12/07/16 – Robert P. Murphy – The Scott Horton Show

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Alright y'all, Scott Horton Show.
I'm him.
And check out the archives at the Libertarian Institute.
That's Libertarian Institute dot org slash Scott Horton Show.
And the full archive, 4300 something like that, is at Scott Horton dot org.
Alright, introducing our good old friend Bob Murphy.
Robert P. Murphy that is consulting by RPM dot com is his website.
He's a fellow at the Mises Institute, and you can also find what he writes at the Independent Institute as well.
He's the author of The Politically Incorrect Guide to Capitalism, and The Politically Incorrect Guide to the Great Depression and the New Deal, both of which are really, really great.
I hope that you'll look at them.
And he's got another book out, newer, I don't know when, called Choice.
And he's also now at the Free Market Institute at Texas Tech University.
You know what to say.
Welcome back to the show, Bob.
How are you, man?
Glad to be here, Scott.
I'm doing well, thanks.
Good, good.
Happy to talk to you again.
What's the Free Market Institute at Texas Tech?
I guess I'm a little bit behind the times here.
Well, sure.
So it's a relatively new group.
It's its own special institute at Texas Tech, which is in Lubbock, Texas, you know, out in western Texas.
And we're a group of seven or eight, depending on how you count them, libertarians, Austrian economists.
And I've been here now for a year and a half.
I think the organization itself is a few years old.
Ben Powell heads it up.
And yeah, we have funding for grad students, and we're just a center here that cranks out research, as the name suggests, studying the foundations and applications of free markets.
And we have a bunch of grad students coming through.
So I would just give a plug for any undergrads listening to this that want to learn more about Austrian economics.
Check us out at the Free Market Institute.
Very cool, man.
Very, very cool.
Tell me about this book, Choice, that you wrote with your fingers there.
Sure.
So this came out.
It was published by the Independent Institute.
And what it actually is, it's about a 300-page distillation of Ludwig von Mises' treatise Human Action.
So this is now the book that if people say to me, you know, I really like Austrian economics, I dabble with it online or whatever, but give me one book that I'm willing to read that will explain this.
This is now the book that I give to people that explains, it covers the material that's in Human Action, but in a way that's very accessible.
And I really focused in this book, Choice, on explaining what's called the Austrian business cycle theory.
Because I think now more than ever, that's really the thing that Austrian economics has to offer, is to explain that the dangers of the Fed manipulating the money supply and having interest rates artificially low and how that blows up bubbles and sows the seeds for crashes.
You know, I think that too.
I think that now is the time for that more than ever.
Always.
Ever since I very first learned about the thing.
It's the biggest thing in the world.
Pardon me for just a moment.
I think that this is the biggest thing in the world.
That the booms and the busts, the swings in the economy.
Sometimes the economy's good.
Sometimes the economy's bad.
Sometimes everybody in the stock market at least is making a lot of money.
And then sometimes it all comes crashing down again.
And everybody knows that.
But nobody knows why, Bob, except you.
Tell them.
So this theory goes back.
It was developed by, again, this guy Ludwig von Mises.
So people may have heard of the Mises Institute.
That's the guy it's named after.
He was an economist.
And in 1912, he had a book come out that we now translate as The Theory of Money and Credit.
And he had this theory of the business cycle.
And he said, look at these ups and downs that we see in market economies around the world.
Where, as you say, Scott, for some reason, there's this period of prosperity.
Workers' wages are going up.
Everybody seems to be making money, hand over fist.
Everybody's happy.
And then for some reason, it all turns on a dime.
And the economy in general is awful.
So it would make sense.
You could understand why there'd be little pockets here and there.
And, you know, one guy invests improperly, doesn't forecast his customer demand, and he goes under.
But why is it that these waves of this massive business failure?
How come banks, you know, just all go under at the same time?
And Mises' explanation was that interest rates perform a vital service in a market economy.
They're like a signal.
And they help businesses know how much investment to put in place and how long to tie investment up in certain projects.
And so if the commercial banks flood the market with artificial credit, with money that's not really backed up by genuine savings, but it's there because, let's say, the central bank buys assets and creates money out of thin air, if that's why interest rates get pushed down so low, that's not the right signal.
And so business people get misled, and they end up making long-term investment projects that can't be fulfilled, at least not in the aggregate.
And so you have this boom period that's unsustainable.
And ultimately, reality sets in, and there's a crash where, you know, people have to go back to, they have to live more modestly because they were living beyond their means.
And so Mises' whole point is, to understand why do we have recessions, you need to look at the prior boom period.
It's too late to try to fix things once the crash has already happened.
What you need to do to stop this boom-bust pattern is to stop having the booms in the first place.
And so that's kind of like the opposite of what, say, the Keynesian paradigm suggests.
Well, and that's really the important point, right, is that for them, for the standard economists outside of the Austrian school, when everything's, I mean, maybe they recognize bubbles for whatever reason, but it seems like we always hear the same thing from them when there's a crash, which is, oh no, some terrible thing caused a crash, but never that the period of prosperity we just lived through was mostly fake, and that's why the crash, the crash is what's real, the prosperity is what was fake.
Right, and so, I mean, there is some nuance, I think, like the standard interventionist position.
This last time around, for example, they will look and say, oh, it was like deregulation, and there was all these people, you know, making bad investments or whatever and getting away with it, and so how do we prevent that?
We just got to be more vigilant in regulating Wall Street and so on on the front end next time, and that's how we'll prevent this.
So in a sense, you know, their theories are coming around, but still it's the case that if the Austrians are right, then what the standard so-called textbook CNBC response to a downturn is, is the exact wrong thing, right?
So the standard response is to say, well, you know, we can wring our hands and worry about what caused it in the first, you know, later on, but right now that we have massive unemployment, we need the central bank to cut interest rates, we need the government to run deficits, we got to put people back to work, we got to boost demand, and according to the standard Austrian view, that's the exact wrong thing to do.
That's just simply going to sow the seeds of another boom and then bust, and so the only way to get out of that cycle is to stop thinking you're doing the economy favors by pushing down interest rates, that no, interest rates are prices, they communicate information, and if you distort what that signal is, you're just screwing things up, you're not actually helping.
All right, now, so here's the thing, though, there's a lot of businessmen in the world, a lot of economists, a lot of bankers and corporate consultants and people like this and that, and it seems kind of odd that you and your buddies at the Mises Institute would be on this so well while even your fellow kind of, what, classical capitalist economists and your Chicago school guys and even some real libertarian types, really, they don't see it this way.
It seems like especially all these businessmen that you're talking about who are making these bad bets, it seems like if anybody has a financial interest in reading Bob Murphy and figuring out how this works so that they can avoid it, it would be them, but part of your whole theory is that they keep falling into this same trap.
How come they don't know better by now?
Okay, that's a fair question.
I think actually that's probably the single best objection to this theory I presented, is to say certain expositions of it make it sound like the same businessmen time after time keep getting fooled and they keep making mistakes.
So just a couple of things in response.
One thing is to say, look, it's impossible.
You can't say to business people, okay, the interest rate is what it is right now.
You're looking out there and it's at 0.5 percent or whatever, but act as if it were higher because you know the Fed's pushing it down.
They don't know what the interest rate really ought to be in a counterfactual world where the Fed didn't intervene.
If they knew that, they wouldn't need the interest rate in the first place.
So if market prices are communicating information and helping businesses make decisions, if those prices are wrong, then they're going to be flying blind.
They can't just say, oh, let me guess what the number would have been.
If they could do that, they wouldn't need the price.
So there's that element.
There's also the fact that at any given time there's a bunch of new people in the market who didn't necessarily, who weren't at the helm during the last crash.
And so if the central bank, just think of it this way, if they're handing out really cheap money, even businesses that are responsible and hold back, their competitors are going to go in and start borrowing that money at the cheap rates.
And so there are incentives like that.
And that's also why the bailouts were so destructive, because there were a few financial firms during the run-up in the housing boom years that were being very conservative and saying, no, this is crazy.
We're not getting into these subprime loans and so forth, these mortgage-backed securities.
We don't trust this.
This is going to come crashing down.
And they were losing market share, and their competitors were making a bunch of money, and their CEOs and other people were getting big bonuses.
So their strategy is we're going to just play it safe and watch.
These guys are going to go under because of the recklessness.
But no, to some extent they got bailed out on the back end.
And so the lesson was go ahead and get rich on the boom, and then don't worry if you're big enough.
Ultimately the system is going to take care of you on the back end.
So why would you then, what incentive is there to be conservative?
So there's that element as well.
But also, the mere knowledge of Austrian business cycle theory doesn't allow you as an individual company or investor to prevent the occurrence of an unsustainable boom.
So it's not enough just if a minority of people are aware of this theory.
In other words, it doesn't tell you, oh, here's how you invest so you come out unscathed.
That's a much more sophisticated question.
Yeah, I mean we do live in a world where some people did learn Austrian theory.
And I think I've told you this story before.
A friend of mine has a construction company where he built skate parks.
And sinfully for governments, mostly local city and county governments, built big concrete skate parks all across the West.
And he read the Wall Street Journal every morning.
And as soon as Ben Bernanke raised the federal funds rate, I guess it was at the end of 06 or beginning of 07, he said, oh, that's it.
They're popping the bubble.
He sold his company, cashed in, sold all his capital equipment and all of his stuff.
Because he knew the theory.
So there are people like that in the economy who did understand.
But I see your point that that's still always got to be just the exception, not the rule, as long as this is the system.
Right, yeah.
And also, two quick points following up on that.
You're right.
I knew a home builder when I lived in Nashville.
And he actually built the house that I was in.
And I met him at some dinner party that a neighbor was throwing.
And he explained, and he pointed at some unfinished houses down the street.
So I think this, I'm trying to remember when this happened.
This was after the crash, obviously, but not that far after.
And he was explaining, said, yeah, that was a young company, or sorry, a company run by some young guys.
They started building houses and then selling them.
And they were making money hand over fist.
And they just got it over their heads.
And so they had like six houses underway.
When the crash happened, they got wiped out.
Whereas he was in construction himself, and he could see that this was unsustainable.
And so he always kept his powder really dry.
He would only have one or two houses going at any given time, and he'd wait, finish them, and sell them before he'd start the next one.
Because he didn't know when the crash was going to happen, but he just knew, I don't want to get caught with my pants down and have a bunch of unfinished homes and all my money tied up in these things, and then the market collapses.
So there's that element, too, that the people who had seen it before knew to be wary, but there's always younger people coming in and getting access to that cheap money, and you can't stop that.
Right.
Well, and even then, it was, what, like a year and a half from the time that Bernanke started raising the federal funds rate to the time that the stock market bubble and everything finally popped and collapsed, right?
Bear Stearns had fallen earlier, but Lehman and the big crisis didn't come until September of 2008.
Right.
So if you look, yeah, the federal funds rate, they brought it down to 1% by June of 2003, held there for a year, and it was actually as early as June of 2004 when they started doing baby steps and marching the rate every time they met.
Oh, was it that early even?
Yeah, it was that early.
If you look at the chart, it looks like a little staircase, but, yeah, they started raising rates in June of 2004.
So they thought, and they didn't, like, jack them way up either.
They were raising it real, like, 25, 50 basis points every time they met.
So they were trying to have a, quote, soft landing, because they knew we can't keep rates down here at 1% forever.
This is crazy.
But they were trying to ease back into it, and it just kind of shows you can't get something like that right, that you blow up a bubble, it's going to pop.
Right.
Okay, now before we get to this bubble, and we're still talking about the period of the last bubble and before the last crash.
In fact, I want to go back one more bubble before that, because this is where everybody gets stuck.
And I have a problem.
I admit it.
I'm stuck to Twitter.
I'm completely addicted with it, and I argue with Democrats on it.
And it's such a shiny object.
You argue with everybody, not just Democrats.
I'm sorry?
Oh, yeah, no, yeah, pretty much everybody.
But about this, I argue with Democrats.
Right-wingers are happy to hear an explanation that blames the state before the corporatists, so they don't really argue too much.
But the Democrats, and it's very understandable to me.
I feel the same way to a great degree.
But they get stuck at these evil corporate chieftains on Wall Street, these guys who get away with blue-bloody murder.
And, you know, as you mentioned, all these mortgage-backed securities and double-blind default swaps and all of these things that they did.
And people constantly bring up Glass-Steagall and the fact that some of these banks, at least, were gambling with regular depositors' money when they're not supposed to be able to do that.
They're supposed to be separate.
But that rule had been changed.
And I've got to say that in 1999, during the dot-com bubble, living in Austin, Texas, man, I saw a lot of just mania and a lot of investment bankers who were basically willing to turn their brain off and give their money to anybody.
In fact, my best example is just a cab driver.
I wasn't part of it or anything.
But I remember in 1999 at South by Southwest, every single guy in my cab has just got $100 bills coming out of his pockets, willing to pay me that much to go right down the street.
And all of them saying that, guess what?
I'm building the new website that's going to be the place on the Internet where everybody goes to get music from now on.
And that was what they all thought.
And they all were being bankrolled to the tunes of God knows how much capital was being poured in there.
And so maybe you're going to get into some fancy explanation about government or whatever, but it just looks to me like a bunch of people who are really greedy and stupid and full of confirmation bias.
And isn't that what they call it, a mania?
And why has that got to always be the government's fault with you libertarians?
Why not blame all the stupid evil businessmen for being stupid evil businessmen or at least ignorant ones?
Okay, so I'm glad you said that because you're right.
I understand how sometimes right-wing libertarian types come off as making it sound like, oh yeah, it's just these politicians that were forcing us to do all this stuff and it's these poor businessmen who are all victims.
And that's certainly not what I'm saying.
So yes, there were in each of these booms you can go and find business people, investors, what have you, who were at the very least acting foolishly but also probably in many cases unscrupulously or even illegally.
But what my point is is that it's not like people were greedy in 1998, 1999, and then they became altruistic for a few years.
And then all of a sudden they were greedy again, and then they were altruistic.
The greed is what it is.
And so the question is just why are these waves, why does it seem like every once in a while the greed and stupidity all kick in a lot more than in other periods?
And so to explain that, it's something that is – the market economy, the famous metaphor of the invisible hand, is supposed to take people's greed and harness it for the social welfare, for social benefit, that you say to someone, how do you get rich?
Well, as long as there's property rights and the rule of law and so on, the way you get rich in a market economy is you make a bunch of people like your product or your service.
That's how you get rich.
And so if you keep making crazy investment decisions that blow up in your face, you don't have $100 bills anymore, and investors should stop bankrolling you.
So that's – so the question is just what keeps sabotaging that system that in many respects seems to work so well in other arenas or other periods?
And there I would say what's going on is the two-pronged, the double whammy of the Fed pumping in cheap money on the front end.
That's partly why all these dot-coms and stuff were getting funded, even though they had no sales to speak of in many cases.
The normal metrics of evaluating a business were thrown out when it came to this stuff, that mania of the dot-com bubble.
And so the Fed can't explain that, but then on the back end, again, the market discipline isn't there.
So even going back in the 1800s or whatever, you still had manias and panics, but actually the economy kind of recovered pretty quickly every time one of those happened.
It's more a 20th and 21st century phenomenon where you just had these lingering awful economies for up to a decade after.
And I would say that's because now on the back end, the federal government comes in and interferes with the recovery process.
Well, also on the back end, they all know that none of them are going to prison.
They all have total immunity and impunity from the SEC and the DOJ and whoever it is, right?
I mean, as an economist, I'm a great anti-war guy, as Lew would say about somebody else in a different circumstance.
But even I know just from kind of just headlines and barely keeping up that these guys are caught red-handed betting against, you know, betting some customers' money against their other customers' money and all these kinds of things that are blatantly illegal.
In the case of some of them, they're caught red-handed, you know, laundering money from drug cartels in Mexico and God knows what.
And they all know that they have a get-out-of-jail-free card.
And I know you're saying that, well, shoveling money in the front end makes all of this kind of inevitable.
But, boy, when there's no protection at all, when they all know that they have a license to steal this way and that they'll at worst get a massive golden parachute to retire with, it's almost like the way that they let cops know that they have this qualified immunity and that if you kill somebody, don't worry, you're not going to get in trouble for it.
And then what do you know?
They kill more people.
Same thing with Goldman Sachs.
And that's not really just hyperbole either because they do kill people, right?
I mean, we can't really—I think a lot of times we talk about these things in terms that take the humanity out of it.
But what we're really talking about is—I mean, you may have some kind of handle on the numbers, but I know that it's untold bankruptcies and divorces and suicides and foster care and entire counties that go bankrupt and all kinds of social distortions and things that are unseen to even the best economists that are almost all negatives in the economy that come from all this stuff.
Sure.
So let me put it to you this way.
Like you mentioned earlier, the deregulation, the things that happened in the late 90s, I think if you break it down, I think a lot of the major things that happened that fueled the housing bubble and then collapsed, I think would have happened even without the changes in those regulations.
But for sure, I'll say this, which I think we can agree on, is that you could have either a system where the government really regulates what the big players do, having all kinds of rules about you can't do money this way, you've got to keep such and such in capital reserves, and if depositors give you money, you've got to put it over here in segregated accounts.
You can't gamble with it.
And then if something goes wrong, we're here to guarantee all your depositors money.
That's FDIC, so everybody knows their money's safe in the bank.
And if something is to happen, the Fed's there as a lender of last resort, so you guys are all fine.
That is a bad system, I think, but it kind of makes sense.
Or you could have a system that I would favor where you could do whatever you want.
People in Washington, politicians are not particularly known for being smart with money or ethics, and so the idea that they're going to regulate Wall Street and keep it honest, to me that's crazy.
So yeah, go ahead and let big business do whatever they want, but nobody gets bailed out.
There's no Fed there to bail them out, and so if you screw up and you get caught in a scandal or whatever and you go out of business, you're done.
And I don't care how systemically important you are.
You go under.
We just enforce your contracts and what have you.
To me, that's the best system.
What's crazy, though, is a system we do have where they have very light regulations, and like you say, they're not really enforced a lot of times when it comes to the big guys because they're a boys club, and they still have all those bailouts and backup plans in place to keep them whole so that their customers...
When someone right now opens a checking account at a bank, they don't go online and say, well, what's this bank do with its money?
Let me check out its portfolio.
Because no, the FDIC, they got the plaque right there on the bank teller's counter saying your account is insured now, what is it, $250,000, your checking account.
So no average American cares at all when they give their money to a bank about what are you going to do with this money because they think, oh, it's safe.
So just things like that where in other contexts, investors putting money into buying stock or whatever, they at least would be wondering, what does this company do?
How does it make its money?
Whereas when people put their money into a bank, they literally don't even do the most cursory check because the government assures them it's safe.
And if you went and looked up the numbers, FDIC, the thing that's allegedly guaranteeing everybody's bank deposits, the last I checked, it has like 0.25% in reserve to cover all the nation's deposits.
So that's really just a psychological thing.
If there was massive bank runs, the FDIC by itself would be nothing to stop that.
Right.
That's funny that it's all based on the confidence that everybody knows they'll just print the money if it comes down to it.
You know, that's where the confidence really comes from.
Or they'll tax us all right out of our homes.
And you hit something there.
It's funny how a lot of people who think the gold standard is stupid and think, oh, we just need to have wise technocrats running the Federal Reserve issuing fiat money, which means money that's not backed up by anything.
You can ask them, when did all these social problems, these problems in the economy happen?
And it just seems so funny how many of them point to like, yeah, for some reason in the early 70s, things started going awry.
Like, yeah, workers' wages all of a sudden were stagnant compared to the other things.
And, you know, they never make the connection.
Like, what major structural change happened then?
And, well, that's when, you know, Nixon went off the gold standard.
And imagine that once.
What prompted me to say that, Scott, was you saying there how ultimately the reason you're right, nobody freaks out if they hear figures like the ones I just cited about how the FDIC would be powerless to, you know, bail people out if there was massive bank runs.
It's because they know, well, the FDIC ultimately got this printing press standing behind them, so we're not going to run out of dollars.
That wasn't the case back when the U.S. was on a gold standard and knew if we print too much, then people are going to turn over the dollars that give us the gold.
Right.
And now what you're saying, too, I think is really important because people like to get this wrong.
And it's understandable, right?
If you're not a libertarian, then you want to probably be suspicious of what libertarians say.
So here Bob Murphy wants to set a bunch of bankers and Wall Street investment firms free to destroy themselves and, you know, means it.
And I think that's important that people understand that.
It's not that you're, as you were saying, what we have now is the worst of both worlds where they get to do whatever they want, but they're also backed with the government license to print money in the first place and the ultimate guarantee of a bailout for when they make all their bad bets, which is the worst of both worlds.
And, you know, I think your favorite congressman of mine, Dr. Paul, back in 1997 or 98, whenever it was, he voted against the repeal of Glass-Steagall.
Ron Paul, Mr. Austrian School.
And people can find his speech online.
And he says, no, look, this whole thing is horrible.
There should never be a Glass-Steagall.
But it's not the first regulation we should repeal, guys.
You know, the first thing we've got to do is just what you're saying, stop rigging the game for these banks to help them get themselves in so much trouble that they need all these bailouts and all of these things.
And then once they really are forced to conform to the rigors of the free market, then we can do things like repeal Glass-Steagall, which that's the one that supposedly kept the banks, maybe did keep the banks from gambling with just regular investors' money, that that was supposed to be kept in a separate pool somewhere kind of thing, right?
Right, exactly.
And again, it's, you know, people get it and I don't have a skin in the game.
I know some people say it's a bit, you know, the Glass-Steagall is still there and really it's like certain elements of it.
And, you know, they quibble about, you know, is that hyperbole to say?
But I totally get what you're saying.
And I didn't know that.
I believe you, of course, that sounds, you know, consistent with his approach that Ron Paul had voted that way.
That's interesting.
Yeah.
And just like if you ask him about Korea or outer Mongolia or Uganda or whatever, he knows what he's talking about on all of this stuff.
He really is, you know, educated on all of it.
For your listeners perhaps who are like, oh, geez, you know, I don't trust these bankers or whatever, again, I want to underscore, it's precisely because you don't trust them and you know they're going to end up corrupting the government officials that are tasked with overseeing them, which is why you don't want to have these, you know, institutions able to bail them out.
So, for example, you know, what is the FDA supposed to do?
Oh, it's supposed to keep the pharmaceutical industry safe and from selling, you know, quack products or whatever.
But I think a lot of your listeners know that actually a bunch of these big drug companies are selling products that are unsafe by, you know, any reasonable man criterion.
And yet, you know, the FDA approves them.
And once the FDA approves something, it's really hard for it to reverse its opinion because it's embarrassing and so on.
And so, you know, there's a lot of people who are by no means, you know, free market gung-ho right wingers, but they're in fact, you know, more about holistic medicine and stuff like that.
And they think that, you know, the FDA is like a club used to beat down alternative medicine and that, you know, you should not at all naively look at the FDA as keeping products safe.
And so by the same token, you know, the Federal Reserve is literally owned by banks.
You know, and some people make more of that than they should, I think.
But it's crazy for people to not be suspicious of the Fed and to think that, oh, we need this institution to keep the commercial investment bankers in check when in fact, no, the Fed, it's there to cartelize the banks.
It's there to bail them out when they screw up.
Yeah.
You know, that should be the preamble to the Constitution, right, is we're doing this to create a system of regulatory capture so that we can violate your rights but legalize it all the time through executive action.
Seems like to me.
Isn't that what Hamilton's motive was in putting this thing together in the first place, basically socializing all of his costs and privatizing all his profits?
Yeah, I think so.
And, of course, you know, how do you get inside somebody else's head?
I'm sure, you know, a defender would say, no, what he was, you know, was national greatness and he knew the importance of promoting industry.
So they would certainly describe it differently from how you did.
But, yes, it's undeniable that Alexander Hamilton was, you know, in many respects for government promoting certain businesses and taking a role and not just setting up the rules of the game and sitting back and saying, hey, let's just let whatever happened happen.
Yeah.
So that's the thing.
I really like the whole thing about the regulatory capture, but especially in the case of the Fed, that's the story where it's more obvious than any other thing.
I mean, I guess they say the meatpackers created the FDA.
The big meatpackers are the expense of the little ones.
They probably meaning you.
I forget now.
But the Fed is the one where all of the most powerful banks came together and agreed to go into partnership with the national government forever.
That's kind of a big one.
And it's pretty hard to ignore.
As Tom Woods says, hey, it's not like some very public spirited professors just kind of had this great idea and had the Democrats pass it for them or something.
That's not where this thing came from at all.
Right.
I mean, it was literally the whole Jekyll Island taking trains and not letting the reporters see it because they knew how bad it would be.
The Federal Reserve Act passed, you know, on Christmas Eve.
I think it was in 1913 because they didn't want anyone to notice it.
So, yeah, it was just like textbook in terms of something that was not in the public interest.
Just to give a quick thing, too, about just how perverse it is, a lot of people might have heard the standard line that, oh, the reason they did all those bailouts and everything, buying all those mortgage-backed securities, well, because they wanted to make sure credit kept flowing to Main Street and they want to make sure the average homeowner could still get a decent mortgage.
Do you know that in October of 2008 there was a new Fed policy?
That's when they started paying commercial banks to not make loans to their customers.
So that's not how they described it.
What they called it was paying interest on reserves.
But what that means is the Fed at that point started the policy, which they are doing to this day, of if a commercial bank kept its reserves parked at the Fed instead of lending it out to a loan applicant, the Fed started paying them interest.
That was a new policy that they started right after Lehman went down.
And so at this point, I don't know the number off the top of my head, but it's several, it's many billions of dollars a year now in payments that the Fed is giving to the bankers, which did not exist before the crisis.
So that's a neat little trick.
That's a good way of turning that frown upside down.
Oh, there's a financial crisis.
Oh, well, let's do this, this, this.
And now all of a sudden we're getting tens of billions of dollars a year from the Fed.
That's kind of neat.
Yeah, well, and it also kind of sounds like there's a little Bob Murphy devil on their shoulders saying, hey, man, if you guys give away too much free money, you're going to have real price inflation get out of control.
So they say, oh, we know what we'll do.
We'll inflate the money supply, but we'll just make sure that only the richest cronies get it and we'll pay them to keep it and to not loan it out to regular schmucks like you, which you're right, would cause bad inflation.
Good point.
And so in a way, it's helped to ameliorate the fact of all this QE12345, I don't know what number they're on now, but they keep expanding the money supply.
But I guess what you're saying is if they weren't paying these banks this interest to not loan this money out, they'd be loaning out a hell of a lot more.
And then that would mean all the multipliers of the fraction reserve ratio and even worse bubbles and maybe even widespread price inflation.
And they're preventing that with this scam.
Am I right?
You're certainly right that the ostensible reason even for it was they said we want to maintain control because I don't want to get too much in the weeds.
The textbook mechanism by which the Fed, quote, controls interest rates, you know, if you took an econ class in college and they told you how to open market operations work, when the Fed wants to push down interest rates, it buys assets and that creates money, creates reserves, pumps in the system.
And now the banks have more reserves to play with, and so they're lending them back and forth.
That pushes down the interest rate they charge on that.
To go the other way, if they want to raise rates, they sell off, the Fed sells off assets, and that extinguishes this money from the system.
And so what they wanted to do was to decouple those two things.
They wanted to be able to manipulate interest rates but have as an independent decision how many mortgage-backed securities or how many treasuries do we want to buy and have the Fed hold because those were now two separate things going on.
They wanted to resurrect the mortgage-backed securities market, you know, all those bundled derivative products and try to bail out that sector of the economy, but they didn't want that to directly affect what the interest rate was.
They wanted that to be a separate decision, so that's why now they're paying banks to keep the floor.
If they want the interest rate to be 1.5%, they will just tell banks, we will pay you 1.5% to keep your money parked here at the Fed.
So now no commercial bank's going to lend to Joe the Plumber to expand his operations to buy a new, you know, open up a new outlet or something.
It's less than that if the Fed itself is paying them a guaranteed 1.5%.
So that's the way they're controlling it.
But you're right.
One of the implications of that is the fact this money now is more bottled up than it otherwise would be.
And so that's partly why, yeah, normally you would think with the Feds pumping all this money into the system, how come bread's not a lot more expensive?
And so one reason is that, yeah, the Fed is paying banks to not lend that money out.
I do think also, though, it's just everybody, you know, the bankers, their balance sheets were bad and they were going to be reluctant to lend anyway.
So I'm not saying that's the whole explanation, but, yeah, certainly that's one of the reasons.
And bread is somewhat more expensive, but just maybe not as bad as some thought it would be, I guess.
Yeah, and I should just disclose, I thought we were going to see worse consumer price inflation by now than we have.
So I was wrong on that.
Given how much the Fed pumped in, I thought you were going to see it.
So it's a question of was I just analyzing it wrong or is that still coming?
I guess the future will tell us.
Well, and I remember asking you back then that, like, well, you know, in the last bubble they created all this money and it didn't lead to widespread price inflation across the board, which it led to some, but mostly it was in housing and in fuel and in the stock market bubble.
So wouldn't that be the same thing this time?
And apparently that's right, right?
I just read that the stock market's at an all-time high.
And I saw, God help me, man, I don't know if this is true or not, but I saw a thing on Twitter where they had some kind of line graph of housing prices in the worst bubble zones from last time, Southern California, Southern Florida, and Las Vegas, and whatever, a couple other places.
Boy, it looked like the bubble's even bigger and worse than before right now.
Is that basically the same replay again then?
Yeah, a couple points.
So what the Fed has done in terms of what's called a monetary base, or if you just look at the Fed's balance sheet, this time is just light years ahead of what they did during the housing boom years.
So to give you an idea, the Fed's assets were like $800 billion in the fall of 2008 before the crisis, and now they're like at $4.5 trillion.
So the amount they've pumped in just dwarfs, like you couldn't even see it as a blip on a chart, what happened earlier.
So there's that element that what they did this time around is just a quantum leap higher than any previous Fed intervention has been in U.S. history.
And you're also right, if you look at, I don't know about the housing sector in particular, I haven't looked at those numbers recently, but just looking at the U.S. stock market, for example, if you plot the S&P 500 index against a measure of the Fed's balance sheet, those things move pretty much hand in glove since 2009.
So I think it's entirely correct to say that the reason the stock market kept booming during the Obama years and to this day is because of what the Fed was doing, not because the policies were so great that the Obama administration was putting into place.
All right, so where in the cycle are we now, if it's 2006 or 2007 or what?
Oh, so I, it's funny, if you go and look at, I do this sometimes with presentations I give to people in the financial sector, just even looking at when a new Fed chair comes in and then how soon after that is there a major economic event.
You know, Paul Volcker comes in and then there was the early 80s recessions.
Alan Greenspan comes in and then just a few months later there was the Black Friday in the stock market in 87, the worst crash in history.
Ben Bernanke comes in in 2006 and then we know that there was obviously the crisis in 2008.
So, you know, Yellen, she came in I think February of 2014.
So even just looking at history and not even doing any analysis of policies, you know, one would think that another crisis is due if you want to use that kind of layman analysis.
But I think- Meaning that these guys all see that, oh man, there's about to be a crash, I better get the hell out of here like Greenspan did to Bernanke, right?
Right, exactly.
And I think it's exactly right, the political economy.
So in terms of the economic analysis, you know, using Austrian theory, I think what happens is the Fed has the ability to blow up a bubble and it has some discretion over when it pops.
You know, they can keep it going a little bit longer if they want to.
But yeah, if you're in office and you see you blew up this big bubble, you want to get out and go write your memoirs and be with your family.
And, oh yeah, okay, I'm going to step down now because I'm an upstanding citizen.
Right.
And then the next person gets in there and is like, oh my gosh, look what I inherited.
And, you know, you would let the thing happen right away to blame it on the last person.
So I think Janet Yellen, you know, I don't know how explicit this is, if there's guys in the back room with cigars telling her or how it works or she just kind of knows.
But I think she was brought in to oversee a tightening.
The so-called taper, you might remember that term, is when they started slowing the purchases for what was called QE3.
It had been $85 billion a month in purchases and they started bringing them down gradually.
They started that, like I think literally the last month, Bernanke was in power and then Yellen oversaw it.
The Fed has not bought new assets on net since the fall of 2014.
So even though sometimes libertarian types kind of rail against, oh yeah, Bernanke and Yellen's mad money printing, Janet Yellen actually in that respect has not been, quote, printing money at all for over two years now.
So, you know, just keep that in mind.
And that's why the dollar has actually strengthened against other currencies.
If you look at charts of the dollar against the euro or the yen or whatever, since Yellen's come in, the dollar has strengthened.
And that's because I think they saw there was a definite change in policy from Bernanke to her and she's looking to tighten.
Hey, is there any way that a guy with no money can place a bunch of short bets on Goldman Sachs?
I don't know about no money.
Yeah, bad premise.
Maybe you could just go to the bar and have a bunch of people promise to buy you drinks or something if it happens.
I don't know.
It seems like somebody's going to get rich betting against these same idiots again.
All they know how to do is the same thing, right?
Yeah, I mean, I know there's ways where you could leverage it.
In other words, in terms of you had just a little bit, you can buy put options and things where you're allowed to, if the stock drops, then you're allowed to sell it at a higher price.
So that's a way you can leverage the money based on what the strike price is and so forth.
If you're really sure there's going to be a bad thing, you've got an idea of the timing.
I probably shouldn't be in it because I don't understand anything you just said.
Yeah, I mean, there's stuff with the timing.
Like I said, for a long time now, I have said I think the market's overpriced.
And people keep saying, oh, you said that.
Is it still overpriced?
So it's the kind of thing where I'm sure a lot of your listeners have seen that movie, The Big Short.
It's the same thing where the funny thing about that movie or one of the funny things was how these guys who would totally analyze the housing sector correctly or whatever, everybody thought they were nuts well into it because the thing just kept getting bigger and bigger and they couldn't believe it.
And there was all sorts of skullduggery involved.
But most people were like, oh, you guys are idiots until, of course, they were proven right.
And everyone was slapping their heads saying, oh, my gosh, what were we thinking?
Well, and that's so funny.
My thing, I was never an investor, but I was totally right about the dot-com bubble because of G. Edward Griffin and Ron Paul.
And I was totally right about that housing bubble because of Ron Paul.
And so I never had any skin in the game or whatever, but I was telling people, and I had the same problem too.
In 1998, I was saying, get out of the market, get out of the market.
It's a giant bubble.
But then it took another year and a half before the NASDAQ popped.
And so what's the point of being right when people are telling me, man, you know how much money I've made since you told me to sell?
And it's like, well, you know, yeah.
But then they ended up losing more.
So no pleasure being right.
And this kind of comes back, circles back to what we were talking about at the beginning of the episode, Scott, of even if you kind of see the big picture, why might you stay in it?
Same kind of thing.
Even if you know, yeah, this whole thing's crazy and we're going off a cliff, but if you think you have time to get out, you might as well ride it a little bit more.
And if thousands of people are doing that, then it's like a reinforcing thing, a self-fulfilling prophecy.
Right.
Yeah, you know, when I was a kid, my dad taught me, at least it's the myth, I don't know if this is what really happened, but Joe Kennedy didn't lose everything in the crash of 29.
And what he said was that he was getting his shoes shined, and his shoes shined boy said, yeah, I'm getting in the stock market and I'm making all this money.
And he said, I'm getting the hell out of the stock market right now because I can see where this is going.
And that was his thing.
I learned that as a young kid.
I learned about bubbles and this and that.
I guess that's part of my interest in all this stuff, going back and inflation and whatever.
But the thing I never learned was, I should be the shoeshine boy.
I don't need to be Joe Kennedy, I need to be the shoeshine boy, but the one that read Rothbard and listens to Bob Murphy and knows a little bit about how to not get carried too far away and get out at the right time.
Right, I could have got some credit cards and bought a bunch of stocks based on those credit cards and figured out a way to keep leveraging it and keep pushing it forward and bet short on the worst companies and do all these things and dance on Lehman Brothers' grave, but I never did it.
I should have been the shoeshine boy.
Yeah, you could be like the shoeshine boy in the naked gun movies or the police squad thing where the guy's giving them ones and fives just to give them more information.
He goes, tell me more about the business cycle.
Yeah, there you go, exactly.
I used to do that in the cab too.
I'd be like, all right, you want to hear how America's behind all the terrorism or about how the bubble's about to pop?
It was like taxi cab confessions but in reverse.
It's just your driver haranguing you.
I just got to say, you must have been the most amazing cab driver ever.
That must have been great.
We had some good times.
All right, hey, so let me ask you this now.
I know that you didn't write the NAFTA and the GATT and the WTO thing, and I know that all libertarians and especially Austrians say, hold on a minute there, buddy, because this thing here is managed trade and it's cronyism and it's patent protections and it's all kinds of things that aren't necessarily free market.
When I say free trade, I mean one page long, no more tariffs, let's have free trade type of treaty.
That's the standard disclaimer for everybody.
But on the other hand, it seems like the bottom line is still the same, that what happened with all these agreements that American workers were put in direct competition with third world labor that they couldn't possibly compete with, and so all their jobs went away.
And now they're so pissed off at the Clintons and the Bushes that they've elected Donald Trump, who has told them that he's basically run as a right-wing populist to say that this free trade economic policy has got to go and that we're going to protect American jobs by putting tariffs on foreign products or at least threatening to, and that'll be good enough, or subsidizing or threatening American companies with regulations and other things in order to keep them here, because by God, you know, America's one big corporation and the population of it are basically the employees and the government owes it to make sure to keep everybody working.
And instead, these Clintons and the Bushes, they sold out all the jobs of all the regular schmucks in the middle and the lower middle of the economy.
You can mention Nixon and the gold standard as you did already, you can talk about that if you want, but everybody knows, Bob, and I think they may be right, that what the politicians did here in going from a protectionist system to a much more free market system where these global organizations have regulated toward freer markets, mostly, that it really pulled the rug out from under a lot of people.
Now, you want to add the boom and bust on top of that and all the other problems of government regulations on top of that, but is that not right?
Is the problem that there was so much protectionism in the first place that propped up an economy that could never really last?
Or is the problem that Bill Clinton signed NAFTA in the first place and basically the U.S. government, on behalf of the financial interests and the owners of the biggest conglomerates, went to war against the regular schmucks of the land?
Okay.
Good, tough question.
I like that.
Hey, and Donald Trump just won on this, so what's the score?
Right.
Yeah.
So let me say, it's funny, I'm getting hit from both angles on social media that people think I'm like a Trump supporter when, in fact, a lot of times I'm just more criticizing what I perceive as hypocrisy among some of his critics on certain things.
So, for example, this Carrier deal, they come out and announce, now who knows whether this is actually how it went down, there could have been threats or whatever behind this, I don't know, but the official narrative being that Carrier was going to outsource, Trump and Pence talk to him and then get him to agree to $7 million in performance-based tax breaks and what have you, and so they stay.
And a bunch of Libertarians were freaking out, like this is now a banana Republican, so I was just making the modest point that, wait a minute, for decades Libertarians have said the problem is not free trade, it's high U.S. taxes and regulations.
There's a company saying we can't compete right now in this environment, and so Trump promises to lower their taxes and regulations and say, okay, now we can stay here, and Libertarians are freaking out.
Isn't that what you said the problem was, and isn't that what the solution would be?
And a lot of them even went further and said, oh, now is this how they're going to be policy?
Why doesn't every company now complain and threaten to leave, and then what's Trump going to do?
But isn't that good from your perspective?
I thought you wanted them to have to cut everybody's taxes.
So I just noted the irony of that, and a lot of people were getting upset with me, thinking I was supporting Trump.
I agree with you.
The proper Libertarian line is we're for all tax cuts for everybody all the time, and anyone that you can come up with on an individual ad hoc basis or nationwide at all times, just for the principle of the matter.
I mean that's my position, certainly.
But part of the rumor at least there was there was more than just a tax cut, right, that there was a little bit of incentive added too, but I don't know.
Well, even there, and again it's hard to speculate, but some people were saying it was because United Technologies was the parent company, and they were worried they were going to lose defense contracts.
Okay, a lot of these Libertarians are anti-war, and so now you're upset.
Oh, he's threatening to cancel military contracts.
You want him to do that?
So it was just weird to me that Trump was, again, on this one issue doing two things.
But beyond that, I mean later in the week as Donald Trump is his want, even when he does something that looks okay, then he does something completely ridiculous two days later with the whole 35 percent tariff threat on any company that outsources, which is a crazy policy.
So I will say to Scott, though, that I have been squeamish, or not squeamish, that's not the word I want.
I've been uncomfortable seeing some purist Libertarian right-wingers talking about these issues, and they come off as completely, like the fact that workers in Indiana got to save their jobs, they act like that annoys them, like these little pesky flies, and no, the important thing is to lower prices for it.
So I just see how rhetorically that comes off bad, and it really does look like some right-wing Libertarians meet the caricature of they don't give a crap about workers, and they sacrifice things to their god of efficiency.
So that has really, I've seen that now, whereas maybe 10 years ago I wouldn't have seen that as clearly as I see it now.
So I will say that, I don't know if that's a concession that you want.
I guess it would be, there is something fundamental.
Well, that particularly wasn't my point.
I mean, I was thinking more like, well, you know, just opening up, I mean, basically the trade deals and dropping all the tariffs have opened up labor in our country to competition from labor in poorer countries, where they're going to always be willing to work less, down to the last Indian or Chinese, and there are billions of them.
So it's a race to a real deep bottom, according to whatever conventional wisdom I'm trying to paraphrase here, basically.
So there's different ways of getting it.
So yeah, that pure element of it I do think is a fallacy.
So you're right, NAFTA's not truly a free trade document, whatever, but if you're saying, come on, let's put aside all those quibbles, even if they were just a genuine reduction in tariffs, and there weren't all this other stuff about managed trade and environmental regulations, blah, blah, blah, isn't it still the case that moving from a high tariff situation down to one with lower tariffs, wouldn't that throw a lot of workers, especially in manufacturing, out of work?
And yeah, I think the answer is yes.
And so there's no way to not come off as being cold and calculated about it, but what can I do?
I think it's the right analysis to say the same types of arguments were made back when the U.S. was primarily agricultural, and then increases in labor productivity just made it so that fewer and fewer people were necessary to grow all the food, and so people were leaving the farms and they started going into the factories.
So back as this manufacturing base grew and the U.S. switched from being agricultural to manufacturing, there were people freaking out and saying this is horrible, this is ruining our way of life, and then you look at Thomas Jefferson and the pastoral thing, and that's the kind of life America was founded on, and now we're moving towards the cold efficiency of the factory, where the worker is just a cog in the machine, and now we're lamenting that switch.
So I think if you had a genuine free market or a very small state with very light taxes and only sensible regulations and so on, in the context of free trade, the U.S. would be gradually shifting from manufacturing to computer-based services.
A hundred years later, that would look obvious, just like now everyone knows, oh yeah, we can't have everybody just on the farm.
It made sense for them to go to the factories.
So that's what I think would happen.
Doesn't it seem like the corporate chieftain types would say, geez, maybe we outsourced too many jobs.
Now Americans can't afford to buy our crap.
We need, you know, it's like at least the mythology of Henry Ford paying his people enough that they could afford a car themselves, you know, that kind of thing.
Where if, yeah, we get everybody can afford things, or at least prices are relatively low because they're being made cheaper and cheaper in China, and that's one thing, but more and more people are, you know, working at McDonald's and can't afford all the stuff that all the people who offshored their jobs are trying to sell them.
So it seems like somewhere in there they've got to find the balance, and it seems like maybe they pushed too far past that balance, and they do need to start bringing some of these jobs back, never mind what the government says, but just because the American people, hey, there are a lot of people who are at best kind of half-educated, and their best shot at making still a decent living, being able to take care of their families, probably working at a factory or something like that, and they can't seem to find those kind of jobs.
And I guess there's the robots too, if you want to address the robots.
No, that's part of it.
And just the overall mechanization of factories and that kind of thing.
Yeah, sure.
So, I mean, part of it is you could say, okay, why is it that Americans earn a higher wage than people in Bangladesh?
And it's because American workers work with more tools and equipment, and we have better institutions here, and so that's why.
So the average American worker at a factory makes more stuff than the average worker in Bangladesh makes at a factory, and that's why they can afford to make more.
So it's not, you know, ultimately you're not going to get around that physical fact.
The reason you can have a high standard of living is not because of regulations.
Well, but then why do they keep offshoring then?
If the Americans are that much more efficient than them, that it makes sense to keep the factories here?
They can keep moving them to Bangladesh anyway.
Right, but I'm saying, well, think of it this way.
Why don't they just cut the wages of the Americans working in the factories down to what they get paid in Bangladesh?
They can't do that, and that's partly because the Americans here have better things to do than to make products and only get paid whatever, $0.50 an hour.
And so that's a signal that American labor is more valuable in other niches than what the Bangladesh workers are.
The problem is we're talking about 300 million people, not dots in a computer, so sometimes it's really hard for people to make the adjustment from doing this thing to doing that.
I mean, after all, you and I both are pretty lucky doing what we do for a living.
It's not the same as really trying to figure out.
And I've spent a lot of time working for crappy wages, believe me.
But this isn't that.
So I don't want to sound like, oh, easy for me to say, because it can be really rough out there.
Right, and that's what I mean when I was saying there's no easy way to say these things.
It's easy for me to say when I'm not personally going through it.
But, again, I mean, look, let's say somebody invented a drug tomorrow that cures cancer.
Well, gee, that would throw a lot of people out of work who had spent their career studying it, whatever, and trained.
Oh, gee, I spent all this money on medical school.
Would you hold that back and say, no, we can't do this because it's going to devastate all these people and all their livelihoods?
I think we'd say, well, no, of course we wouldn't.
We want to cure all these people.
Now these other people, it's from the point of view of the patients.
And so by the same token, if some company can all of a sudden send us a bunch of stuff more cheaply than it can be made domestically, and we say, oh, no, that would throw the American workers out of business who make that stuff, okay, but that's completely ignoring the benefit to the consumers.
So I think part of the issue is, yes, there's all these trends of globalization, and you can see the workers that are hurt by it, but you just take for granted the fact that you can go into Walmart and you can feed a family pretty cheaply right now with stuff that's not half bad.
And that is partly because of all the forces of globalization, that if you just sealed off the U.S. border and we had to make everything domestically, then stuff would cost a lot more.
So, yeah, people would keep their jobs, they'd pay more, but then they'd go to the store and stuff would be more expensive.
Now, I don't know.
I don't want to ask you to tell the future or whatever.
I don't think that Trump is really going to change the international order of things that much in terms of trade or war or anything else, really.
I think a lot of people are panicking, but I think this is a guy basically who's only doctrine, maybe he has a couple of doctrines, but mostly he just wanted to be the president.
That's his thing.
It's not like he's Mussolini with a big plan or some kind of thing.
Yeah, I mean my best theory is he ran as a publicity stunt, like to help his – he just thought that's going to help my business if I'm more popular or whatever.
He likes hanging out with cool celebrities and being the fun guy or whatever, and he just thought, yeah, I'll run for president.
Then he just started winning.
That's what I think of him.
I think he was winging it too and couldn't believe it.
He started to really like the idea, yeah.
Yeah, of course.
So, yeah, I mean everybody's saying – well, not everybody, but many people are afraid that this is the end of the current order and whatever, and I'm not really seeing that.
But on the other hand, a president can be very powerful, and he's the kind of guy who seems to make sure.
I think that's what this Boeing thing was about.
A lot of the other little moves he's made is to basically prove that, yeah, you might be Boeing, but I'm the president, President Trump, kind of thing, and he's doing that to the CIA and to the military and to everybody else kind of too and really pulling rank and making sure everybody knows who's boss.
But that doesn't necessarily mean that's because he's going to challenge everything that they want to do as the status quo policy in terms of the way that they regulate Wall Street or the Iraqis or whatever it is that they're doing.
Yeah, I mean, again, I don't know the guy or anything, but it seems to me like he really is someone who likes to cut deals.
And so, yeah, I'm sure he's got his agenda, and the CIA will have theirs, and Wall Street will have theirs, and he'll meet with those various groups and say, okay, well, we've got these different objectives, and what are we going to do here?
How are we going to compromise?
And so whatever shoots out of that process, I'm sure you and I aren't going to like.
But on the other hand, I mean, I will say, Scott, I don't know what your view is or if you don't want, but I would rather him be cutting deals or whatever and doing things that are win-win based on their narrow agendas, which might be bad agendas, than Hillary Clinton's well-thought-out, coherent plan to increase the power of the state.
In other words, with Trump, put it this way, I think since he has no coherent philosophy, half the stuff coming out of his mouth is actually not bad, whereas with Hillary, I think it would have been systematically bad because she is smart and has a well-thought-out political philosophy that I find abhorrent.
Yeah.
Although, on the other, I agree with all of that, except the one thing I would add is he's such a lightweight, that makes him overly dependent on his cabinet, and he's picking a lot of really bad guys.
He's not picking neocons, because neocons made themselves his enemy, too uniformly, really, so they're pretty much out.
But to just put the Marine Corps in charge of everything instead, I guess we'll see how it goes.
Yeah, the last thing I'll say on that is I was treating him just as a literal joke until National Review came out with that issue against him.
Oh, right.
That's when I first sat up and said, wait a minute, why are they doing this?
Because it's not certainly like they sit up at night worrying about the feelings of Mexicans or the integrity of the Constitution.
Right.
Or at least some of the people contributing to that issue.
Some of them, maybe that was their motivation.
And I thought maybe because they actually think if this guy somehow gets in there, he might not play ball with the military-industrial complex.
And that's when I started thinking maybe this actually isn't just a joke.
Maybe this is actually something that might be better than what the alternative would be.
Right, which is just another example of how hysterical the neocons are, right?
Because here's a guy who never really indicated that he was going to break from their policy all that much.
Not any more than Obama, right?
He's basically Obama on Russia and Iran and other things at this point.
Maybe a little more hawkish than Obama on Iran.
But they acted like he was Ron Paul.
But why?
In fact, Jennifer Rubin at the Washington Post even wrote, oh my God, he's going to make Ron Paul the Secretary of State.
And it just goes to show the mindset of the neocons that they really live in these paranoid fantasies where anybody out here could tell that, yeah, right, Ron Paul, there's about a 0% chance he's going to give any power to Ron at all.
Give me a break.
I don't know how that would come up.
Right, or people worry he's going to privatize education or reimpose, get rid of the Fed or whatever.
You're talking about Trump.
And it's funny when they say, yeah, I wish he would.
But I don't think that's going to happen at all.
But now, so let me ask you this, though.
What about, and, you know, I'm a real amateur at this.
I appreciate you bearing with me here, Bob.
I know sort of kind of the story of the early 80s where Volcker really came in at the end of the Carter years and he started jacking up those interest rates in order to strangle the economy, to deliberately force the recession they'd been inflating since Nixon to try to prevent from ever really taking hold.
And he forced the country into one deliberately.
And Ronald Reagan wanted to kill him because he's destroying his presidency.
He had a very low approval rating, 30-something percent or something.
The economy's just dying.
But priority one was stopping the price inflation, the widespread across-the-board price inflation.
And then he, I guess, reversed the policy and quit, handed it off to the next guy.
And this is sort of the reverse of the usual scheme you were talking about earlier.
He went ahead and let, I guess it was Greenspan, or maybe there's a placeholder in there.
I forgot before Greenspan.
But anyway, they started inflating again and the bubble was on the way up and everything was fine by the time, or just in time for Reagan's landslide of 1984 and all that.
But anyway, part of the story there was that Reagan was cutting taxes and was cutting regulations and was trying to spur the economy right at the time that Volcker was trying to prevent any more loans from going out.
And that was, you know, they were really crossways.
And then I guess once Volcker started letting the banks inflate again and lower the interest rates again, then the effect of the tax cuts and the deregulation kicked in and that was where the economy really got the boost that everybody really remembers Reagan for.
And that was kind of sort of the way that it came from.
But so now I'm looking at Trump coming in and I'm wondering, and I guess I don't know how long yelling is supposed to last, but Trump is saying, as you were indicating before, yelling is starting to tighten.
The Fed has kind of been tightening.
But here he wants to come in and cut taxes and cut at least some regulations.
I don't know if he really plans on repealing Dodd-Frank, this, that, the other thing.
But I just wonder if you think that his countermeasures are going to prevent the recession that she's trying to go ahead and cause but give us a soft landing on.
Am I setting this up right at all?
Yeah, I see where you're going with it.
So, yeah, my view is I have been warning, and I told you earlier, alluded to, that I give presentations to people in the financial sector.
And so for years now, basically since all these rounds of QE, I have been warning people, showing them charts, look at the stock markets moving lockstep with the Fed's balance sheet.
This is clearly unsustainable.
When the Fed starts tightening, we don't know when, but when they do, there's going to be a crash.
So I've been saying it.
So I still believe that, yes, it would be good.
It certainly helps if on the margin, Donald Trump pushes through cuts in marginal income tax rates and gets rid of silly regulations and stuff like that.
But that's not going to change the fact that, going back to that analysis of the boom-bust cycle, if all of these bad investments have been made because interest rates have been screwed up for the last seven years or whatever it is now, Donald Trump coming in and changing policy can't undo that.
Those mistakes have already been made.
That's already baked into the pie.
And I think there does need to be a crash.
So the question is just how long and agonizing will it be, or will the economy crash, get it over with, and then bounce back and have a robust recovery?
And that's certainly the policies of a Trump administration could affect.
But to answer your question, I don't think there's a way of getting around a crash.
I think that that's going to be inevitable.
So in other words, maybe the comparison would be like an 87-kind-of-quick-turnaround sort of a crash versus a 2008 end-of-the-world thermonuclear bomb kind of a crash?
I'm thinking more.
I think your early Reagan analogy was possibly better that Volcker slammed the brakes in terms of money growth, and that made interest rates rise, and that broke the back of price inflation even as they were cutting marginal income tax rates.
And so, yeah, there was a really sharp recession in the early 80s.
That was the worst since the Great Depression at that point.
And then there was the apparent boom under Reagan where they went the other way.
So, yeah, if I had to pick a period, I would pick that.
And there's even guys like Arthur Laffer and Stephen Moore and stuff who are giving Trump advice about here's how you cut taxes to get pro-growth, supply-side policy, grow the economy, that kind of stuff.
So the analogy with first-term Reagan, I think, is pretty sound.
Right on.
Well, listen, man, it's been great to talk to you again, Bob.
I really appreciate you coming back on the show.
Thanks for having me, Scott.
Always fun.
I always learn a lot of stuff when I talk with you, man.
Appreciate it.
Thanks for having me.
All right, y'all, that is Bob Murphy.
He's at the Ludwig von Mises Institute.
Well, the Mises Institute, they call it now for short.
Mises.org, M-I-S-E-S, Mises.org.
And really, I mean this, and also it's the holidays and stuff like this, so I double-extra seriously mean this.
You will love, and whoever you think might like this gift will love, the Politically Incorrect Guide to Capitalism and the Politically Incorrect Guide to the Great Depression and the New Deal.
I've read both of them, and they're really great.
And then his latest book is Choice, and as he said, that's basically human action, the massive tome by Ludwig von Mises, distilled Bob Murphy style for you.
I think I'm going to get myself that for Christmas right there, myself.
And there you go.
And that, as he said, is published by the Independent Institute, where you can find him also blogging and writing articles and other great stuff at independent.org as well.
And that's The Scott Horton Show.
Thanks, everybody, for listening.
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Appreciate it.