Wednesday, June 24, 2009

Ramblin' On

Peter Schiff often has a lot of good things to say, and he said quite a lot of them in his recent Henry Hazlitt Memorial Lecture at the Austrian Scholars Conference on March 13, 2009. Unfortunately, he frequently got side tracked and the speech in its entirety is long and rambling. Below are a few choice segments..and as lengthy as they are, the original article is much lengthier. If you prefer, you can meander along with Peter through the whole speech posted on the Ludwig von Mises Institute website--or you can read the highlights below.

Why the Meltdown Should have Surprised No One

Comparing the current recession to the recession:

When people bought stocks they pretty much bought it with their own money. And if they got a margin account, maybe they had to put 50 percent down. And many of the brokerage firms were requiring higher margins on Internet stocks. So, when the bubble burst, the losses were pretty much confined to the people that made the bad bets.

And at least when the losses happened, nobody tried to bail anybody out. If you lost money, you lost money. There was no one looking to the government to get their money back because they bought a dot-com stock that went to zero.

None of the brokerage firms failed. Nobody failed because they had loaned money to people to buy stocks.

This time around, of course, everybody who bought real estate did it with somebody else's money. Very few people were paying 100 percent. Many people were buying real estate with none of their own money; people were buying real estate with nothing down. Is it any surprise that people gambled when they had nothing to lose?...

On securitization and government guarantees:

The reason that it was so easy for people to borrow all this money to buy houses was because of securitization.

At first it started with Freddie and Fannie. If it wasn't for Fannie Mae and Freddie Mac, Americans couldn't have borrowed all this money to buy houses. The only reason they did it was because the US government was co-signing their mortgages.

And people knew, well, if you lend somebody money to buy a house and if they can't pay you back, the government will pay you back. And, so, people were able to borrow a lot more money than a free market would have allowed because the government was there co-signing it.

But there were some mortgages that the government wouldn't co-sign; these were the ones known as the subprime mortgages. But Wall Street figured out that, well, we can securitize these mortgages; the government won't guarantee them, but we're going to buy them all up and put them into these structured products, and by structuring them like this we're going to reduce the risk....

Well, but it was because Wall Street was able to securitize all these bonds and sell them to the Japanese and sell them to the Chinese and sell them to the hedge funds that there was demand. And, of course, why was there so much demand for high-yielding assets? Because the Fed had the interest rate too low. Everybody needed yield and they were willing to take risk to get it...

It used to be that the mission of Freddie/Fannie, before they went broke, was to try to make homes, homeownership affordable. Now their mission is to keep home prices high, to keep homes unaffordable, to make sure we have to mortgage ourselves to the hilt to buy a house.

The government solution is high prices but low mortgage payments subsidized by the government. The free-market solution is low prices. Because if real-estate prices go down, you don't need to borrow that much money to buy a house. So it doesn't matter that your mortgage payment is a little higher...

The Fed vs. the Free Market

President Bush, in one of his speeches, said that Wall Street got drunk. And he was right, they were drunk. So was Main Street. The whole country was drunk. But what he doesn't point out is, where'd they get the alcohol? Why were they drunk?

Obviously, Greenspan poured the alcohol, the Fed got everybody drunk, and the government helped out with their moral hazards, and the tax codes, and all the incentives and disincentives they put in — all the various ways that they interfered with the free market and removed the necessary balances that would have existed, that would have kept all this from happening...

Federal Ponzi Schemes

The US government, we don't pay our bills. We're like Bernie Madoff. People loan us money. How do we pay it back? We borrow more.

If somebody came to Bernie Madoff a couple years ago and wanted their money, they got it. Why did they get it? Because they were able to take in new money. They found another sucker who didn't know it was a Ponzi scheme.

Same thing the US government does. Every time a bond matures, we just go sell another one. And every time we need to pay interest on the national debt, we go borrow that too. Well, it works until nobody wants to lend us any more money, then we're going to have to default, just like Bernie did.

And there's only two ways we can default. We just legitimately don't pay, or we print money. That's it...

Growing the government instead of the economy

And, what's happening now, of course, is the government is using this economic crisis, that they caused, to get even bigger, to grow their power, to expand, to come to our rescue, to save us from the evil forces of capitalism with government, with socialism...

[President Obama]wants the US economy to have a sound foundation, but he wants to be the one that builds it. He thinks the government can erect a sound foundation; that central government planning can replace the market; that resources can be allocated efficiently by politicians who want to get votes, as opposed to entrepreneurs who are looking for profits. He wants to replace the invisible hand with the hand of the state. And he thinks that he can do it better...

It's all about bailing and stimulating:

The government right now — everything that they're doing — what is the government trying to do right now? They want to bail people out and they want to stimulate.

Well, the bailouts are the worst thing that you can do, because they want to bail out companies that should fail, that should be bankrupted. Bankruptcy is a good thing. It's the way the market cleanses the economy of companies that shouldn't be there.

Why shouldn't they be there? Because they're not generating profits; they are not effectively utilizing resources. Those resources need to be freed up. Right now they're being held hostage. We need to free them up so that we can use them productively...

But the stimulus, what is it that the government is trying to do with the stimulus? The government is trying to recreate the conditions that led to the crisis. Because when they talk about stimulating the economy, they're not talking about stimulating economic growth. They're talking about stimulating spending...

[W]e said, "Hey, we're actually getting wealthier!" — even as we were getting poorer, because we were spending money instead of saving money. But — and as we spent money, we counted that spending as GDP. And, so, as long as our GDP was rising, we thought our economy was growing.

But the whole time our GDP was actually going up, we weren't measuring real economic growth. We weren't measuring how much wealth we had been destroying or dissipating. We were simply spending. And we thought we were okay because some appraiser said that our house was worth more, or the stock market was still going up.

But all that was an illusion, and now that those bubbles have burst, there's no way to go back to it...

[W]hen you borrow money and you invest in productive capacity, you have a real asset and the asset can generate revenue...And we became the world's wealthiest economy because we borrowed to produce. What we've done recently is we've borrowed to consume. We didn't produce anything. We borrowed money and bought trinkets. We bought depreciating consumer goods. So how can we possibly pay the money back? We didn't acquire any income-producing assets to pay the money back....

Nothing fundamental has changed

[T]he combination of Obama/Bernanke is way worse than Bush/Greenspan, but it's the same philosophy. Nothing has changed. This might as well be the third Bush term. He is doing the same exact stuff.

The rhetoric is a little bit different, but the policies are all the same, the ideas are all the same: that economic growth is a function of people spending money and that we need more government to stimulate the economy; that we should bail out the people who fail and punish the people who succeed. And that we should have no interest rate. The Fed should be cranking out money...

And if we want to have a real economy, if we want to have production, then savings need to go to producers. Well, they're not going to go to producers if they're squandered by consumers. They're not going to go to producers if the government is borrowing all the money.

So what do we need? We need the government to eliminate the deficit and go to a surplus. We need the government to stop spending money and depleting our savings. We need consumers to stop spending money and rebuild their savings. We need a recession. We need it. We need one badly...

Toward the end of the article, Schiff draws and interesting parallel between what happened during the Great Depression and now. I know, I know, that comparison has been WAY over done. But, in pointing out that Hoover was mistakenly associated with a free market, just as Bush is today, and then was followed by Even-Bigger-Government Roosevelt, whose policies deepened and prolonged the depression, what President Obama is doing now is even less defensible. It's the same damn thing all over again!!

The popular notion is that we had a depression because Hoover was so irresponsible that he trusted the free market and he did nothing, and because he did nothing we had a depression. And then Roosevelt rode to the rescue and saved the day with big government.

Well, the reality, of course, is that we had a depression because, (a) we had a Federal Reserve that was too easy in the 1920s and created a boom.

And then when the boom bust, Hoover ignored the good advice of his secretary to the treasury — which maybe is the last time the secretary to the treasury ever gave anybody any good advice. And instead of allowing the free market to work, he came up with all kinds of crazy things to bail people out and to prop things up and to distort prices and fix wages and all kinds of things that created the depression.

And then Roosevelt came in and proceeded to make it worse. And everything that Roosevelt did exacerbated it and made the depression great...

And that's very similar to what's happening now. You got Bush, who is the Hoover now of this generation, who is now associated with the free market, who is nothing like the free market. And now we have Barack Obama, like Roosevelt, coming in to save the economy with big government. Of course, the government is already huge. Maybe he hasn't figured that out.

Wealth is not the problem. Wealth is the solution. But it has to be real wealth, based on production and investments from savings--not consumption based on debt and dollars created out of thin air.


1 comment:

z said...

Hey Beth, I found this speech very entertaining. The subject was such that the rambling doesn't bother me. The part about Obama going on television and telling everyone who still had a job that a major tax increase was coming in order to pay back China was very funny.

On another topic, I keep wondering why they don't add "Egalitarianism and Inflation" to C:TUI. They have it in Philosophy:Who Needs It, but, I think it would fit in the Cap book as well. Just a thought.