Robert Murphy, senior fellow in business and economic studies at the Pacific Research Institute and adjunct scholar at the Ludwig von Mises Institute, discusses the financial and credit meltdown, the perils of central banking, the reckless risks taken by the banks because they knew the Fed would socialize the costs if they failed, the use of the IRS as a weapon against dissent and the in’s-and-out’s of the inflation game.
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Welcome back to Anti-War Radio, it's Chaos 92.7 FM in Austin, Texas, streaming live worldwide on the internet, ChaosRadioAustin.org and AntiWar.com slash radio.
And our first guest today is, well, you know, this has something to do with foreign policy.
I have a feeling, you know, that maybe it's beginning to turn out that wars aren't free.
Maybe he can help set us straight, but the focus is economic meltdown.
All over TV, you know, people who were obviously born rich are screaming at each other and apparently terribly worried about what the hell is going on here.
And I always turn to the Austrian school economists because, well, they actually know what they're talking about.
Hey, it's Robert Murphy from the Ludwig von Mises Institute.
How's it going, Bob?
Pretty good, Scott.
Hey, I'm really glad to have you here.
So first of all, please just catch us up on the news.
We got Lehman Brothers, which I always thought was so politically connected, they would never cease to exist.
Merrill Lynch, which I guess is like a mutual fund thing or something, they're gone.
You got Merrill Lynch, I guess, what got bought by Bank of America or something.
You got AIG, this giant insurance company, General Electric, they're talking about is General Electric.
What's happening to General Electric?
Bob, what the hell is going on with all the rich people are losing their money on TV, it looks like?
Well, sure.
So the basic reason motivating all this is the housing price decline.
And then that, in turn, meant that a bunch of financial institutions that had bet heavily on the way up, and they were very exposed to the mortgage market.
And so now when housing prices have fallen to the floor, that means a lot of people are defaulting on their mortgages a lot more than the computer models had assumed was possible.
And then that meant a bunch of these financial institutions holding these mortgages.
Now they're not getting their monthly flow of payments because so many people are defaulting.
And so then they're in trouble, but then it spreads because that means people who are doing deals with those firms are now also in trouble, and so there's this whole big crisis.
So yeah, what just recently happened was that a Lehman had to file for bankruptcy because they couldn't get a private or the government to come in and buy them out.
And they say AIG, the big insurer, now is in serious trouble.
And they turned yesterday to the Federal Reserve in New York State saying, you know, we need a bailout.
We can't get a private party to come in.
Because what happens with these firms, if you just think about it in terms of the individual level, suppose you have a good job and you have plenty of income, and it's just you have a bunch of bills that come due in a certain month.
You might still be solvent, meaning over a 10-year period, your income matches your revenue and you have more than enough to pay your bills.
But that month, you might be tight.
You might say, oh, I'm tight on money right now.
And so you need to borrow money from your friends, or you have to put it on your credit card.
And so the same thing is true for these huge financial institutions.
Some of them are solvent, so in terms of their income and expenditures over the next five years, things look like they're fine.
It's just they're in a pinch and they're illiquid.
They need to raise capital.
But what's going on in Wall Street now is because nobody trusts each other, no one's even willing to lend funds, even for a very short time.
And so that's what this whole credit crunch is.
Well, why don't they trust each other?
Well, the simple reason is because they don't know.
You don't want to lend $100 million to a firm, even for an overnight loan, and then the next morning they file for bankruptcy protection and you don't get your money back, or you got to wait for a bunch of bankruptcy proceedings to get your money back.
I mean, they still are lending to each other, technically.
It's just that the rates they're charging each other now are much higher than they normally would be.
And that's what people talk about, the spread between money that's lent to the government versus to private institutions now, that that spread is much bigger because the government now, ironically, is seen as the safety haven to lend your money to.
Well, why is that ironic?
I mean, I remember learning pretty young, probably, that full faith and credit, that phrase in the Constitution, had been kind of taken and twisted.
It used to, I think, just mean that the states had to recognize and accept as legitimate paperwork from other states and so forth, but now it means the government promises that they will be around forever and they will tax Bob Murphy as long as it takes, as much as it takes, in order to pay bondholders face value plus interest for their bonds.
So that is a safe bet, right?
Yeah, I mean, you are right.
The people on Wall Street aren't stupid.
Some people might question whether they're moral or not, but they're certainly not dumb.
And yes, it does make sense.
Any individual buying treasury bonds is much more likely to be paid off than lending to even a large Wall Street investment bank.
And I say it's ironic because, of course, as you and I both believe, this whole mess is generated by government policies, and then the crisis has been prolonged.
You asked a moment ago, why don't these banks trust each other?
And part of it is that they haven't had the incentive to really make their books completely open.
You know, people talk about transparency, and so they don't really know how much, in terms of mortgage-backed securities and other poisonous assets, the counterparties might be holding on their books, because what's happened is I think people have been just waiting and waiting, thinking, well, maybe this latest trick by Bernanke is going to fix things, because you don't want to go public and fully disclose to your shareholders, yeah, we're actually holding this much in mortgage-backed securities, and we expect over the next quarter we're going to lose this many billions of dollars.
I mean, they have been trickling that information out over the months, but I just think if they knew from day one, if we were in a completely laissez-faire society and this crisis had hit for some reason anyway, that things would have been resolved much more quickly, because there would have been no advantage to drawing out the pain and making people suspect you for months at a time.
They just would have announced the losses up front and tried to get it off the front page and move on, whereas now they keep prolonging because they're thinking, maybe the government's going to rescue the housing sector, and then all of our bets that were really risky aren't going to turn out to be so bad after all, so let's wait and see what happens.
Well, you know, a couple of months ago, a friend called me up, and he said, now, Scott, I've read a little bit about central banking, and I thought I sort of understood it, but tell me something.
I'm just barely behind on my mortgage, and I can tell.
I mean, it's just no secret.
My bank wants me to default.
They want to foreclose on this house, and they're doing everything they can to just figure out a way to get me out, and screw them, I'm getting the money, and I'm paying, and I'm keeping my house.
But I'm curious.
Why are they trying to do this to me?
Why are they trying to get me to fail?
It's just purely obvious what they're up to here.
And I said, well, I don't really know for sure, but it sounds like they think they're going to get bailed out anyway, so they figure they can kick you out, keep the house, and the money.
Oh, that's a good theory, because, yeah, on the face of it, you would think that doesn't make sense, that the standard story we're hearing is that the problem with the housing sector is that all these banks now are seizing, foreclosing on houses, but the bank doesn't want to sit there with the house on its book either, so it has to do a fire sale, and that's what's making it hard for normal sellers to get their houses off to another buyer, because there's all these houses that have been foreclosed.
But yeah, you're right.
In certain circumstances, if a particular bank thought it could get a house at a very low price, and once the market recovered, it would be sitting on a nice asset, then I guess it would make sense to try to push out the tenant.
Well, so I was kind of hoping that you were going to say something like, well, Scott, come on, don't be so conspiratorial.
But no, that sounds like it makes good sense, huh?
Well, like I said, I wouldn't have predicted that, but I'm not going to second guess what your friend's telling you.
I mean, I don't know his particular circumstances.
Maybe there's something funny about his house, or it's in a really good location or something.
But yeah, in general, I think everyone's trying to get as far away from anything tied to real estate as they can, except for speculators who think that the market's at the bottom.
All right.
So I saw the screaming guy on TV, the bald-headed guy.
What's his name?
Kramer.
Kramer, the screaming guy.
Yeah.
So I saw him yesterday, and he's interviewing the CEO of Wachovia.
And the CEO of Wachovia is breaking down all these statistics and percentiles and so forth.
And he's saying basically that, don't worry, man, we have $300 billion in assets for $500 billion worth of liabilities.
And that's just fine.
And then I thought, actually, you know, maybe that is just fine, because I would have thought that the ratio would have been even greater than that.
I was sort of pleasantly surprised to hear that they only owed $500 billion for which they had $300 billion they were sitting on.
Yeah.
I mean, a lot of these things, what you need to keep in mind, though, and this ties into my theory of why the government is being counterproductive.
So it's not merely a matter of that it's putting taxpayers on the line for all these billions of dollars, but even the alleged benefits of these actions actually don't exist, is that, to think back to when I was thinking about your individual level, even if you're solvent, even if your long-term financial plan is fine, if you have a nice paying job and your bills normally are under control, and you just have a bunch of hospital bills or something in one particularly bad month, if people stop lending you money, if you all of a sudden lose access to your credit, then you're in trouble.
Or maybe you just buy your groceries on a credit card, and then your paycheck's going to come next week.
If your credit card all of a sudden stops giving you that credit, you're in trouble, even though, in a sense, you say, oh, I still have my job, and I still spend responsibly.
And so that's what's happening with these Wall Street firms, is that once now a rumor even starts that a particular firm is in trouble, people might be afraid to lend to it, and then that firm just, all of its operations seize up.
These banks, it's not like they have a huge bunch of cash just sitting in a checking account that they draw down.
No, I mean, the way they do their day-to-day operations, they're borrowing money and lending money to each other like crazy.
And so if all of a sudden all the other banks and their financial institutions decide that, well, this one over here is a pariah, and I know I'm not touching them, I'm not doing any business with them, if everyone starts saying that, then it's a self-fulfilling prophecy.
So it's sort of like fractional reserve banking, and maybe the reason Wall Street's like this is because of the central banking, but whatever the reason, it's the case that a lot of these firms, if everyone just decides they're going to fail, it's a self-fulfilling prophecy, and then they have no choice but to turn to the government, because they say, hey, nobody can bail us out.
But what's ironic is the reason firms start thinking like that, it's precisely because of these previous bailouts, that what the government's done, and understandably so, is when they bail out Bear Stearns or Freddie and Fannie, they make sure that the common stockholders take a large hit.
And the reason they do that is because otherwise people would cry foul and say, hey, you're giving taxpayer money to investors who made bad bets.
But then what that means is now when a firm is on the edge, private investors aren't going to lend them billions of dollars so they can regain solvency, because they're fearing, well, no, if this firm does fail, then the government's going to come in and impose really harsh terms, and so why would I want to get a piece of that action if they're close to being bailed out by the government?
And so it's this perverse thing where the government scares away all private lenders, and then everyone's saying, well, gee, the free market's not doing anything, the government needs to step in.
But the only reason the government needs to step in is because it's scared away everybody else.
So tell me this.
I remember back in, oh, say, 2000, maybe 2001, I think it was 2000, I met some real estate people, and they were going, ha ha, we tried to tell everybody that this whole dot-com thing was a big joke and that everything was way overvalued and that the Nasdaq was going to fall.
You want to be smart, you want to invest your money and make money, then real estate is where it's at.
How come they were just as wrong as the dot-com people, Bob?
Well, I think it's because of the perversity of central banking that when the government decides to inject billions upon billions of phony money into the credit markets, it goes somewhere, and yet people are complete morons.
They're not going to just invest in the thing that just busted, and so they move on to something else.
And this is what fueled a lot of people saying that they thought commodities was the next bubble after the real estate market.
And so what happens, you can always come up with sort of rational explanations for why a particular asset is making new highs and that things are different from how they used to be, and there were plenty of, I've seen very sophisticated analyses, and I'm not saying that sarcastically, about why real estate values were going up because, for example, President Clinton changed the tax treatment and so forth for capital gains if you sell a house, and there are other sorts of explanations.
Interest rates were very low, and so the boom in real estate made a lot of sense.
There were all these innovations in terms of financing that made real estate seem less risky than it used to be.
So in other words, you weren't, if you were an investor and you wanted exposure to real estate in the mid-2000s, now you didn't have to just buy a particular property and put all your fortunes in that one mortgage.
You could buy these securitized assets where places like Freddie and Fannie would buy up thousands of mortgages and bundle them into a security and then sell them with different properties, and so depending on your risk tolerance, you could expose yourself to mortgages across the entire country, for example.
All right, so there were a lot of things going on that made people start to think, well, maybe this boom is justified.
And it's kind of hard to ignore year after year double-digit returns in real estate, and more and more people started getting into that.
And if you were an investment bank and you weren't heavily into real estate, you were reporting quarterly returns, earnings that were much lower than your competitors.
And that kept happening year after year, and it's really hard to have the discipline to say, no, no, this is a bubble.
I'm going to stay clean of this, and that's what happened.
And then, of course, the bubble burst, and everyone says, why did we get fucked into that?
But it's hard to resist.
Well, but when we're talking about Lehman Brothers and Bear Stearns and all these giant things, these really are the best and the brightest students from Yale and whatever, right?
I mean, not just there's some rich wasp, but these are the guys who are real geniuses at this, right?
How can they be, I don't know, not as on top of things as, say, for example, Dr. Ron Paul in the Congress, who I saw myself on TV years ago.
I think I played the audio of him years back on this radio show explaining that the government is creating a giant bubble in housing here, and it's going to pop and everybody's going to be left holding an empty bag, that kind of thing.
How come the geniuses here who actually have the incentive to not get canned for losing bazillions of their investors' dollars are, like you said, unwilling to say, no, no, this is a bubble.
We've got to do the smart, right thing here.
Well, there's a couple of things going on.
So one is, as you said, I mean, these guys really were smart, and I don't mean that sarcastically.
They were smart, and they have really clever, sophisticated models to deal with the rational, accurate way to price risk and how much should we pay for this sort of stock option and this sort of real estate contract.
And so in terms of, you say, well, how come people didn't listen to Ron Paul?
Because people would say, well, come on, this guy's a medical doctor, and he's just talking about general principles of liberty and so on.
But in terms of, do I buy this particular piece of real estate or this one down the street, and how much should I pay for it?
I mean, that's not enough.
It's not enough to show me the Constitution.
I need to get some guy who just came out of Harvard.
And so that's the idea.
And these guys did have advanced degrees, and they were very smart.
But the problem is, and this goes back to, you were talking about Austrian economics, the difference between Austrian economics in the mainstream that people teach in MIT and so forth, is that they had these models that were based on false assumptions.
And it's not because they were lazy.
It's because in order to get the model to spit out an answer, you have to make some simplifying assumptions.
And so like I said, part of it was the variables they were plugging in, the distribution of the random elements in the model, they didn't assign a very high probability to what just happened.
These sorts of events of the last few years should have been extremely unlikely in these models, and so they didn't give enough weight to them.
And so therefore, the rational thing to do was to keep it enlarging their exposure to real estate.
And in terms of you say, well, they're on the hook for billions of dollars.
But here, you just think about it, yes and no, because a lot of these firms were getting bailed out by the government.
So you say, these Freddie and Fannie executives, how come they were so reckless?
Well, they still made millions of dollars personally, right?
And they're large creditors.
They're being bailed out by the government.
And so the point, it's sort of like a heads, they win, tails, they still do okay.
I mean, obviously, they feel foolish, and it's not good for their reputation when they try to go get another job.
It's not good on your resume to say, I was the CEO of Freddie during the bubble.
But my point's just, they don't know in 2004 how long it's going to last or how bad it's going to be.
And they don't want to sit back and let all these profits go by while all their buddies who are out drinking and dropping $500 tips because they made so much money that day on the Wall Street.
They don't want to just let them keep doing that.
Especially when in terms of the institutional arrangements, like I say, they're personally not going to lose that much.
I mean, just think about an individual analyst or someone working for an investment bank.
They might get a large bonus if the firm does well.
It's not like the firm is going to take their house if they end up losing billions of dollars that quarter.
So even there, there's a bias towards good times, if you will, that individuals working for these companies do better during good times than the pain they suffer during the bad times.
So there is sort of a group think mentality.
And like I said, ultimately, the reason is that the government doesn't keep it a level playing field.
That if it really were the case that if you lost that money, you failed, and that was it, that I think there would be a lot more discipline.
Yeah, you know, J. Edward Griffin in his book, The Creature from Jekyll Island, says that the name of the game is bailout.
And, you know, actually, this is one of the important questions I wanted to get to is Lehman Brothers not being bailed out.
Geez, I thought that's like old money, you know, political connected type people been around for a long, long time.
I don't know how many bazillions of dollars worth of assets they've lost.
But is it really that the Fed will only bail out those, quote unquote, too big to fail because it'll really just create ripples and bring down the whole economy?
Or is it not political connections that get these things done?
I don't know.
I'm not confident because I don't know the particular people involved.
And so you're right.
I would have suspected they would bail them out.
But on the other hand, I think part of what's going on here is the government is realizing that they're running out of room.
They're getting painted into a corner.
I think even libertarians and people who are anti-state, I think sometimes they attribute too much power to the government.
They don't realize it's only a few hundred really important decision makers we're talking about.
And there's hundreds of millions of people in the country that they're trying to distract and keep occupied and not realize that they're being ruled.
And so, I mean, they really there's the laws of economics, the laws of economics, and the government can't create wealth, can only redistribute it.
So it might just be nothing more scandalous than the fact that this bailout or takeover of Fannie and Freddie, I mean, the euphoria, the honeymoon from that lasted one day.
So they announced that on a Sunday.
And then on the Monday after, the stock market was way up.
And then the very next day, the market dropped further than it had been before the announcement of the takeover.
OK, so in terms of getting a bang for your buck, I mean, they pledged $200 billion to support Freddie and Fannie, and it gained them one good day on Wall Street.
And so I think they just, with Lehman, they just said, you know what?
It's not worth it.
Already, the latest CBO forecast says that in the coming fiscal year, unless they allow the alternative minimum tax to kick in, the deficit is going to be $500 billion.
And that's like the official one of the newspaper reports.
I'm not talking about off-budget liabilities.
I'm saying the actual deficit that the news will report could be over $500 billion, it had this huge tax hit on the middle class.
And so when you say, well, should they just keep injecting more and more billions of dollars?
I think it might just be, they say, not because of some sense of prudence, but more, we just don't have the money.
Now, I know from a libertarian principle point of view, and really, frankly, from just kind of my own angry anti-establishment point of view, I like to see these giant things like Merrill Lynch fall apart.
Thing is, I know that there are regular people who have their money tied up in these things and are being severely hurt.
But so my question is really, is it the right thing?
Could it even possibly be the right thing, Bob, for the government to bail out Freddie Mac and Fannie Mae and Bear Stearns and some of these things that are, quote unquote, too big to fail because otherwise we're facing total meltdown?
I mean, it seems like what they're saying is even what freaking Alan Greenspan brought up the Great Depression or something.
This is the kind of thing only happens once in 100 years or something.
And so what they're trying to do is create some sort of soft landing rather than a complete unraveling, right?
Is that even right, that that's what they're trying to do?
And is it working?
Is it going to make matters worse?
What's the damn deal?
In terms of, is that what they're consciously intending to do?
I'm not sure.
I think you and I have talked about this before.
It's a great question.
Do the politicians actually believe what we think are lies coming out of their mouth, or do they even, does their spin even fool themselves?
And do they really think that they're serving the common good?
I don't know.
Probably some do more to some degree and others don't.
In terms of, though, objectively, is this going to be a good thing?
No.
I think this is terrible.
This is the exact opposite of what they should be doing.
Lou Rockwell had a good article the other day explaining that the reason it was the Great Depression, the reason it lasted so many years, was precisely because the government tried to stop that one in its tracks.
Previous financial crises were just as severe in many respects as 1929.
I mean, not in terms of the actual drop in the market, but they were very severe financial crises.
And we don't study them in American history because they were uneventful.
The market saw them, in a lot of cases, in under a year.
Things were back to normal.
And that's what would have happened here.
So the housing boom and bust, I think, was caused by the Federal Reserve, by Alan Greenspan's policies with interest rates.
But OK, suppose that happened, and then now you're running the government last year when this credit crunch hits.
I think at that point, the government should have just said, this is unfortunate, but we're just going to keep our hands off and let the chips fall where they may, and this will serve as a lesson next time.
Be careful who you invest with.
And it would have been very painful, and the market would have fallen, and the dollar would have dropped, and there would have been billions in losses and mass layoffs.
But you know what?
All that stuff happened anyway over the last 14 months.
All of those things that people would have said at the time, we need to have the Fed cut interest rates, and we need to have all these emergency lending operations, because otherwise X, Y, and Z will happen.
Well, X, Y, and Z already did happen.
And even right now, after the bailout of Freddie and Fannie, the housing market still is in serious trouble.
It's still possible that you're going to see prices fall and more and more mortgage defaults.
And so the government hasn't really gained anything.
And again, the ultimate thing is that these bailouts, I mean, the government, even though in a sense it seems like it's not handing out money because it's just bringing people back to the zero point by bailing them out, well, no, I mean, they're still getting billions of dollars.
So if we just thought in terms of normal times during a normal market, suppose the government all of a sudden just started randomly picking big firms and giving them $200 billion.
And can you imagine the chaos and how much that would screw up the markets?
Well, that's what the government is doing right now during this huge crisis anyway.
On top of that, the government's not just starting to randomly hand out hundreds of billions of dollars.
And so that just makes things even more screwed up.
I think you just put your finger on why I'm so angry about this all the time.
I want them to create a couple of hundred billion dollars and give it to me if that's what they're going to do.
How come these people get to counterfeit, but I don't?
Bob, that isn't fair.
I got to work for a living.
Right.
So, I mean, in defense to them, you know, for somebody who's more of a serious mainstream person who might hear this interview, it is true that it's not just an isolated, well, if you fail, then you personally are out.
I mean, like you said, there are plenty of people who, if they have their pensions, are exposed to these places.
And there's a lot of regular folks and people that are going to be hurt, even though they personally weren't speculating in real estate.
And just in terms of international ramifications, there's going to be a lot of issues.
And so there were those effects.
And it's like I say, it's not that I'm downplaying how bad things would have been if the government just did nothing and allowed firms to fail.
But the point is just do you want to?
It's like taking off a Band-Aid.
What the government's doing is slowly taking it off over a 14 month period instead of just ripping it off and getting it over with.
Well, all right.
So Jose is in the chat room and he wants me to ask you why Bank of America overpaid for Merrill Lynch.
Is that right?
They overpaid for it?
And in what sense?
And why, Bob?
It is.
I mean, I'm not going to give you specific figures.
But yeah, it is.
There are a lot of people saying that Bank of America did overpay.
And I don't have a specific reason to give you one speculation, though, is simply that we don't know what kind of pressure is being applied behind closed doors.
I mean, I don't know if you've read that there's some big banks, investment banks right now.
I forget the verb that the paper used.
I think it said that the Federal Reserve strongly urged them to form this private little piggy bank of 70 to 75 billion dollars to sort of be a lender of last resort to some of these places that are in trouble.
And so that's a lot of money to just strongly urge someone to kick into a pot.
So it's ultimately, even though we get angry at these private fat cats and that they're feeding on the government trough, I mean, ultimately, the government still has more power than most people do.
And who knows what's going on behind closed doors and what sort of leaning that the Federal Reserve is doing on these banks.
Right.
I mean, that really is the key to well, you talked about the Great Depression and all the so-called attempts to fight it.
I guess they were.
We got to guess good faith attempts to save the people from the depression that just made things worse.
But ultimately, what happened is that they moved the financial capital of America from New York to D.C.
And really, it is the White House and the Treasury Department and the Federal Reserve system who really have far more control and influence over the way things are than any even Citigroup or anybody.
Exxon.
Right.
That's that's a good point.
It really just to go to go back to your question, is this a good thing?
No, because even putting aside all the other stuff we've talked about, just the fact that now, I mean, what do investors do?
They can't concentrate on, well, what's the real estate market in this zip code like?
And gee, should we try to shift some more funds?
No, they have to say, well, what did Paulson say?
And oh, I was out to dinner with him last night.
Well, what was he talking about?
I mean, more and more, their business decisions are based on the arbitrary announcements of a few government officials rather than on the real economy.
And so that's certainly not good for long run recovery.
All right, everybody, it's antiwar radio.
I'm talking with Bob Murphy from the Ludwig von Mises Institute.
He's got this opinion piece in the Philadelphia Inquirer called Let the Markets Find Their Own Recovery.
Now, let me ask you this, Bob.
What about the war?
When they started this thing, they said, hey, don't worry, everybody, this war is going to be revenue neutral.
We're going to make the Iraqis pay for it all and it's going to be fine.
Meanwhile, it turns out, according to Joe Stiglitz and Linda Bilmes, this is going to cost three trillion.
They wrote in The Washington Post, sorry, did we say three?
We're looking more like five trillion over the long term.
This war turns out to not be free after all.
Is that what's going on here?
Is that whatever manipulations they got away with in order to spend all this money on war during Bush years while at the same time cutting taxes are now finally coming due?
I mean, that's just my guess.
I bet you you're going to tell me I'm right, though.
Well, certainly the war contributes to one caveat on that five trillion figure.
I would need to go review it.
But I think some of that is like implicit cost in terms of if somebody gets hurt, like they're factoring in some costs.
I mean, so that's still a real cost.
But in terms of what does the government care about in terms of on their books, I think that it's not that they expect to actually spend five trillion in terms of tax dollars over the next whatever period it is.
Well, I think they're talking about they're taking into account, you know, health care and everything, all the government services for veterans for the rest of their lives, too.
OK, yeah, like I said, I would need to review.
But it's certainly a big price tag, whatever the number turns out to be.
And yeah, the money has to come from somewhere.
That's that's when people, especially the Bush administration, they have just been spending money.
You want to like a drunken sailor, but that doesn't even do it justice.
So like don't like drunken Democrats in terms of the standard rhetoric here.
And it's it's really just amazing that this allegedly free market Bush administration is the one that's basically nationalizing the mortgage market and just engaging in these unprecedented actions.
And yeah, they've been they've been spending money like the figure I quoted you before.
I mean, it's still shocking to me that the official deficit could be as high as five hundred billion dollars just in the next year alone, half a trillion dollars in one year.
And that money has to come from somewhere.
And so, yeah, they've been inflating.
And that's why the real estate bubble happened.
And it's yeah.
So I don't I don't think it's just, oh, the war, but certainly the war was a very expensive item.
And as you know, in terms of how do you get taxpayers to consent to having hundreds of billions of dollars just thrown around is just tell them it's for defense.
And then that gets you so much farther than saying it's for, you know, nursing mothers or something that none of people I mean, they don't even bet an eyebrow or raise an eyebrow if it's hundreds of billion dollars, if you can tell them it's for defense.
You know, Thomas Johnson calls this whole system military Keynesianism.
It's demand side economics, basically by way of the armament people, you know, the tank manufacturers.
Yeah, exactly.
You've heard all the things about you don't want to close the military base in a certain community because then all those jobs and all the money that they spend on restaurants and things, all those jobs will be lost.
Right.
And so there is a very Keynesian mindset when it comes to military spending.
And it's ironic that it's so-called conservative Republicans who usually promulgate this Keynesianism, though they might not use that term when it comes to the military.
And certainly the rhetoric that they use in terms of why do we need more money?
And, you know, just like how a Democrat might talk about how we're making an investment in the community, we're going to build these housing projects and that'll save us money down the road because then we won't have to send these kids to jail.
Well, that's how Republicans talk when it comes to military spending.
Like, yes, this war is expensive, but it's a lot less expensive than if we didn't fight them over there, if we fought them over here.
I mean, imagine how much that would cost.
You know, so they think it's an investment in world security or something.
So it's just ironic that the same techniques that so-called liberal Democrats use to justify billions of dollars in domestic spending is the same thing that the, again, so-called conservative Republicans use for hundreds of billions in military adventures.
So then a lot of the new money that was created in order to fund the war and that has gone through, well, like you say, the military base and the restaurant down the street from it and so forth.
This is a lot of the same money that has gone to create the bubble in housing.
Well, it's a little bit hard to follow the life cycle of a dollar bill, if you will.
Yeah, I understand.
But, yeah, certainly in order to, let me put it this way.
The government certainly benefits from fraction reserve banking and from the ability to inject money into the system.
I mean, clearly the government benefits from that option and that's why they were so eager to get off the gold standard, to untie their hands.
And it's ironic, though, that it's really, it would almost be better if the government just literally had a printing press and when they were running short, they just printed up sheets of $100 bills and covered the deficit that way.
Because then, yeah, there would be that one-time injection, but that would be it.
Prices would go up and that would be the end of it.
But what they do now is they inject money into the banking system and then with the fraction reserve system, it gets multiplied.
And so, and it's really sort of an indirect effect that the government benefits because it keeps interest rates lower and so they can pay less when they borrow money.
But it's not that the government directly gets the pocket, that money that's being printed, because that would be too blatant.
And so instead, they lend it to these politically powerful banks and then presumably they get some sort of quid pro quo down the line.
But it's a very convoluted shell game because they have to make it obscure so the public can't figure out that the government's just printing money to spend it.
And so the government ends up causing a lot more price inflation than it would need to for the benefit it gets from the operation if it just directly printed the money and spent it.
But again, that would be too blatant.
So they have this big, huge, complex shell game.
Right.
You know, I've heard it said that the only real purpose of at least personal income taxation is simply just so that the national government has a lever of control over us all, that the amount of money that they tax from individuals is really negligible.
They could just as easily print that money out of nothing like they do a lot of the rest of it every year.
It's sort of just to reinforce the illusion that this is where the wealth comes from, is, you know, some fair, you know, everybody pays their fair share thing, not some sleight of hand through inflation as a hidden tax.
Yes, I mean, I agree with the spirit of that, but though I wouldn't call it negligible.
I mean, they take in over a trillion dollars in the personal income tax.
They do make serious money off of taxes.
But I guess what your point is, is that if they didn't take that money, they could just print the difference, and then people would be taxed through rising prices, not from having to write checks.
And of course, another reason for having the personal income tax or the corporate income tax is that then they can give tax breaks and loopholes to politically favored groups.
And so it gives them more power over individuals than they would have just in terms of, you know, if they just printed up money, they couldn't really control who the price increases fall on.
It would be pretty diffused around the population.
But now what they can do is set high marginal tax rates and then give all sorts of breaks, like, you know, deductions for mortgage payments and special manufacturing tax credits for people that keep jobs domestically and stuff like that, so they can exempt people from this onerous tax code.
Kind of like the police have so much power over you because they can pull you over and give you a ticket for just about anything.
No matter how you're driving, you're probably breaking the law.
And it's just that normally the cops let it go.
And so it's the same thing with the income tax system, is they can get just about anybody for an infraction.
And so everybody is breaking the law, and the government can penalize any particular pariah it wants to with the existing tax code.
Well, and I think that people know that, at least sometimes, people who stick their necks out politically and disagree with the internal consensus, but in a way where others can hear them often do face the IRS.
That this was something that the Clintons were famous for, was sickening the IRS on people.
And that's the kind of thing that'll give a man a heart attack.
You know what I mean?
That's kind of, it is a dangerous, what reminds me of the pit in the pendulum, with the swinging razor-sharp blade overhead that is on its way, and it's coming sooner or later.
That's how I feel about it.
You know what I mean?
At some point, I'm going to piss off somebody, and they're going to audit my ass.
It's a good thing I've never made any money in my whole life, for them to say I owe them.
But anyway.
Right.
I mean, that's the thing.
And you know, as you get more and more money and influence, and so as you become somebody that could challenge the government in some respect, I mean, they could easily take you out with, again, they don't have to send black helicopters in the middle of the night.
They don't have to be so fancy about it.
You're surely breaking the tax code somehow.
And I think that makes a lot of people keep their head down in the first place.
It's the kind of thing, it's one more thing that you may have to deal with if you decide to go ahead and start speaking out.
And it's just one more reason to not do so, I think, for a lot of people.
Yeah, and that's why everyone plays it safe that, you know, even, I mean, you and I, I'm sure you guys, you've noticed this, too.
I mean, it's, even if you're writing for an avant-garde website and thing, I mean, there's certain things that you just kind of don't touch, because, you know, there's boundaries and there's things that you know, okay, there's plenty of people writing on this topic, and I'm not going to stand out like a sore thumb if I write on this, and let me just say a little more eloquently, maybe, than these other clowns writing on it.
But there are certain things that people don't do, and again, if you just start testing the waters and you see what, I mean, I remember when I first started getting into Austrian economics and I visited the Mises, too, I asked all the faculty, I said, have you guys been audited?
And then they said no, they hadn't been, and so that sort of reassured me a little bit that, you know, because you don't know until it happens.
And it's hard to know if the government has dossiers on everyone who's ever written anti-Bush things, or if no, there's so many people doing that that they don't even care and they focus on more serious dissenters.
So, I mean, the stuff that just happened in Minnesota with the Republican, what was it called, the Welcoming Committee?
Right.
I mean, all that stuff.
And I think a lot of those kids were probably being foolish, and that's certainly not something I would have done personally, but it's a little bit scary that police are going in and breaking down doors and handcuffing people and taking their computers away when, up to that point, the kids at best were just planning to do mildly punkish things.
So, yeah, the climate's definitely changed, and the tax code is just one huge weapon that they have that they can sort of keep rich people in their place.
And then they have the DEA and SWAT teams to keep, you know, the poor people who are violent and keep them in their place.
Yeah.
In fact, nowadays, they'll go ahead and hook the armored personnel carrier to the front of your house and just tear it down.
They do that on A&E, on the Arts and Entertainment Channel a lot, on Dallas SWAT.
I love that.
All right.
Now, tell me this, one more thing.
We're almost out of time here, Bob.
But so they say, though, that the inflation rate is really kind of low, and it's not that big of a deal.
So I sort of got a two-parter for you.
Are we going to see much higher rates of inflation because it's all a delayed effect sort of thing?
Or maybe part of that is whether they're lying about how much inflation we actually have now.
Dollar sure seems to be worth less at the pump to me.
And then also, should we expect a 1980s Paul Volcker style war against inflation to come after where the central bank will artificially raise the interest rate so high in an attempt to strangle the economy to put an end to all the inflation that they had caused?
OK, that's a good question.
So on the issue of the measurements, and is it really true that inflation right now is only at whatever, 6% in the annual rate?
No, I think that that statistic underplays what inflation has been.
And there's been some people, this guy, he runs a site called Shadow Stats.
I think it's shadowstats.org, but I'm not sure about that, maybe .com.
But anyway, he goes through and shows how the definition, the way that they calculate inflation and also unemployment and other popular measures has been modified over the years always to make things look rosier than they are.
And so, for example, with the inflation, they do all sorts of little tinkering.
My favorite is called a hedonic adjustment, from the word hedonism, meaning that, let's say your computer gets better year after year.
Well, they're going to say, well, the price then of computing has gone way down.
Because, or if you pay more and more for a new car every year, they're going to diminish that price increase because they're going to say, well, a car now has so many more options than a car in 1980.
And so you're really doing apples to oranges.
And that's fine in terms of the economic theory.
But then you wonder, the people actually cranking out these numbers, that gives them a lot more room to fudge things if they need to.
So if the rate's going to come out really high, they can just tinker with the hedonic adjustments and get that rate down to a politically acceptable level.
So yes, there are definitely little bells and whistles and tricks that they do so that number is lower than it really would be if it were objectively calculated.
And then also, I think, regardless of their tricks, it's very soon we're going to reach a point where Bernanke's going to have to decide, is he going to keep the lifeline going out to all these major players?
Or is he going to pull that back in order to prevent massive inflation?
Because up till now, Bernanke's actually been fairly responsible, given all the crazy stuff he's been doing.
Because he's been what's called sterilizing these injections of liquidity by selling off Fed assets.
So the Federal Reserve actually was holding Treasury bonds and things like that.
And Bernanke has been selling those off.
As he's been injecting money into the system with his right hand, he's been pulling it out with his left hand by selling off Fed assets, if that makes sense to you.
But the Federal Reserve is running low.
And so the point is, now that they've blown through most of their savings, if you will, they're going to have to decide, are we going to keep this up and then just start creating new money?
Or are we going to stop with all these massive injections of liquidity?
And so that point's coming soon.
And I think politically, he's going to have to keep these injections going on.
And so then you're going to see really high price increases.
And then your last point, is there going to be a Volcker coming in?
I don't know.
Because I mean, things are pretty bad right now systemically.
And that could really cause some serious dislocation if they decided to jack rates up.
And I would guess they'd be afraid of that.
It seems like what they're trying to do now is they want to have just moderate pain for years on end, rather than having three months of just absolute awful economic conditions.
All right.
Well, listen, I've learned a lot.
This is always really difficult for me to keep up with, mostly because I don't have a personal interest in it at all.
I guess I don't in the war either.
But I just don't have any money.
So why sit around watching these goofballs on CNBC all day?
I sure am glad I have you guys at the Mises Institute to help set me straight, and in a way that the audience can overhear, too.
That's really cool, man.
I appreciate it.
Everybody, that's Robert P. Murphy from the Ludwig von Mises Institute.
Check out his new one in the Philadelphia Inquirer.
Let the markets find their own recovery.
He's also at the Pacific Research Institute.
Thanks very much for your time today, Bob.
Thanks for having me, Scott.
