11/12/08 – Mark Thornton – The Scott Horton Show

Welcome back to Antiwar Radio, it's Chaos 92.7 in Austin, Texas.
Our next guest today is Mark Thornton.
He is Senior Resident Fellow at the Ludwig von Mises Institute.
Their website is mises.org.
He is the book review editor of the Quarterly Journal of Austrian Economics.
He is the co-author of Tariffs, Blockades, and Inflation, the Economics of the Civil War, and he is also the editor of the quotable Mises and the Bastiat Collection.
Welcome to the show.
Welcome back to the show, Mark.
Hey, it's great to be with you, Scott.
Good to talk to you again.
And now listen, I heard people praising you all over the place, and I hadn't seen it for myself yet.
You know me, I'm much more of an antiwar guy than an Austrian economist.
So I went back and I did a Google search site at mises.org, Thornton, housing bubble, and I found all these articles you've been writing for years and years about how there's a giant bubble in housing and how it's going to pop, and when it does, there's going to be severe consequences.
How did you know?
Well, you know, you look at markets, and I'm here at the Mises Institute, and that's part of my job is to be looking at the markets, looking at policy, looking at the economy.
But the truth of the matter is, is that I was just looking around Auburn and other towns that I visited and saw the housing bubble in action, basically, you know, where somebody would put a house up for sale, and for, say, $200,000, and by the end of the day, they would have gotten four or five bids, bidding up the price higher than $200,000.
So it's that kind of maniac-type activity in markets, which is a clear signal to an Austrian economist to take a look under the hood at what government's been doing, what the interest rates are, what's happening to the money supply, things like that, and basically follow the Austrian theory and see if it's, you know, if it's the case.
And it certainly was the case.
So we were discussing the housing bubble on Mises.org as early as 2003, and even earlier than that, actually.
So you know, we were on the money, basically, but nobody outside the Mises.org community was really listening or taking us seriously.
They were telling us, slapping us back and saying, home prices never go down, you can never lose money by buying a house, there's no such thing as a housing bubble, there's no such thing as a bubble.
All of these ridiculous retorts to our arguments, and basically trying to make fun of us, you know, saying that this time, things are different, and Greenspan wouldn't let this happen.
And of course, even people like Alan Greenspan was saying there's no such thing as a housing bubble, and a housing bubble couldn't exist because of certain factors of the housing market, you know, you couldn't have a nationwide housing bubble, you know, maybe pockets of froth might exist.
But you know, and so Fed economists came out with studies in 2004, 2005, 2006, saying no housing bubble couldn't happen, wouldn't, even if it did happen, it wouldn't have any major impacts.
And so the Austrian economists at Mises.org, who were consistently putting out regular reports on the housing bubble, and everybody else denying it.
I'm sorry, but it sounds almost like the people who disagreed, were using these sort of specious arguments, the kind that I hear from people who support the war all the time, well, the president must have secret information he can't tell us.
Well, Alan Greenspan knows what he's doing.
But I mean, pardon me, but it sounds to me like what you're saying is simply that you and your colleagues at Mises have 2020 vision, and you take a look at these numbers, and you take a look at, I guess, what the reserve ratios, the interest rates, and you say, well, no, this is too much easy money, and we can see where all the extra easy money is going is into housing, that's where a bubble is, and then we know what happens when there's a bubble.
This doesn't, I mean, hell, I understand it, Mark, and I'm no economist by a long shot.
I'm on like, you know, chapter two of human action, what the hell do I know about it?
And I can see all this in front of my eyes, you know, reading just LewRockwell.com and Mises.org over the years, I've known there was a housing bubble all along.
People have encouraged me to buy a house.
Not that I really could afford one anyway, but that really wasn't stopping them.
And I said, no way, this is fake, it's a big bubble.
And I'd probably buy a house and then end up owning a house that's worth less than I bought it for.
I've known this for years, and I know nothing.
So how could all these people, is it just because they have vested interests in pretending and perpetuating the thing?
It can't be, right?
We're talking about economists who want the truth, just like you.
Well, first of all, Austrians don't have 20-20 vision with respect to the business cycle.
It's a very difficult matter of applying the theory and putting it into practice and to making correct predictions.
That's not easy to do, and not all Austrian economists saw this coming.
As a matter of fact, outside of the Mises, LewRockwell.com group, I don't recall very many articles by other Austrians who noticed the housing bubble.
Alan Reynolds, associated with Cato Institute, for example, he's not an Austrian, but he was a free market economist, and he was calling the housing bubble people crazy and lunatics and unrealistic.
But there is vested interest here.
I mean, Alan Greenspan, right in the very pinnacle of the housing bubble, came out and shot down this argument that there could be a housing bubble.
And Ben Bernanke, who was, when he was vice chairman of the Fed, came out with this speech and paper where he claimed to have brought together all the economists at the Federal Reserve and investigate mortgage lending practices.
And he came back, and this is right at the pinnacle of all these teaser raids and interest-only, all these crazy subprime loans were at their peak.
And Bernanke came out and made the statement that he and his team had investigated mortgage lending practices and real estate appraisal practices throughout the country and found that everything was okay, that everything was well-regulated by government agencies.
And he said that things have never been better with government oversight of the financial markets.
And so, of course, the Fed economists came out with technical reports saying that there was no housing bubble.
And of course, this bleeds through to Main Street, to Wall Street economists, to mainstream economists, all basically denying that there was a housing bubble.
Very few examples outside the Austrian school where you can find somebody who saw the housing bubble coming.
And Paul Krugman didn't call a housing bubble until it was already way too late, so much for the Nobel Prize.
Muriel Rubini at New York University, who's not an Austrian, he's a very eclectic type of economist, he called the housing bubble.
But other than a few examples, everybody with a vested interest was denying that there was a housing bubble.
And basically, if you're a macroeconomist or a prominent monetary theorist in the academic community, the chances are really good that you've worked for the Fed, or you've received Fed grants, or you would like to work for the Fed, 85% of all monetary and macroeconomists have had some connection with the Federal Reserve trough.
And of course, they pay very well, and a very prestigious position.
So I think that there is both ignorance of the Austrian theory of the business cycle, and I think that there's a vested interest amongst economists, the investment community, to deny the existence of problems like this, severe economic crisis.
Wow.
Well, maybe I'm in the wrong business.
Maybe I should be making money for a living.
The only problem is, I knew it was a bubble, but I wouldn't have no idea how to predict when it would pop.
Did you know when it would pop?
Pretty much.
I put out an article on LewRockwell.com, August 1st of 2005, and the article was, Is the Housing Bubble Popping?
And indeed, the week before, the Home Builder Stock Index, which is an index of stocks of companies that build houses across the country, that of course had bubbled up, just like the housing market underneath it.
And that peaked in the last week of July, 2005.
It's been declining ever since.
It peaked out at 300, and I believe now it's less than 100.
So the home builders have lost more than two-thirds of their value, and of course, those are the well-financed corporate home builders.
You know, hundreds and thousands of home builders of a smaller scale size companies that have gone out of business and have been gone for quite some time.
So that was the very peak of the market, and I noticed through technical analysis of the charts that that looked like a good time in terms of turning it around and the bubble starting to unwind itself.
The midpoint in 2005 was that.
And then, of course, you look forward and you say, well, stocks are looking forward about six months out into the economy, and sure enough, home prices peaked about six months later.
And of course, subsequently, you see the subsequent fallout of foreclosures, bankruptcies, the mortgage lenders going under, mortgage brokers going out of business, all the subsequent things that you would expect to happen after a bubble peaks.
Well, I've got to tell you, Mark, this little pirate radio show has got the most highbrow audience in the world.
We've got a chat room right now that's just full of professors and economists and corporate CEOs.
It's really kind of strange.
But one of them has asked me to ask you if an exogenous shock caused the recession or intertemporal misallocation of capital.
He also told me to ask you, what the hell did I just say, and then answer it, please.
Well, an exogenous shock would be something like a war, a major national disaster, something of that nature, or an economic event outside the country that had an impact inside the country.
I don't think that, in any way, explains what we have going on here today.
So I don't believe it's an exogenous shock.
The only possible exogenous shock would be something like the Iraq invasion of Iraq.
And I don't see that as causing what we have here today.
I think that's just an extra burden on the American economy.
Not a specific trigger for any particular crisis, though?
No.
And when you look at it over time, there's no reason to suspect that an exogenous shock would be the explanation for the housing bubble or the subsequent bust, the financial crisis that we have right now.
The second alternative is an intertemporal misallocation of resources, and that's essentially what is behind the Austrian theory of the business cycle, that signals in the economy to get out of whack.
And this results in the allocation of resources in a way that is inconsistent with basic consumer wants and desires and demands.
And this is a general way of explaining the Austrian theory of the business cycle.
And essentially what you have here is the Federal Reserve, in 2001, reduced interest rates from 6.5% down to 1%.
So that's the exogenous shock right there.
Well, yeah, that's a Fed-induced exogenous shock, for sure.
And what that means is that banks could essentially borrow money from the Fed at 1%, which after inflation means that they're actually borrowing at a negative real rate of interest.
So there's a tremendous incentive for banks to try to take advantage of those low interest rates and make a lot of loans and make a lot of fees, things of this nature.
So when the Fed reduced interest rates, the banks got a hold of the money.
It ended up in the mortgage market with the tremendous credit expansion.
Homebuilders could easily finance development projects.
People could get low interest loans, things of that nature.
And so housing, which was already pretty hot at the time.
You know, it had been hot in 1997.
There was a tax break.
And then, of course, we had the dot-com bubble, so there was a lot of home building already.
But in 2001, we had a recession, and yet home building and housing prices did not decline.
It's the first recession we've ever had where there wasn't a reaction in the market for homes and home construction.
Typically in a recession, the amount of homes being constructed, permits being issued, things of that nature all decline.
Home prices either stay level or they decline somewhat in a recession.
But this time, this recession, because interest rates were so low, the housing market continued upward.
Housing prices continued upward.
The number of homes being built continued upward.
And then when, of course, you come out of the recession, interest rates are still low, and so housing is really on fire at this point.
So the precise time when potential homeowners could have been warned that, hey, you know, housing prices go down in a recession, no, the Fed came in and erased that, prevented that from happening.
And so naturally, you know, as time goes on, people say, well, I've never lost money on my house.
You know, they can't remember back to the recession of 1991 when housing prices fell.
And so you have a whole host of people who are believing this notion that home prices never go down, they go up, because that's all they've ever experienced.
And so the housing bubble got started, became tremendous, humongous number of homes were built, prices were increasing 10% a year in real terms, adjusted for inflation.
And so housing prices got bid up to tremendous values, and the number of homes built was a tremendous increase in the number of homes built.
And so you have resources in the economy that are being moved around, real resources.
People are leaving, for example, the manufacturing industries and coming into home building.
People are leaving Mexico to come into the United States to work into the home building industry.
All that problem of illegal immigration that we had and that Lou Dobbs talked so incessantly about was basically because of the housing bubble.
They came into work in home construction, landscape installation, road construction.
That 75% of all illegal Mexican jobs were caused by the housing bubble.
And of course, now that's all changed around.
But basically, during this housing bubble, you have a reallocation of resources, of land, labor, and capital into housing.
And now, all that's going to have to be moved back around into congruence with real consumer wants and desires.
In the meantime, however, things get moved around by unemployment and by bankruptcy.
People are losing their jobs in home construction, in construction, landscape installation, things of this nature.
They're going to have to become unemployed.
Companies that are related to financing homes, construction, things of that nature, they're going to have to go bankrupt and those resources are going to have to be reallocated to other industries.
Yeah, but Mark, aren't you talking like Ron Paul had won the election or something?
Because the Democrats are going to do a stimulus package and they're going to save us from this recession that you're describing as necessary.
Well, Scott, they can't really prevent this correction process.
They can stall it.
They can distort it.
They can do a lot of things to it, but it's inevitable, okay?
And everything that they've done in terms of trying to bail out the economy and to stimulate the economy are actually making things much worse.
The economy had been making adjustments to the housing bubble for over a year prior to the government jumping in and getting in the way of all this.
And what had been going on was people were restructuring their finances.
Companies were trying to increase capital on their balance sheets.
Other companies were filing for bankruptcy, you know, so companies were downsizing.
Companies were merging with one another.
They were raising capital from foreign sources.
They were making all of these necessary adjustments and then the government jumped in for the last 12 months and have been inducing bailouts and stimulus packages, rescue plans from the Fed, all of which have been unprecedented, okay?
So these are not just the normal type of things that they've done in the past where they give, you know, rebate checks.
They did that, of course.
That didn't work.
And, you know, and then the other thing they can do is reduce the interest rate at the Fed, and they've done that.
That hasn't worked.
So their normal remedies have not worked, and so they've come up with a dozen or so unprecedented emergency measures, all of which have been unsuccessful at addressing the real problems that are involved here.
It's like this is what they say about pushing on a string, that the Fed, they can only do so much, really.
And that they're trying basically, well, I saw Chris Matthews the other day, basically, he put it perfectly well, I think, in explaining what it is that the Fed is up to, is the American people are saving.
They're looking at bad economic times, so they're saving.
But we need them to spend, spend, spend.
We need them to take out loans.
We need, you know, that's how you prop up the economy is with consumer spending and this kind of thing.
We have to fight the onset of this recession.
People aren't going along with what the Fed is attempting to master plan their behavior as doing, right?
That's right.
The Fed can influence markets, but it cannot actually control markets.
And pushing on the string is the old phrase that's used to indicate that time in the business cycle when the Fed tries to do something but has no impact on the market.
And that's basically what we see here is the Fed has reduced rates, the federal funds rate, which is where the Fed is lending money into the banking system.
And no one is really buying it.
You know, the banks have, what the banks have essentially done, have gone back to the old standards of making loans.
And even then, they've been even more careful because, of course, as the recession gets worse, they have to take that into account.
So lending standards have gone back to what they used to be.
And during the bubble, of course, when the Fed is, you know, basically giving away free money, free credit, and indicating they'll bail out anybody at any time, credit standards were reduced.
All of the corruption and stuff in financial markets and mortgage lending markets is the result of the Fed making money too loosely available.
And therefore, lenders reduce their credit requirements on customers.
And of course, you also have contributing factors like the Community Reinvestment Act, which mandates that banks have to give away loans to people who can't pay them back.
The Financial Modernization Act, which basically allowed banks greater leeway with how they structured their portfolios.
And so you have the government increasing the pool of bad lenders and bad borrowers, which contributed to the overall bubble and the degree of the bust.
But you know, the Fed is in a position right now, and people, whether they're banks who are going back to lending standards or people who are trying to improve their own personal balance sheet by saving money, paying down their debts, reducing their consumption, increasing the amount of work they do.
I know a lot of people are trying to not only maintain their job, but increase their skill levels, take part-time jobs.
These are the types of things that people should do and are doing in response to this crisis.
And so, you know, you find people moonlighting, you find people working overtime, you find people working for Tupperware or Avon or, you know, whatever to try to raise extra money to provide yourself with a cushion against this depression.
Because you know, all these bailouts, they haven't helped the American people one bit.
You know, all of this stuff, you know, is with the eye of helping the American citizen, but it hasn't.
I mean, it's all directed to the big money guys in Wall Street.
And really is amazing, isn't it, the way that they say that this is to benefit Wall Street and Main Street, because Main Street needs Wall Street, and you've got to have all this liquidity and what not.
And basically what they're saying is, we're taking, what, a trillion dollars to start from all of you to give it to these few people that we all know make, what, tens of millions of dollars a year, being the richest people in the world that they are.
And it's for you.
We're taking your money and giving it to people who are already rich, but it's all for you.
And they're actually getting away with that.
Yeah, it's probably the biggest scam in the history of mankind.
You know, here you have, well, I mean, Hank Paulson, the Secretary of the Treasury, is the former CEO of Goldman Sachs.
And you have him and his employees from Goldman Sachs.
You know, these teams that go into companies like Lehman Brothers and so on and so forth, those weren't really treasury people.
Those were Goldman Sachs people who are looking at the books of these companies and deciding who is and who is not going to get a bailout.
You know, is J.P. Morgan going to get a $30 billion low-interest guaranteed loan from the Fed, or is Lehman Brothers?
Well, it turns out it was not Lehman Brothers, it was J.P. Morgan.
So I think you see, you know, a giant heist of the American pocketbook.
And you see the criminals who have caused this problem, like the people at the Fed and the people at the Treasury and the White House.
And now they're doling out money essentially to their friends and their co-workers and their shareholders.
And it's not going to do any good, except for those people, you know, what the market would do is to take away the ownership of all these companies and give it to other people through bankruptcy.
And what they're doing is they're wasting the American taxpayers' money trying to keep their friends in charge of all of these companies that they've mismanaged, and which they have received multimillion-dollar bonuses on a yearly basis, going back to the recession of 1991.
They've been made filthy rich through the bubbles of the 90s and through the housing bubble, making fees off of all these mortgage-backed securities and all that kind of stuff.
They're making, you know, oodles and oodles of money off the American people and the American economy because of that bubble, and now we're supposed to be bailing them out?
I do not see it.
It's the wrong thing to do if you want the economy to recover, and it's just an immoral criminal act that's taking place right in front of us.
All right, well, help settle a contradiction, I think, that I have in my head here.
First of all, it seems to me outright theft for a bank to be able to loan me money for a house.
They buy a house.
I'm on the mortgage.
I got to work.
I got to get up in the morning.
I got to work for 30 years to pay them principal plus interest for money that they loaned me that they actually never even had when they loaned it to me.
I mean, if this was a situation that somehow, you know, I had a magic wand and I could make it where I could loan you money that I never had, and you had to pay me back, I mean, this is clearly just a scam on its face.
It seems to me that to have that kind of fractional reserve system, never mind all the bailouts and criminal conspiracies going on with Goldman Sachs, I mean, there was that great report about how it was really just the current CEO of Goldman and Paulson in the room when they decided to do the bailout for AIG because Goldman had so much money invested in AIG.
Aha, that kind of thing.
But no, never mind all that.
Seems to me basic housing loan structure, fractional reserve banking, I as a bank can loan you money that I don't have, but you still have to pay me back and you're blood, sweat, and tears for decades for it.
Seems like a scam.
On the other hand, they say that, well, you know, the inflation only really comes when banks and the government are creating more money than is needed for economic growth, but you have to increase the money supply for economic growth or else there will constantly be downward pressure on prices that will bankrupt people just the same.
No, I mean, you don't have to increase the money supply.
There's no requirement to increase the money supply.
Any amount of money will do in an economy, and decreasing prices, which Paul Krugman and everybody else in New York and Washington is deathly afraid of deflation, but everybody I know loves deflation.
That's why they go to Walmart, because they want lower prices.
So falling prices is good for the American people.
It's bad for Wall Street and all these criminal operations.
And Washington, D.C. doesn't like it because it's such a huge debtor, but the American people love lower prices.
Now, the issue of fractional reserve banking is really how the Federal Reserve generates such tremendous inflationary waves in the economy and why the banking system is so inherently unstable, because banks are only required to hold a very small fraction of all of their deposits on reserve.
And as a consequence, they can make a lot more loans than they otherwise would be able to make.
And basically, you know, everybody in America thinks their money is in the bank, but it's not.
There's not a little pile of money in the vault that says, Scott Horton, you know, and this is your little stack of money in there.
The money is not in the bank.
They lend it all out.
And if they ever get in trouble, they go to the Federal Reserve and borrow money from them.
So it's a very, it's an inherently unstable banking system that we have, because it's only fractional reserves.
And the Fed tries to manage that process.
But in this case, they've been bailing out the system for so long that they've gotten us to a point where they really can't continue to bail out the economy.
They've created this monster.
They're fighting it with all of their might, with all these unprecedented expansions of the monetary base, expansion of the federal debt, you know, doing all sorts of things.
But, you know, they've gotten to the point where you have a huge pile of pyramided money in the economy, and it's coming unglued.
All right, now let's talk about the role of government spending in all this.
Dr. Ron Paul, who I guess really is an Austrian economist in his own right, he doesn't say that.
He likes to talk about people like you and say, well, this is what the Austrian economists say.
But he is one.
I think government spending is driving many of these distortions in our economy, driving us that the government itself is bankrupt, that really they're leading the entire country to bankruptcy.
I think I read something where you mentioned $60 trillion in liabilities out there.
And particularly, I'd like to see if you could address the cost of not just the wars in Iraq and Afghanistan, but maintaining the empire around the world, which has been estimated, I think, by Robert Higgs and others as approximately a trillion dollars a year.
Is that actually a negligible amount compared to gross domestic product, like they say in the New York Times?
Well, one thing I point out is that, you know, apparently Ron Paul has been listening to me because he referenced my work in the housing bubble in his book on the revolution.
And so he, you know, he's a regular reader of Austrian economics.
He's been reading Austrian economics since the 1960s.
He reads, apparently, he reads Mises.org every day and LewRockwell.com every day.
And AntiWar.com.
And AntiWar.com, of course.
And, you know, so he's aware of all this stuff.
And the $50 trillion figure that I wrote about recently is now at least $60 trillion.
And that does not take into account any of these bailouts.
So the number, the amount of our unfunded future liabilities in the United States is enormous.
It's something that we can't possibly pay off, honestly.
We can't cut spending.
We can't raise taxes enough to pay that off.
It's going to have to sort of pyramid itself into greater and greater debt.
And of course, inevitably, they're going to resort to more and more inflation.
The empire is a big part of that picture.
The various factors that are involved in the empire, of course, military bases, military actions, subsidies of foreign governments, the drug war, which is all part of that empire building and control, command and control of other countries.
So the cost of all that is enormous.
Is there any question that it's a net loss?
I mean, you know, empires traditionally are about armed robbery and making money off the people that you conquer, right?
That's right.
And, you know, economists for a long time have recognized that empires are losing proposition economically.
They are an economic drain on the host country, on the home country.
Empires never fail to bankrupt the host country or the home country.
And the results, the aftermath, is something to consider.
You know, if you look at the Roman Empire, for example, where they reached out and stationed troops all throughout Europe and Africa and the Middle East, you know, eventually that ate away.
And they took from all of these other countries, they took their silver, they took their actual took their excess grain, and they brought it back to Rome.
And they had a big party for a long time.
But ultimately, the empire began to crumble.
They couldn't finance the army, couldn't continue to maintain the infrastructure.
And when the Roman Empire fell, Rome itself and Italy itself went into, you know, a long period of economic dormancy, a long period of depopulation, and a long period of declining standards of living.
The same thing happened to Britain.
Britain had this worldwide empire.
It couldn't continue to finance it.
They gave it up, so to speak.
They didn't really fight to maintain it.
So the impact on Britain wasn't quite the same.
But still, I mean, Britain declined as a economic power.
They became dormant, and have only really recovered from that in recent years.
And so the same thing is going to happen to the United States.
Do you think it's basically, it's a done deal now?
Yeah.
Yeah.
I think that we've, you know, every empire learns from the previous one.
And we learned that it's not a good idea to take control and try to maintain the military structure in all of our various foreign possessions.
So we maintain the military for Japan, but we don't maintain the full military for places like Germany, Israel, you know, other countries.
We leave them in control of the political situation, and we don't maintain the entire military structure of the empire.
We share that cost.
And so we've tried to, you know, we'll learn from previous empires.
We won't spend ourselves in the Bolivian, but I mean, ultimately, those costs continue to build, and they continue to mount.
The structure continues to break down and to fragment.
And so, you know, financially, we've dug ourselves this whole Social Security, Medicare, Medicaid, the industrial military complex, the foreign spending, you know, all of that.
$4 trillion a year now, right?
It was $3 trillion.
And now we have this bailout on top of that.
It's $4 trillion a year is the national government's budget point, right?
I believe that's right.
Yeah.
All right.
Now, let me ask you, and I'm sorry, because we only have, you know, well, we don't even have time.
I'd like to get you back on the show and see if I can ask you what you're predicting for the future, particularly in terms of the politics and a push toward a new Bretton Woods and all these kinds of things.
But that one's going to have to wait, I guess.
I'd love to.
All right.
Thanks very much for your time on the show today, Mark.
Great.
All right, everybody.
That's Mark Thornton.
He is senior resident fellow at the Ludwig von Mises Institute of Austrian Economics.
That's at mises.org, M-I-S-E-S.org.
He's the book review editor of the Quarterly Journal of Austrian Economics.
And what the hell?
I'm going to get away with playing this song.
See you all tomorrow.
See you all tomorrow.