a totalitarian bureaucracy within 1033 00:59:00,360 --> 00:59:04,320 our shores for our own good. Meltdown is an absolutely 1034 00:59:04,320 --> 00:59:07,600 excellent book, one of the early books I read in libertarianism 1035 00:59:07,600 --> 00:59:12,120 after Ron Paul's The Revolution and Frederick Bastiat's The Law. 1036 00:59:12,280 --> 00:59:15,040 Thank you so much Tom Woods for talking to me about this. 1037 00:59:15,720 --> 00:59:19,080 Well, thank you, Keith Knight, for asking me questions about 1038 00:59:19,080 --> 00:59:21,400 it. It is the 15th anniversary. 1039 00:59:21,400 --> 00:59:24,840 There is a new introduction bringing things a little bit up 1040 00:59:24,840 --> 00:59:27,160 to date. This is one of those things, 1041 00:59:27,160 --> 00:59:30,560 like COVID, that if we get it wrong, then the conventional 1042 00:59:30,560 --> 00:59:34,440 wisdom becomes the stupid heads wouldn't let the experts take 1043 00:59:34,440 --> 00:59:37,720 care of business, you know? And it's like, yeah, how many 1044 00:59:38,040 --> 00:59:41,840 these people have no shame. So if any of this interests you, 1045 00:59:41,840 --> 00:59:44,040 check out Meltdown. We'll have the link in the 1046 00:59:44,040 --> 00:59:46,840 description and on the show notes page tomwas.com slash 1047 00:59:46,840 --> 00:59:50,360 2558. Also, I have a big booster and 1048 00:59:50,360 --> 00:59:56,080 indeed a member of the board of the Libertarian Institute, and 1049 00:59:56,080 --> 01:00:00,040 that is Libertarian institute.org, which I very much 1050 01:00:00,040 --> 01:00:02,440 want to encourage you to check out. 1051 01:00:02,440 --> 01:00:06,160 So thank you, Keith Knight, and thank you ladies and gentlemen. 1052 01:00:08,720 --> 01:00:11,800 Make yourself and those you love less vulnerable to the regime, 1053 01:00:12,000 --> 01:00:15,960 both mentally and physically. Get more forbidden information 1054 01:00:16,040 --> 01:00:19,520 at tomsfreebooks.com and be sure to subscribe to the show 1055 01:00:19,520 --> 01:00:21,760 wherever you listen. See you next time. 1056 01:00:30,400 --> 01:00:31,880 Like the sound of the Tom Wood show? 1057 01:00:32,000 --> 01:00:34,920 My audio production is provided by Podsworth Media. 1058 01:00:35,280 --> 01:00:37,440 Check them out at podsworth.com.