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Welcome to the show.
Back to it.
It's antiwar radio.
I'm Scott Horton and our next guest on the show is Robert Higgs.
He is a fellow at the senior, something or other, at the Independent Institute.
That's independent.org and he's the editor of their journal, The Independent Review, and he's the author of, get a load of this, Crisis and Leviathan, Against Leviathan, Neither Liberty Nor Safety, Depression, War, and Cold War, The Challenge of Liberty, Resurgence of the Warfare State, and Opposing the Crusader State, and that's only before you hit page two on the website there.
Welcome back to the show, Robert.
How are you doing?
I'm fine, Scott.
Very happy to have you back here on the show.
Now, I'm sure that you saw this article in the Washington Times yesterday.
We talked about a little bit on the show.
Financial terrorism suspected in 2008 economic crash.
It turns out that the Pentagon, which isn't a very authoritative source, as you know, has come up with this report from 2009, which says that the financial crash of 2008, and probably, I guess, all our difficulties since then, is the result of an Arab conspiracy to attack the United States through unconventional means by attacking our economy.
What do you think?
It looks to me, Scott, like another example of the multitude of reports that the Pentagon, in particular, and the government in general, pays for that are worse than worthless.
The Pentagon will be happy to pay for any consultant's report so long as that report comes up with some cockamamie idea of a threat that the Pentagon is currently not spending a sufficient number of trainloads of money to combat.
Well, maybe that's why we had an economic crash.
Well, as you know, the Pentagon is never satisfied that it has identified enough threats to national security.
So, if some contractor comes along and promises to invent a new one, then it's a done deal as far as buying the report.
But the shocking thing, I guess, is that the Washington Times would make this the subject of a report in its pages.
Well, yeah, you know, good old Bill Gertz.
We're always about to be attacked by somebody.
Poor little innocent doe-eyed America over here.
But then, so, I don't know, what do you know about, or what do you say caused the financial catastrophe?
Because, you know, maybe Bill Gertz is right that America never did nothing wrong or even not smart.
Well, I think the financial and economic difficulties of the last few years have a number of important causes, Scott.
And excellent people have, at this point, written at great length about them and documented them and laid out the logic of how they came into being.
And, of course, the highlights of that story have to do with government housing, finance subsidies that go back all the way to the New Deal, but became bigger and even more distorting from the late 1990s onward.
And the Fannie and Freddie operation was at the heart of that.
And along with it, making sure that there was plenty of liquidity to keep the locomotive running was the Fed, with its response to the dot-com crash of 2001, in which it drove interest rates down for short-term interest rates, actually made them negative in real terms.
In other words, short-term loans were something you were being paid to take.
And, of course, that dragged down, the Fed's policies dragged down or contributed to dragging down longer-term interest rates, such as mortgage rates.
And all of these things, together with a variety of contributing causes, like ratings being issued that never should have been issued for securities and a lot of shenanigans involving peddling derivatives to people who had no idea what they were buying.
And a variety of other things all went together to create a kind of perfect storm that finally hit in the form of panic in late September 2008, and then elicited more panic on the part of the government as it attempted to rush in and rescue us from all the troubles that its own policies had brought into being.
So it's not a simple story, but at the same time, it's not beyond understanding.
And I think at this point, most people who've taken the trouble to really look into it do understand the main outlines of the financial difficulties of the boom and bust of the past decade.
Well, now, as Jess Romano notes in his article today on antiwar.com, the guy that wrote the report doesn't even really attempt to make his case at all, prove his case at all, but at least there is a narrative that has some sort of cause and effect in it, and basically says, you know, when gas prices in the summer of 2008, well, and I guess in 2007 it was like this too, were up the high threes and $4 a gallon, that that was an OPEC conspiracy to put the crunch on the American economy, and that's what precipitated the crash.
Yeah, you know, one of the interesting things, Scott, about conspiracies that are said to lie behind big run-ups in gasoline prices is that somehow no one brings forth conspiracy theories when later gasoline prices plummet, as they did afterwards.
You know, if these conspiracies are out there and they're effective, then why do they work so momentarily and not work in a more persistent fashion?
You always get this kind of nonsense.
Usually it's members of Congress that want to make a show of huffing and puffing about run-ups in gas prices, so they call in oil company executives to berate them on television, and that's kind of a constant of any run-up in fuel prices.
But now, of course, we can throw in the Arab terrorism angle, if that's something the Pentagon will pay to hear.
The Islamofascists.
Oh, absolutely.
Yeah, you know they're no up to no good with a name like that, that we named them.
Yeah, and that was probably paid for, too, by the Pentagon.
Right.
Well, you know, I just interviewed somebody on the show yesterday from the National Priorities Project, and your name came up in the very first question because you did a study for the Independent Institute that said that we spend a trillion dollars a year on militarism, and as I like to point out, Mother Jones Magazine from the progressive side of the political spectrum did a study called Shock and Audit, where they came up with the same trillion dollar figure.
Then Ron Paul, citing you, was talking about a trillion dollars a year being spent on militarism, and a website called PolitiFact did a fact check, and they went over your numbers to make sure they were right, and they said, yep, about a trillion dollars a year.
Well, this guy Chris Hellman from the National Priorities Project has updated your numbers, or maybe he's come up with, you know, a few more categories that y'all skipped or what, but we're at 1.2 now, Bob Higgs.
What do you say?
Could that have anything to do with, you know, the bubble in housing that they had to, you know, push this easy money policy so they could make this giant war and all of this war spending seem like it was free at the time?
Well, one of the things that happened, Scott, when the Bush administration got rolling with its war on terror after 9-11 was that the Bush administration, for political reasons, couldn't simply throw all the money it wanted to throw at the Pentagon and the intelligence agencies and the rest of the so-called national security apparatus.
So it basically cut in practically every other part of the government in order to sort of politically spread the wealth around and get Congress to come along, which Congress did very happily.
Of course, this meant that the government began to run big deficits in its budget after, you may recall, the Clinton administration had more or less balanced the budget in its second term.
And so that was very short-lived, and the Bush administration started running the huge deficits again.
And of course, when the government is conducting policy like that, it very much needs help from the Fed lest it force interest rates higher, and that, of course, creates all kinds of complaint from a variety of special interest groups well represented in Congress.
So the Fed came along and conducted a quite accommodating monetary policy at the same time it was holding interest rates down.
As I mentioned, it was allowing money stock to run up at about three times the rate that real output was rising in the years from 2002 to 2006 or so.
And that meant that, yes, the war on terror was being accommodated by the Fed, but at the same time you could say that all the other government spending was being accommodated from the same source.
So I think it's very often the case that the federal government's way of making a choice is not to make the choice, but to simply create purchasing power with the Fed's help out of nowhere, and then use that purchasing power to spend more than it's taking in in taxes.
Well, but they had to not only bribe the Democrats, which is easy enough, but the American people too got checks in the mail for 300 bucks for, what, two, three years in a row, the stimulus money.
The war is going to be free, oil will pay for it, and in fact, you know, everybody now gets one big food stamp a year.
Isn't that nice?
Well, of course.
We're all making money.
I guess war is good for the economy.
If the government were not in a position to run these big deficits, I mean, in retrospect, they don't look big anymore, do they, since the last three years have really put them in the shade?
But at the time, they were very big by historical standards, and the Bush administration was able to avoid the necessity of making the public choose, in effect.
If the deficits hadn't been run with help from the Fed, then people would have been much more aware of what that military buildup was costing them.
But as usual, the government likes to conduct policies in a way that befog what is actually being done.
Now, of course, people were still making sacrifices.
It's just that they were not as aware of making them as they would have been had a balanced budget policy been carried out, along with a run-up in military spending.
So, I mean, really, it seems like, as an economist, I'm a great anti-war guy.
I'm not all that well-versed in this.
But it seems like, really, no matter what the central bank, or the Congress, or whatever these people do with all their smoke and mirrors, eventually the pain comes due.
And so if we're standing in the unemployment line, that, in a sense, is we're paying our war tax from 2003, from a certain point of view.
Well, whenever the government carries out bad fiscal and monetary policies, there will be consequences.
That's where the economics comes into play.
You can't carry out these bad policies and just get away with it by waving your hands.
Eventually, the consequences will be felt.
And in our case, the consequences have been felt in all sorts of ways, beginning with the housing bust in 2006, and then that sweeping into all kinds of financial troubles, and then those dragging down the general economy.
So we end up here, as a result of this easy living at the hands of the Treasury and the Fed, between 2002 and 2006, we end up with at least five years of hard times, and maybe ten years.
At this point, it's really difficult to say how long it's going to be before the government finally rights itself and gets back to something like genuine growth and a decent level of employment.
Well, and it seems like, even though it's really a time of so-called correction and contraction and liquidation of bad debts, they also keep continuing to inflate.
And just in the last week, I've spoken with Ron Paul and with Charles Goyette on the show, both of whom said that they think that because the global food sales are denominated in dollars, just like the oil is, that, for example, Egypt imports a huge percentage of the wheat that they consume, that kind of thing, that it's Ben Bernanke's inflation, the stimulus and the Obama fiscal and monetary inflation to make up for the last correction from all the inflation before that, that's now causing the Middle East to go up in flames.
Well, it's true that the government's response to the housing bust and the financial debacle has been not to allow the restructuring that is required to get the economy operating well again, to clear away all of these malinvestments and allow bankruptcies where firms are actually insolvent, including big banks insolvent.
Instead of allowing those kinds of corrections, the Treasury and the Fed have done everything they could think of to do to prevent them or slow them down.
And by doing that, they've guaranteed that the process of correction is going to take much, much longer.
And the period during which we endure slow growth or no growth will be longer and longer.
So the government's way of dealing with these troubles, which are largely the product of government policy in the first place, has guaranteed that they persist.
And one of the upshots of this is that this fighting against the restructuring has led us to the quantitative easing episodes on the part of the Fed.
And this has meant, of course, that the dollar's been driven down on international exchanges.
And that creates these difficulties, you mentioned, for people in the third world who need to use dollars to pay for fuel and for foodstuffs.
Well, which brings up the question of whether the game is up here, because at least there's more and more talk, and I should keep up with the business press more, but I keep seeing headlines anyway about the Russians and the Chinese and others talking about abandoning the dollar for their international, you know, state-to-state and, you know, I guess, major private institutional transactions across international lines.
They want to create a new basket of currencies through the IMF or something that'll replace the dollar.
What will that mean if they, I mean, look, we're giving every dictator in the world right now, every government in the world right now, reason to look for alternatives to the American dollar if this is what's happening in Egypt and Libya and etc.?
Well, there is an unusual amount of talk, Scott, about alternative international monetary arrangements and perhaps going away from dollar settlements in a variety of ways.
And, you know, there's always this going back to the new Keynes money, you know, that never quite got created after World War II.
But the difficulty, one, is getting enough important players in the world to agree about how they want to do this.
It's not an easy thing to pull off.
And secondly, although people are nervous about the dollar, we have to understand that practically every monetary system in the world is being mismanaged.
So the dollar has actually been relatively strong in the past few years, despite all these troubles, because it's still looked at as a place that is safe relative to many other national currencies.
So then going back to what you were saying before, you know, even if, you know, that worst case scenario doesn't happen or whatever, you're still saying that looks like at the rate we're going, the recovery is going to be a very long time coming.
All this talk of green shoots and whatever, it seems notwithstanding, because they won't just let the bad debts get, you know, thrown out in bankruptcy court or whatever and let the fresh start get started.
Well, you know, there is some restructuring, there is some correction going on.
So it's not that they've prevented all of it, Scott, but they've certainly kept a lot of it from happening as soon as it would otherwise have happened.
And there's still a great deal more that needs to be done.
And it's probably the case that housing is still too expensive and house prices need to come down even more than they've come down already.
And there are many other things that need to be sorted out properly and won't be sorted out properly as long as the government keeps getting in the way of the restructuring.
But my best guess right now, and I don't pretend to be a prophet, but my best guess is for stagnation or something pretty close to it for the next few years, and possibly combined with accelerating inflation.
And so, you know, we could be back to a 1970s type situation very easily or perhaps something even worse.
All right.
Well, we'll have to leave it there, but I really appreciate your time on the show today, Bob.
You're welcome, Scott.
All right, everybody, that's the great Robert Higgs, editor of the Independent Review, senior fellow at the Independent Institute, author of Crisis and Leviathan and Against Leviathan and the Resurgence of the Warfare State, and a ton of great books.
