Alright, welcome back to Antiwar Radio, Chaos 92.7 FM in Austin, streaming live from ChaosRadioAustin.org and Antiwar.com slash radio, and for the first hour of the show all this week, also from Ron Paul's campaign for liberty, focusing on our current economic crisis and the government reaction.
Our guest this hour is Robert Blumen, he's a software developer based in San Francisco and writes pretty regularly for LewRockwell.com and for Mises.org, which is the website of the Ludwig von Mises Institute, the headquarters of the Austrian School of Economics here in the United States of America.
Welcome to the show, Robert.
It's great to be here, Scott.
I'm a fan of the show, I listen to the podcast.
Oh, really?
Well, thank you very much.
I guess I know that.
You've been a friend of the show for quite a while now, and I appreciate it.
And thank you very much for joining me on the show today.
I've got some interesting questions I think I want to ask you, if that's alright?
Go right ahead.
Alright, so I kind of want to rewind a little bit, and maybe let's start in the 1990s.
I remember listening to the radio one morning, and I've got to tell you, the whole dot-com thing just passed me by.
It seemed like such hype that I didn't even get a computer.
I guess I had one for a little while in 97.
And I said, this is all such inflationary hype, I'm not buying into it at all.
I didn't even get a freaking computer until the new century, is how obviously bogus the thing was.
But I remember listening to the radio one day, and all the callers were calling in and talking about, I just lost $50,000 in garden.com stock, and all this stuff.
And I remember how, well, I guess everybody remembers how they even came up with the name for it, right?
Vaporware.
All these companies that were going to develop something someday, who were getting infused with just this incredible amount of capital.
And they built this gigantic dot-com boom, far beyond what the technology of the internet was actually bringing forward to us.
At the time, it seemed pretty obvious to everyone.
And the darn thing crashed.
So I was wondering if maybe we can go back and discuss a little bit about how that happened in the 1990s, and then maybe how we moved from there into the new century of brave new monetary policy here.
Robert?
Well, I think your instincts are pretty good on that, Scott.
And it's interesting you use the term inflationary.
What people perceive as inflation is when stuff they buy, like gas and food, is going up.
But when things like stock prices or home prices are going up, there's not a perception of inflation.
It's a bull market, and we're all making lots of money.
We're all getting richer.
But those two phenomena are really just different manifestations of the same thing.
As money supply expands, prices of something have to go up.
And it depends on how the money comes into the system, whether you have asset prices going up or consumer prices going up.
So the speculative stock mania in the 90s and then the housing bubble in the early 2000s were both examples of asset price inflation.
Okay, well, I remember talking to some real estate people who were kind of gloating and laughing and saying, ah, look at these poor people who invested all their money in the dot-com thing, and what a bust that turned out to be.
And then they gave me advice.
You want to make some money?
Speculate in land.
That's where it's at.
Real estate.
Yeah.
Well, we'll probably get into talking about the Austrian business cycle in a little bit.
A lot of people who look at these speculative mania have more of a psychological explanation for them.
They think that it's somehow a form of math psychology where everybody gets very delusional about a certain asset at the same time, where they can only conceive of the price of that asset going up.
And certainly that does happen.
But I think that the psychology is more of a response to what's really a monetary phenomena.
Well, and I think that's really the key of what all you Austrian economist types always say, and you're certainly right, that to turn it to mainstream economic coverage on TV, all the terminology is sort of like pop psychology.
It's all about whatever flaws in the human psyche cause them to do these terrible things.
It's very rarely, anyway, attributed to anything systemic in the monetary system.
I think, Scott, a lot of that goes back to the theory of modern macroeconomics, which was created by the British economist Keynes in the 30s.
And his theory is that the market economy is inherently unstable, and it's completely driven by various psychological phenomena, like suddenly everyone wants to build up more cash at the same time, or investors get all optimistic at the same time, or pessimistic.
And the way that economic statistics are collected is driven by the Keynesian model.
So you've probably heard consumer confidence reported monthly.
It's considered to be very important how people feel about where the economy is going, because ultimately it's all just this big mental phenomena.
Or the Austrian school is looking at it more in terms of economic processes and prices and credit.
Well, this is what happened right after September 11th.
George Bush said, go to Disney World, go shopping, you've got to keep that consumer confidence higher, or else we might get in some trouble here.
Yeah, and that's also based on the belief, you hear all the time that consumption is what drives the economy, you hear that 80% of the economy is consumption.
This is false, Scott.
The fact is that 80% of GDP is consumption because of the way that GDP is defined.
But if you look at total economic activity, about 80% of economic activity is production, and about 20% is consumption.
So the importance of consumption is really dramatically overstated, and the importance of saving and investment, which is what drives production, is really understated.
Alright, so now let's rewind again back to the dot-com thing, because, well, boy it sure seemed psychological, didn't it?
All that euphoria.
I remember it must have been 1999, I think it was, yeah it must have been 1999 when they did the South by Southwest music festival here in Austin, and they do it every year.
But boy, in 1999, it was like everybody was a millionaire.
Cab drivers were never tipped so well, and it was just an absolute madhouse, and that was the problem, right?
Mass psychology, the dot-com thing is going to make us all rich forever, right?
That definitely is a perception that occurs during the later stages of a financial asset mania, but if we go back to this concept of production and consumption, production cannot really grow that fast because it takes a lot of savings to bring online new production, so it's really not possible for us to all get rich at once.
What happens is, because there's all this money flowing around and people see asset prices going up, they feel richer, but it's not really backed by anything real, it's just a perception.
All right, so then what happened, I guess it was what, February or March of 2000, reality hit that NASDAQ and the whole thing just fell and all the dot-com people's hearts and careers were broken into little pieces.
Yeah, just to finish the last point, think about it this way, suppose we're on an island and let's pick houses instead of stocks, let's say there's a hundred houses on this island and there's 200 people, and for some reason people decide that a house is worth more, so the house price is doubled, then some people are better off but some people are worse off.
The people who own the houses are better off, but the people who don't own them are worse off because now it costs more to buy a house.
So asset prices are just prices, and a price going up doesn't make everyone better off, it just makes the owner of the asset better off.
If you're a young person and you want to save for your retirement by investing in stocks, you would like stock prices to go down, and you'd like the stock prices to go down every single year until you've saved up enough stocks, and then maybe start going up.
It sounds kind of strange, but there's nothing really magical about stock prices going up or down, they're just prices, and prices have a job to do within the economy, just to tell us about the relative scarcity of different things.
That's an important point, too, because I think for those of us who are up to our eyeballs in this stuff all the time, it comes pretty easy, and we learn a little bit of Mises here and there and figure these things out, but I think a lot of people really don't understand.
I had a conversation with a friend yesterday in Florida who said, what do you mean there's no gasoline?
She was driving around pulling up to the gas pump, what do you mean there's no gasoline?
And I said, oh, well didn't you read that there's shortages all over the Gulf Coast area because the government has put laws against price gouging, and I was reading on the Lew Rockwell blog where they were explaining, I think it was Lew Rockwell was explaining, that because the gas station owners are afraid to raise their prices because they might get prosecuted, the prices are unable to do what you just said is their job, to signal who needs the gas most when, who can put it to the most efficient use first.
So therefore, there are shortages all across the Gulf Coast region because the government has fixed the price, not artificially high, but artificially low.
Yeah, so did I derail you, Scott?
You wanted to talk about the stock market crash in early 2000?
Right, yeah, I want to figure out how we went from the dot-com boom to the housing boom without having that big recession in the middle.
It sort of seems like they picked something else to make a bubble out of rather than face the consequences of really what they'd done in the first place back in the 90s.
Yeah, well, these speculative mania, they result in a lot of distortions in the real economy because all kinds of crazy investment processes get started that there isn't really any demand for, and these can go on for a while until somebody runs out of money, either they find there isn't a demand for what they're making or the cost of doing what they're doing is much higher than they thought.
Something has to bring this process to an end.
If you look, we have a couple of hundred years of data about the U.S. stock market that gives us some idea of what the fair value of a company is, or maybe not of an individual company, but of the aggregation of the entire market.
Stocks were by some estimates three, four, five times fair value in terms of the profits that businesses could actually earn.
Even now it's overstated because most of these dot-coms had no real economic basis.
What we call a recession is where unproductive activities that should never have been started shut their doors, they lay off their employees, and the economy reorganizes itself through the price system toward producing things that people really need, that there really is a demand for.
During that time, the unemployment is people shifting from things that don't really matter to things that do.
Alan Greenspan did not want to have the consequences of this bubble be realized, so he lowered interest rates to a ridiculously low level and kept them there for several years, which then touched off this housing bubble in combination with the government-sponsored mortgage enterprises Fannie Mae and Freddie Mac.
Let me ask you this.
When the Federal Reserve keeps the interest rates, what the Austrians would call artificially low, extremely low, lower than the market would have it, what decides whether that money goes to prop up the NASDAQ or goes to prop up the housing market?
Obviously Lockheed is getting a direct transfer of wealth from the Treasury, but beyond that, just sort of anybody's guess where the bubble's going to go, or did Greenspan choose, let's inflate the housing market?
Well, what the Mises and the Austrians believe is that they have a certain injection effect, which is, where does the money come into the systems?
So let's say you, Scott, had a printing press in your basement, then what we'd expect is probably some of the cafes, bookstores, restaurants right around your neighborhood would be getting an artificial injection of cash because you'd be walking around and spending it.
It's a matter of where exactly is the money created and who gets it first, and then it spreads out from there.
The first point to understand is money is created through the banking system in the form of credit.
When banks make loans, they create money out of nothing and loan it into existence.
So there's a bias toward money coming into the system as credit, which means things that are financed on credit are going to get the money first, which in the case of, now that was how Mises in 1920, the credit markets were primarily business credit.
So when Mises analyzed it, he said what you're going to see is an expansion of loan to business and you'll have a distortion in the investments that business make.
Since then, we've had the rise of consumer credit and mass participation in securities markets.
So you couldn't, I don't think you could have had a housing bubble in 1910, but you can have a housing bubble now because we all buy houses on credit, which we get through banks.
And we can also talk about securitization.
The other point is the whole concept of a 30-year mortgage is based on government intervention.
In the 1920s, the housing market collapsed and they set up these agencies that were like, they were the precursors of Fannie Mae and Freddie Mac.
They were doing the same thing we're doing now, which is they bought mortgages off the banks that otherwise would have been worthless and refinanced them.
At the time, people did not amortize mortgages.
The mortgages were typically five or six years with a balloon payment at the end.
So people would have to try to keep rolling their mortgage over every five years.
And they realized, hey, if we refinance these things on 30 years, we can lower the monthly payment.
So it enabled them to stretch these things out and relieve the debt burden of borrowers to an extent.
You did see in this recent housing bubble, there were some attempts to make these mortgages 40 and 50 years, but you don't really get the same effect because going from non-amortizing to amortizing, that's where most of the benefit is.
And stretching it out to 40, 50 years doesn't really do that much for you.
And now this is, if we rewind even further, this is the same sort of thing that happened in the 1980s.
I remember there being a giant real estate bust around here.
There was an S&L crisis.
I'm not very well versed on that, but certainly American financial history is replete with recurring financial crises.
And the response to them tends to be fairly predictable.
We don't seem to learn anything.
Only what happens is we get bigger and bigger crises each time.
Let me ask you this, and I learned this anecdote from, well, it's not so much an anecdote, but this part of a story from William Greerter's book, Secrets of the Temple, which is, he's a former Washington Post guy, I think, and it's mostly about Paul Volcker's term, fighting the war against inflation in the 80s, the inflation that was caused by the war in Vietnam and the Great Society and all that in the 60s and 70s.
And one of the stories that they tell in there is that, I guess in the late 70s, early 80s, when inflation was high, this encouraged a lot of farmers, and I think you alluded to this with the artificially low rates encourage business to invest in more infrastructure and building up their business, capital goods and that kind of thing, and that what happened was all these farmers were basically lured by the Federal Reserve policy into taking out massive loans and getting the brand newest tractors and all the brand newest technology to try to really improve their farming capacity.
And then Paul Volcker came in and said, we've got to lick this inflation and started raising interest rates through the roof, and all these guys defaulted, an entire generation of Midwestern young men lost their grandfather's farm.
And I think he even says in that book that, or at least maybe I put this together from somewhere else, that these are many of the very same young men that became kind of the anti-government militia movement of the 1990s, was these were a bunch of pissed off young guys who basically had been cheated out of their grandfather's farms by the interest rate policy, inflation then deflation.
Yeah, well, you make a couple of interesting points there, Scott.
One is that in an environment of unsound money, it becomes increasingly difficult for individuals to plan for the future.
And your ability to plan becomes more and more correlated with your skills as a financial speculator, your ability to anticipate the future trends in interest rates.
Or if you look at historically before the era of central banking, interest rates were much more stable.
One indication of this is people, the cliche of widows and orphans could own bonds.
Bonds were a safe investment.
Whereas under the modern regime, bonds actually have a negative rate of return right now, most bonds.
So you'd be a little bit crazy to own a bond.
The only reason for owning a bond is if you think that you're going to lose money more slowly on a bond than on other asset classes.
So this regime of unsound money has had the effect of pushing people into riskier and riskier asset classes.
Stocks until fairly recently were considered too risky for individual investors.
It was a professional's market.
But if you've destroyed the bond market as a means of retired people or savers for saving, then that pushes people into the equity market.
The other point that comes up in relation to that story is in these credit-driven booms, it becomes very difficult not to participate if you're a business, because if all your competitors are expanding and you know it's fake, you are going to lose a market share if you don't play along with it.
You do hear about occasionally these mavericks who kind of step aside and just watch the whole thing play out, but it's quite difficult to do that.
Yeah, you talk about the cluster of errors, right?
Everybody makes the same screw-up at the same time.
So that term, I think that comes from Rothbard.
And the way he poses the question is, if we believe that markets are pretty good at allocating resources and generally businesses are fairly good at earning profits, you always have some businesses taking a loss because they produced the wrong good or their costs were too high or consumer tastes change, so people no longer want what that business produces.
So there's always some business failures going on.
But why is it that you get these periodic crises where everybody seemingly makes the same mistake all at once?
How can that happen?
So that, for Rothbard, is the real question of business cycle theory.
Why is there this cluster of error?
Well, now, like you just said, though, if all the companies, all the competition are doing it, you have to do it too, or else, even though you might know that this is sort of a boom-bust situation, you're still going to get left behind if you don't play along with it.
So isn't that just the simple explanation right there?
I think that is an explanation not of why there's a cluster of error, but that's an explanation of why, even if participants know there's something going on, that they may still participate.
I do think there's another piece that's come in to this in recent years, which is the increasingly short-term focus of people in capital markets.
So a lot of people in the dot-com boom were able to flip out of their companies and make millions of dollars and pass it on to the stock market investors, where the goal during that period was not to build sustainable companies.
It was just to build something up and then go public, take your chips off the table, and who cared what happened.
I would tie that back to this increasing separation between equity owners and managers in public firms, but that's sort of another whole tangent.
Well, I think I see what you're saying, that the people who were putting the firms together were not the ones who were paying for it, and basically the investment banker types were just saying, here, go ahead, and not exercising any management themselves about where that money was going, because I guess the money was so easy, why waste your time on it?
Playing with somebody else's money, yeah.
I mean, this point, Scott, just that when there's this artificial creation of credit, the Austrian view is that for a stable economy, you need to have credit funded by savings.
That means if you go, whether you're going credit in the broad sense, you're getting financing from an investment bank, a commercial bank, through the bond market, whatever, that somebody saved that money, and you're investing somebody's savings.
There's a limit to how much people will save.
Maybe somebody could save 20% of their income, 30%, but you're not going to save 70% or 80% of your income, because you need something to live on.
You've got to buy gas, food, pay rent.
So there's really a limit to how much people will save, and that limit on savings really limits how much money can be invested.
If you remove that limit by just creating credit out of nothing, it appears that there's just all this credit, and all this funds available for investment, and we can invest in this and that, and pets.com, and gardentools.com.
Credit just appears to be so cheap, because it's not constrained by savings.
Well, I think people would imagine that, well, if we had a gold standard and all this stable money supply, that our rates of growth would be so much lower, and that we like these booms, and we've got to just figure out a way where we don't have to deal with the bus thing.
But we want to pretend that the boom, that's normalcy.
There's a real tremendous confusion out there, Scott, between credit and savings, and I even see professional economists make this mistake.
Credit by itself is just a means of transferring savings, but what really creates economic growth, and we were talking earlier about that 80% of the economy that's production, and the 20% that's consumption, it's increasing that productive part of the economy, and that can only come about by real savings.
Creating credit in excess of savings, it's just a form of inflation, and all that does is create more competition among the borrowers to buy up the same amount of resources.
So it's only the real savings that funds the real investment that creates economic growth.
All right, well, I know you're an Austrian economist, and the answer is going to be no, and why not, too.
But I know that there are a lot of people in this country, maybe more than half, I don't even think this just goes for liberals.
And I don't even know what the poll numbers are, but it's got to be some giant number to see what kind of garbage we're putting up with here.
Some giant percentage of Americans think that for the government to use its policy to intervene on behalf of those of us who, for example, aren't born with wealthy, literate parents and live in good neighborhoods and get good schools, but quite the opposite, that those people have a chance, and that, you know what, maybe it is, like you're saying, artificial credit rather than savings, that no one would really loan their savings to these people, but ah, what the hell, we're creating credit out of nothing.
Let's go ahead and invest some more and transfer some wealth from, I guess, not the rich, let's not kid ourselves, but at least from the middle class to some of the poorest in order to help them out, give them a chance to bring them up.
After all, we're all one big society here, in a sense, and these are our neighbors, and we've got to take care of them, so who cares if it's a little bit of, you know, what we call artificial investment, if it's an attempt to, you know, carry out an egalitarian policy.
Well, I don't think most, that the policy of credit expansion generally, it's not even discussed.
It's not even that people say we need to do this because it has social benefits.
It's just woven into how the financial system works, and it's not even talked about.
But if someone were to say, well, we need to do this, it helps the poor, what ultimately makes everyone better off is the economy becomes more productive.
If you think about, say you have two countries, and one of them is growing by 5% a year, and one of them is growing by 3% a year, and you multiply that out over a century, you find that the faster-growing economy is two or three times wealthier than the slower-growing one.
And what ultimately determines wages is productivity.
Productivity is based on the amount of capital in the economy.
So really what makes the workers better off is investment, which creates more capital and raises real wages, whereas the policy of credit expansion, and we can talk about this more, the Austrian view, it distorts investment, it destroys capital, so in the end it slows down the growth or lowers the growth of real wages.
Well, and you know, I'd like to point out, too, that, well, I know I learned in school that, hey, all this inflation is good for poor people because it means that the average schmuck can borrow in dollars and pay back in dimes, and it's the creditors who take the loss.
And we all know the bank created the money out of nothing when they loaned it to someone.
It's probably, I mean, in that sense, if you're like my parents, I think we're tremendous beneficiaries of inflation because they bought a home back in 1960-something, early 60s on, I think it was a 5% 30-year fixed-rate mortgage, and the home was $20,000.
So over the time that they owned their home, the price of the home probably increased at about the rate of inflation, or a little bit faster, but their housing cost was fixed at this very low rate.
But, you know, markets aren't quite that stupid, and what happens is, over time, the rate of interest on loans starts to factor in the rate of inflation.
So in the end, it all kind of nets out to zero.
But generally, for people who are earning wages, wages usually do not keep up with the growth in prices.
So generally, it's the little guy who gets squeezed more by inflation, whereas wealthy people, if they're smart and sophisticated and they know how to move around in asset markets, they can own assets that may or may not protect them in a period like this.
Obviously, by definition, the wealthy own most of the assets.
That's why they're wealthy.
So if the stock market crashes by 80 percent, that is going to impact the wealthy, in terms of their net worth, a lot more than the poor.
Well, and I think that's a very important point, that the wage earner, or the low-salary earner, that they are the last ones to get that cost-of-living increase to keep up with the inflation.
That can be true.
It depends on the political environment.
There used to be this belief going around in the 70s, and I think this may be one of the few areas where the economists have triumphed and finally extinguished an economic fallacy, where we all know now that inflation is too much money chasing too few goods.
If you go back in the 70s, there was this idea that inflation was caused by the greedy labor unions who were demanding cost-of-living increases.
So it depends on how the political process plays out.
If the labor unions see the money in the manager's pocket and say, no, we want that money, we're striking unless you give it to us, then they may be able to get a little bit ahead of the process.
It's a big battle, and somebody, one side may win some time, the other side may win other times.
Well, I've even seen Alan Greenspan testifying before the Senate and saying, almost verbatim, if this upward pressure on wages continues, it could cause inflation.
And I thought, oh, you dirty S.O.
B.
As though we don't all know you're the guy with your hand on the lever of the money machine here.
Yeah, it's still out there that rising energy prices, rising wages may cause inflation.
Yeah, that's what they say.
Well, we've just got to keep plugging away at it there.
The other thing is, too, and this is something else that, I don't know if Rothbard talks about this in the case against the Fed or not, I'm sure he does, I know this is covered in that book I mentioned, The Secrets of the Temple, that when Paul Volcker came in to lick the inflation that his predecessors had caused, what that meant was basically put the entire economy in a headlock, shake out not only the bad investments, but pretty much everybody and everything else.
Of course, doing that means raising the interest rates through the roof, which means if you're already rich, just sit back and collect the money.
And in fact, Greer in the book compares it to Keynesian economics and says, you know, it's not really supply side because there was not a lack of supply in any sense at the time.
In fact, it was an era of mergers when there was excess supply and that kind of thing was being shaken out.
So what it ended up being was demand side for the rich.
It was just nothing but welfare for the rich and diamonds and Porsches had never sold so well.
Greeter is really, really totally messed up on that point.
There can never be enough supply until the day when all human needs have been met.
So to say there's enough supply, that's not true.
I don't even know what this guy meant by that.
Well, I guess he meant that in that time, there were a lot of mergers and consolidation, and at least the men on Wall Street sure didn't think they needed an increase in supply or anything.
And so the money that all the rich people were making off of their interest rates was simply just almost all or whatever in the greatest proportions ever were going to, you know, cocaine and fast cars and fun.
And while everybody else, all the regular little people, were the ones paying those interest rates.
They were the ones collecting them.
There's always a supply problem.
Any time in history, ever, anywhere, there's always a supply problem.
The problem is that we all have some material needs that have not been met because we can't afford them.
How can the economy produce more supply of goods?
And that is through saving and investment.
So to say there wasn't a supply problem is to completely misunderstand the nature of economic reality.
I can't even imagine what...
I haven't read that book, but I can't imagine what he meant by that.
Well, you know, it's funny.
I brought up something about that book one time to Lou Rockwell, and he said, well, of course, Greerter is a communist.
So maybe it is based on a misunderstanding.
But there is this view out there, Scott, John Kenneth Galbraith, the Affluent Society, whatever, that we all just consume too much, we're too materialistic, we're greedy, and we should all just want less and get by with less.
Maybe that's where he's coming from.
I'm not really sure.
I see.
Well, but even in the context of government-created inflation, deflation, this, that, and the other thing, there are periods of time, right, where the people with the capital are not wanting to invest in new supply, at least at that moment.
Is that not ever the case, that this is, you know, like in the 80s, right, it was all the companies were merging together.
Was that a symptom of, at least in the fields that they were all operating in, they felt that there were too many of them, they needed to go ahead and consolidate rather than, and I guess he says, and I don't know whether this is a fact, but I guess he says, they didn't spend this money building new factories and hiring new people and on supply.
That's not where the money went, is what he says.
Yes.
If we talk about a normal economy, let's say outside of the business cycle, there's a constant process of reorganization going on because at any point in time, there's always too much of some things and not enough of other things.
So there's always some firm who, if they're in the part of the economy where there's too much, meaning too much in relation to consumer demand, that those firms are not making profits or they're earning losses.
Some of them need to shut down, shut their doors.
The resources go back onto the market, the labor that goes into something else where there's an unmet demand, whether that's new inventions like iPhones or it's in relation to people having moved from one place to another place or what we're seeing now, globalization, where people in areas of the world that had formerly been in socialist or communist economies are starting to produce things, so they're starting to demand things.
The economy is in a constant state of flux where some things are shrinking, some things are growing.
It's always being reorganized.
Now there are periods in the business cycle where due to distortions in the credit market and you get into a credit crisis where it becomes very difficult to invest because you're in the midst of a crisis or a period of monetary instability like right now where it's very hard to figure out what to do.
People I talk to about investing and try to figure out what to invest in right now, it's very, very hard to figure that out, but that's because we're in the unwinding of one of these crises and not because there's just enough of everything and so there's no point in investing in anything right now.
Yeah, I see what you're saying, sort of like when Robert Higgs talks about the Great Depression and what he calls regime uncertainty, the FDR and his brain trust were up there just experimenting with the economy in all these different ways and so the people who had any money didn't know what the hell to do with it except just try to hoard it and wait out and see what's going to happen because they didn't want to invest their money in something that was going to be taken away the next day.
Yeah, that's one factor.
There's also, I think right now, a lot of uncertainty.
People no longer believe they can really trust the balance sheets or the income statements of any of these financial companies and almost any debt instrument is suspicious.
You're not really sure if you own a debt instrument, is it going to be able to pay itself back?
When the value of money itself is thrown into question, it becomes much harder.
Well, Mises talked about this term economic calculation which is how he conceived of what businesses do.
All investment decisions, what Mises meant is investment decisions are forward looking.
You invest now to produce something that you will sell in the future.
You don't even necessarily know what all of your costs are going to be at the time you invest because you build a new factory, you're going to have to hire workers, you're going to have to buy electricity, computers, energy.
You can estimate what your costs will be but you don't know for sure and you definitely don't know for sure what prices you'll be able to sell at.
All investment is a matter of some guesswork.
What business investors are guessing about is they're guessing about prices.
That's what Mises called economic calculation.
They're looking at where can I earn a profit where profit is going to be the difference between revenues and costs which is intimately tied in with prices.
In order for people to do that with some degree of rationality, they need a stable monetary system.
When the monetary system itself is unstable, you don't know what the value is of the monetary unit or what it's going to be.
It makes economic calculation very difficult.
It makes it very difficult for businesses to invest because price is an amount of dollars that you pay for something.
You have to deal with not only changes in the supply and demand for that good but changes in the value, rapid changes in the value of money.
It just complicates that whole process by another order of magnitude.
What about the guys who sit on the open market committee?
What about the banks who own the stock in the Federal Reserve?
I'm certain, for example, a leftist view would be that these people are deliberately transferring wealth from regular people to them.
They're waging economic war against the rest of us through this mechanism.
It seems like there's a lot of talk, and this sure makes sense to me, that basically nobody with the power really, for example, understands what Ron Paul is talking about.
They don't understand the Austrian business cycle, and so they're operating on all these false premises.
At the same time, these are the guys from Goldman Sachs running our government, and certainly they know what they're doing to some degree.
They're not risking really that much of their own wealth in this, are they?
There is this whole political critique of the Federal Reserve System.
I tend more to favor the economic critique.
I talked to some LaRouche people on the street corner, and they believe that this whole thing is planned, that they're carrying out a plan to destruction of the U.S. economy.
But if I were a rich person, all things that make it great to be rich are cities, nice hotels, travel, luxury goods, and general social stability so you can buy all these nice things.
I think rich people are hurt just as much or more as anyone else by the collapse of an economy, because look, Scott, would you rather be a rich person in Bolivia or Uzbekistan or in the West?
Yeah, no, I perfectly agree.
But what if I was only, and obviously I'm 0% LaRouche, but what if I was half LaRouche?
And I said, well, maybe what they're trying to do is not wage total economic war, but just cause severe recessions, because then they get to buy up all the assets, all the bankrupt assets.
The people who are the richest get pennies on the dollar, so to speak.
They get to collect all the foreclosed property.
Dr. Hoppe on your show, right?
Yeah, Hans-Hermann Hoppe.
I interviewed him one time back in the day, yeah.
I think his explanation of this is pretty good, which is he brings in a concept from ecology called tragedy of the commons.
The idea is if there were some plot of land, suppose you have your own plot of land that you farm, and then there's this other plot of land that's the common, and anyone can either work on the common or work on your own, and you can harvest from the common or harvest from your own land, then the incentives are all aligned when it's your own land.
What you get out is what you put in, whereas in the common, you have an incentive to take as much as you can and give as little as possible.
What Dr. Hoppe argues in his book about democracy is that democracy makes all of the wealth, the private wealth of a nation, into a common, and that because politicians are only in office for a short time, their incentive is to take as much as they can for themselves and their buddies in as short a time as possible while they have their hands on it before they get booted out.
I think that's what's going on.
You're seeing all these guys trying to bail out all their buddies on Wall Street and prevent them from taking losses, and sure, it creates tremendous costs for the rest of us, but who cares?
They're only in office for a few more months.
In fact, I have a friend who had a theory about Bush's first term before we knew that he was going to be re-elected.
I guess I thought he would.
Her theory was that the Republicans' policy is simply to get in power and screw everybody absolutely as hard as they can, and even if they get thrown out after only four years, they don't care, because they just made so many billions of dollars, forget about it, and then if we're dumb enough to re-elect them after that, well, so much the better.
I think they have that in common with other presidential administrations.
Yeah, exactly, with every other politician in D.C., indeed.
All right, well, you know what, we're over time, but I've still got a few minutes before the next interview.
If you'd like to stay on, I was going to ask you a little bit more about what's happening right now with these bailouts, and just how much money we're talking about, and what it really means in terms of the government taking money, as you said, as a commons from all of us, and transferring it to these people who apparently already are as rich as they could possibly be, and who have made bad business decisions, and left themselves vulnerable to Chapter 13 bankruptcy, and so the government's coming in to save their hides at our expense.
How much of our expense, what does this really mean for those of us who aren't investors in the stock market, who didn't just see our worth go down, because we don't have anything in the first place, what's this going to mean to us down the road from here?
It's pretty hard to put a number on it, but the way that it will impact people who didn't own stocks in these companies, or who aren't investors, is through lower value of the dollar, and eventually as this recession unfolds, everyone will be affected in some way or another.
Well can you give us any kind of ballpark on how many billions or trillions of dollars they're talking about right now?
So I've seen some estimates that the Fannie bailout will cost around a trillion, and this other Paulson plan that's being discussed right now, to buy up worthless assets from banks is $700 billion, but generally these things always end up costing more than they think, so you can just multiply that by whatever you think the lying factor is.
Yeah, it's got to be at least half again what they say, that's got to be the bare minimum or something.
And this is also very hard to quantify, but as I was saying earlier, as you nationalize the financial system, that process I was talking about where the economy is constantly reorganizing itself, some things going out of business, other things starting up, that whole process can only occur if there are private capital markets to allocate resources, so by nationalizing the financial sector, they are creating this vast monopoly that has no ability to allocate resources, which means slowing down of economic growth of the United States for the foreseeable future, very hard to put a number on that, but as I said, if you multiply out small rates of economic growth over long periods of time, that really is what accounts for why some parts of the world are so much wealthier than other parts, because they just grew a little bit faster year after year.
Well, George Bush, our leader, the decider, our president, gave a one-minute speech about the economy, and he basically said, listen, we have a crisis, we have two evils to choose from, and trust me, I'm not sure why we should, but trust me, what we're doing is going to be painful, but it's better than the alternative, which is all these companies falling apart.
We've got to create, and obviously I'm paraphrasing in a far more eloquent manner what he said, we have to create some sort of soft landing here so that we don't have a complete unraveling.
You're right, it sucks, but it's better than the alternative.
That's what's being sold to the American people.
It's better than the alternative.
Do you buy that, and if not, why not?
Yes, Scott, that just illustrates why the only real solution is to avoid getting into these problems in the first place, because truly they do face a terrible choice.
If they stood aside, then the crisis would take down not only all the investment banks, but it would take down a large chunk of the commercial banking system as well.
It would wipe out the bank deposits of most Americans, money market funds, and cause just tremendous amount of pain, and also there's this little sidebar, a great writer whose book is available on the Mises Institute called Charles Holt Carroll.
He wrote about this timeless topic in the 1860s, and he pointed out that when these banking crises occur, there's a seemingly very arbitrary redistribution of wealth where some people are suddenly wiped out of their entire life savings overnight, and other people who just got in line first are solvent.
So that's one direction.
The direction that Bush and Paulson are going, in my opinion, is leading toward a hyperinflation, which also results in a totally arbitrary redistribution of wealth.
So it's a terrible choice, and political processes being what they are, they pretty much have to do something, because politicians are supposed to be perceived as always doing something.
They can't just say, we screwed up, we should have never gotten this mess, we have to take our punishment, we're really sorry.
So they're going to do something, but it's not a solution, it's just a terrible choice.
The economic laws of gravity that they're trying to defy here by continuing to create new credit to prop these companies up, does that mean that when the recession finally really hits, in a way, that it'll be worse a year or two from now?
In the same sense that Ron- Because they keep this, the problem is that all kinds of economic activities were started that had no basis in consumer demand.
They built too many houses, too many real estate brokers, too many mortgage lenders, too much bad paper, that there never was any real need for, and the real right thing to do is mark it down to zero and tell those people you've got to do something else with your life.
By trying to keep it afloat, they're just furthering the whole process that led us into this problem.
You're right, Scott, it just makes it, the more you try to keep, this is an Austrian view again, the more you try to keep the boom alive through inflation, the worse the distortion of resources becomes in the productive part of the economy, and the more, the longer and harder the corrective process will have to be.
Well, you know, it's fun because Ron Paul is such a great economist on all these things that he's been saying for years and years, and it's just fun almost to just type in Ron Paul and Fannie Mae and just see how long ago he introduced bills in Congress to cut off their line of credit, and I guess the thought then to however many congressmen even had the dignity to stand there and listen to what he was saying was that, oh, well, geez, if we did that, that could cause a crisis, and I guess that may even be true, right?
If in 2003 or 2005, the government had cut these institutions off, that might have precipitated the crisis then, but now it's even worse because they waited until 2008 sort of thing.
Yeah, if you're addicted to some kind of drug, then going off is going to be painful because there's this vast artificial life forms that have been created, but if you don't go off, yeah, you make it worse, and you have to suffer even more when the thing finally stops.
All right, folks, that's Robert Blum, and listen, I really appreciate your explanations.
This is not my expertise by a long shot, but I sure don't like the idea of a bunch of people using the power of the state to rip off everybody else, and that's what it looks like to me, and I'm really glad that I have you Ludwig von Mises Institute types to give us the real perspective, and I think especially because liberals particularly think of libertarians as apologists for these type of corporate criminals, and the Mises Institute crowd certainly puts the lie to that belief.
Yeah, they're doing a great job at the Mises Institute.
It's really the number one place to go for economic analysis on the net.
All right, everybody, that's Robert Blumen.
He's an independent software developer based out of San Francisco.
You can find his articles at luerockwell.com and over at the Mises Institute website.
That's mises.org, M-I-S-E-S.org, and I thank you very much for your time today, Robert.
Pleasure, Scott.
