All right, everybody, welcome to the show, it's Antiwar Radio, Chaos 95.9 in Austin.
You get the background noise, this is the repairman edition of Antiwar Radio today.
We'll have a little bit of background noise, but that's all right.
To make up for that, we're going to go ahead and introduce our first guest, Bob Higgs.
He is the editor of the Independent Review, Senior Fellow at the Independent Institute.
He's the author of Crisis and Leviathan, Against Leviathan, The Resurgence of the Warfare State, Depression War and Cold War, and 100,000 great articles that you've got to read.
Welcome back to the show, Bob.
How are you doing?
I'm fine, Scott.
Well, I really appreciate you joining me on the show today.
My pleasure.
All right, so big deal going on.
Obviously, I guess the public anger at the bailouts and all the money for the bankers at our expense over the last year seems to really be coming to a head and expressing itself even in the actual Congress of the United States, of all places, where Ron Paul's very real Audit the Fed amendment, not the fake Milwaukee version, passed out of committee.
It's getting more and more co-sponsors, including, I think, a couple more this morning.
And there's a push in the Senate, I guess, to strip the Fed of its regulatory powers.
And I guess, I don't know, give those over to the Treasury or the Commerce Department or the SEC or somebody.
Do you really think, is it possible, Bob, that the central bank will be severely curtailed or perhaps even abolished?
Is it on?
I mean, Ron Paul says once we get an audit and the American people really see what's going on, the Fed will have abolished itself that day.
I'm a little skeptical of how far all of this will go, Scott.
It is remarkable that there's been so much public dissatisfaction with the Fed.
Historically, the Fed has operated as a very powerful institution that the general public knew nothing about.
I mean, they had no idea what it does, how it does it, or any of that.
And it's always sort of had a public face that it's a public-spirited collection of wise men operating behind the scenes for everybody's good.
And we're not supposed to look inside the darkness of the inner sanctums of the Fed.
But now, for the first time in my memory, a great many people are aware of the Fed, have some idea of what it does, and are very unhappy with what they think it's been doing in the past two years especially.
So that is an astonishing development.
And I think had that not occurred, this large number of members of Congress would never have been willing to co-sponsor Ron Paul's bill to audit the Fed.
So amazing things have happened, but I think we need to be cautious in looking ahead and imagining how far this is going to go.
Because, in fact, the Federal Reserve is enormously resourceful.
It's a very astute, experienced political actor.
It is hooked into the highest levels of power throughout the government.
And I'm afraid that it may turn out that some of these members of Congress have simply put their names on the bill to, as it were, fool their constituents into thinking that, yeah, they are looking into this matter seriously.
But when push comes to shove, I think it'll be a different matter.
And, of course...
Push comes to shove, meaning in the conference committee.
That's right.
There are many slips between hearings and actual statutes passed.
And so a great many things can happen.
That's assuming that something will happen.
I'm beginning to think something will, though, Scott.
I think some kind of legislative action looks likely.
The question is whether it's going to be real or fake.
And my inclination would be to think that, in the end, it will be fake.
That it will do something that purports to bring the Fed under more control or to give it greater transparency.
But it really won't.
Now, I may be wrong.
This may be the time when the skeptic turns out to be too skeptical.
I hope so.
Wouldn't that be nice?
But I'm going to wait and see how this plays out.
Well, you know, Bob, I actually went to an end-the-Fed protest on the 22nd.
And there were, I don't know, more than 100 people protesting out in front of the Los Angeles branch of the...
I guess it's the Los Angeles front for the San Francisco branch of the Fed, or however exactly that works.
But anyway, I wasn't just protesting the Fed by myself, like usual.
There were actually others joining me.
It was incredible.
So I think you're right that there seems to be a real change in the just kind of generally accepted legitimacy of this organization.
And, you know, it goes to kind of my whole thing about libertarianism.
And I guess why I bother doing this is because it seems like the libertarians, even not including me, but the libertarian, the individualist explanation of history, of economics, of the rest of it, is it always makes more sense.
So it seems like the libertarian argument ought to always win.
I'll give you a perfect example.
Ron Paul's on the Dylan Rattigan show this morning on MSNBC.
That was from this morning.
And Dylan Rattigan asks him, well, so Ben Bernanke has to face the Senate.
And the question is whether he'll be reconfirmed.
And Ron Paul cuts right to the chase and says it's not about Ben Bernanke.
You've got to understand.
When they fix the price of money and they are allowed to create extra credit, easy money and just dump it into circulation, it causes massive bubbles and dislocations.
And now we're suffering the consequences of that.
Blam!
Austrian business cycle theory in 15 seconds.
And who can argue with that?
I mean, what Chicagoite or Keynesian economist can, with a straight face, win that argument against Ron Paul?
They can't because he's right.
It's as simple as that.
And so that truth just, it seems to, maybe it doesn't really stick in the minds of all these people, the news people, but it seems like we're making some progress here.
No one even really tries to refute him about that anymore, do they?
I think what has happened, Scott, to stir up the public so much is the way in which this time, that is in the past couple of years, the Fed has undertaken to go beyond simply making general monetary policy, fritzing around with interest rates and manipulating the stock of money.
Those are very important actions that have sort of generalized effects throughout the economy.
But this time the Fed went far beyond that kind of policymaking.
And for the first time in its history, began to make specific policy decisions with regard to particular firms, particular industries, particular lines of business in the financial industries.
And in doing so, it certainly gave the appearance that it was trying to do favors, to save great amounts of money for certain individuals and firms.
And I think that has stirred up people.
The objection I see is not so much libertarian or Austrian as it is populist.
I think people have taken offense at the idea that the public's money and the public's sort of guardian of the money supply, the Fed, have been used to enrich very wealthy people at the expense of the great mass of us.
At a time when the economy was going into recession and more and more people were suffering in one way or another.
So I think it's unfortunate in a way that people have been awakened by the belief that what's going on here is the use of the Fed as an engine of income redistribution.
It's not that it doesn't operate in that fashion.
It can, and I believe it has actually.
I think the public's perception is by and large true in this regard.
But it would be much better, I think, if the public understood that even if these kinds of industrial policies made by the Fed were to be completely eliminated and the Fed returned to making generalized monetary policy, the Fed would still be a highly dangerous institution and one that we should get rid of.
Because it has very pernicious effects in creating the boom-bust cycle.
And that, I think, has not got through the public nearly so well as the income redistribution aspects of the recent developments.
Well, I think one way to make it real simple would be – because I'm no economist.
I have a very layman's view of all this stuff, although I've been interested in it for a long time.
But one of the things – well, like the other day, the guy with the bow tie was on trying to argue with Ron Paul.
And he was saying, well, if it was known which banks went to the discount window to get some money from the Fed at night, then that could cause a run on the bank.
That would be – we have to keep that information private and secret and what have you.
And, of course, you can just tell right there that it just goes without saying.
It's just assumed that, of course, every bank runs at minimum to the very edge of bankruptcy every single day.
That if people knew that all banks create money out of nothing and have way more loans than they have deposits, all their liabilities and assets are the very same pile of IOUs, and that the whole thing is bogus, why, that could cause a run on the banking system.
And the whole point is, well, that's why we have the Fed in the first place, is so that the banks can all commit fraud.
If we didn't have a central bank, then they would have to have their books balanced or cease to exist, right?
That's not that complicated.
Well, they would certainly have to have a greater surplus on hand to take care of clearing balances.
What happens every night when the banks borrow from one another is that each day, millions of checks are written, and so balances are being passed back and forth across the thousands of banks in the commercial banking system.
Now, what that means is that the balances won't perfectly offset on any given day.
And so if a bank comes up short, that it ends up owing the other banks more than they owe it, it borrows those overnight funds, those so-called Fed funds, and that's the interest rate on Fed funds that the Federal Reserve uses as its main instrument for controlling the operation of the credit economy and the money stock, ultimately.
But you might still, if you had a very honest banking system, you might still need some way for banks to borrow to settle daily imbalances and clearings.
But you're correct in saying that with the Fed's assistance there being open as a chronic lender, or a window that they can go to any time they have a shortage, then they are able to push their operations right up to the margin.
And they wouldn't be able to push them so far, they'd have to hold more reserves, and they'd have to hold more cash balances without the Fed.
And indeed, that's why the Fed was created in the beginning, to operate as a so-called lender of last resort.
Because in some crises in the 19th and early 20th century, these interbank settlements came up so imbalanced during banking panics and runs on banks that some banks would go broke, or have to close their doors at least, even though they were still solvent in the sense that their assets were not less than their liabilities.
But the idea of a lender of last resort was certainly badly abused from the beginning, and before long the Fed was not simply serving as a lender of last resort, but attempting to manipulate credit conditions in the overall economy in a way that would achieve certain macroeconomic goals, whether it was price stability, or low rates of unemployment, or what have you.
So that's where the big trouble really began.
Well now, this is funny.
I think this is part of the myth of the founding of the Fed, was that J.P. Morgan used to be the Fed.
J.P. Morgan had enough money and enough power that he could demand that all the CEOs of all the banks in New York meet at his place, and he would say, now you loan him a million dollars, and you loan him five, and he would arrange for the bailouts among the private bankers, basically.
And that then, this just wasn't effective enough anymore.
Even Morgan couldn't do it any longer, and I guess it was the crisis in 1907 or whatever, where they realized they really needed the central bank.
And yet again, they start with the false premise that it's perfectly okay for all these banks to do this fractional reserve system, where they're all in such danger of bankruptcy all the time.
Oh yeah, I don't think anybody historically, well I shouldn't say anybody, but very few people, when these institutions were being developed, questioned the fractional reserve character of commercial banking.
That was pretty much an axiom of almost everybody's thinking.
Over the years, there were a handful of economists that toyed with the idea that 100% reserves was the best arrangement, but bankers themselves, of course, had no interest in 100% reserve banking.
Of course not.
Well, and you know, pardon me for skipping around so much too, but of course time is limited.
This is something that seems very important.
It's something, again, that Ron Paul mentioned on TV this morning, and that was the last tie to gold, the last limit on the ability of the government and the banking cartel together to create money out of nothing was eliminated in 1971.
Even then, it was a very partial, kind of twisted gold standard anyway.
But now they've basically been unleashed, and then something he says over and over again is that, but don't you see, this is the last time.
They've reinflated the bubble over and over and over again, but now we just can't get away with it anymore.
The hole in the tire is too big to reinflate, and that kind of thing.
But why is that true?
Why is that true?
That the game of continuously just pumping up credit bubbles is over, the bubble economy is over, and that we have to completely restructure everything.
It seems like TV is saying, CNBC announces whenever they're not interviewing Ron Paul that everything's fine now.
Unemployment's still high, but the stock market's great, and the recovery has begun.
Well, I think there is a lot of wishful thinking about the recession and the financial troubles as having been, if not surmounted at least, that we're past the worst of it and things are getting better.
Things are being taken care of.
The Fed, if you read their announcements, talks about how they are readjusting their balance sheet, and that's true.
A lot of the assets they acquired during the crisis in the last quarter of last year are being drawn down, but at the same time, what they did is create such an enormous increase in bank reserves that has just sat there in the banking system.
More than $800 billion worth of legally excess reserves are in the hands of commercial banks in this country, and if they start lending those, then this question of a so-called exit strategy that some people talk about becomes critical.
Can they control this bank lending before it generates very high rates of inflation?
Now, they think they have ways of doing this.
Of course, they now pay interest on all bank reserves held at the Fed, so the banks aren't holding those and getting no return, but they're getting right now a tiny return.
It's one quarter of one percent, and the Fed can pay them more.
The Fed can also, it tells us, capture more of the reserves by basically holding them in the form of time deposits, where the banks would have to commit to leaving them there for a fixed amount of time in exchange for a higher rate of interest.
In addition, some of those assets the Fed acquired, toxic assets so-called, last year, late for the most part, will mature or be repaid, and that will draw down the Fed's balance sheet, and so forth.
These things are the tools, that's the language that Bernanke uses.
We have the tools to withdraw from this condition of having pumped up liquidity in a way that no one had ever dreamed of before in late 2008 or early 2009.
But my question is whether these tools are adequate for the job.
One consequence of the use of all these tools is higher interest rates.
But if the Fed starts adopting policies that substantially raise interest rates at a time when unemployment is still high, and it's certainly bound to be high for the next couple of years, then tremendous political pressure will be brought by Congress and probably the executive as well on the Fed to back away.
And then it's really in a bind, because on the one hand is the political pressure saying don't let interest rates rise, and on the other hand is the economic pressure that unless it takes actions which cause the interest rate to rise, it risks hyperinflation.
So Fed statements sound very, very calm, and it's just business as usual, ma'am.
But I have really grave doubts about the Fed's ability to navigate through this very dangerous water.
Now, well, first of all, I just want to make sure and say now in case I forget later, I'm actually holding in my hand a $100 trillion bill from the Reserve Bank of Zimbabwe.
This was sent to me by a friend of the show named Dave.
Thanks, Dave, for this $100 trillion bill.
This is, I think, about enough to buy a loaf of bread if you're lucky.
Not anymore.
No, no.
They gave up on the Zimbabwe currency and finally authorized the use of foreign currency.
So everybody has gone totally over to the use of foreign currency.
Zimbabwe is now on basically a dollar standard.
Well, yeah, which is pretty soon they'll have $100 trillion bills there to buy a loaf of bread.
Well, and so this is really my question.
Well, let me try to summarize what I believe you just said and kind of repeat it back to you to make sure I understand.
Basically what you're saying is the Fed created so much money out of thin air in order to – basically they say soften the landing of the financial crisis a year ago.
But all that money that they created is basically sitting in the banks.
But then if unemployment starts – the unemployment rate starts to go down, people start going back to work and businesses start taking out loans because of the fractional reserve system.
If there's growth, if there's any real growth at all in the economy, then there's also all this growth in the money supply to go along with it.
Then we'll have major price inflation, at which point the choice will either be to let there be major price inflation and have our $50 bills become nickels, or to go ahead and raise interest rates and force the recession that they refused to have in the first place.
Well, it's pretty close, Scott.
The only distinction I'd want to draw is that what they've done in the past year has not increased the actual money stock very much.
It's gone up some, but it has increased bank reserves in the Federal Reserve banks.
And that is potential money, but it's not yet money.
It's not anybody's checking account that can be drawn on to go down and buy something at Target.
It's in the bank's bank account, not in any businesses' or people's bank account yet.
That's right.
So when it becomes somebody in the public's checking account, then it becomes money.
And that's the problem here.
It's a kind of time bomb sitting there, and it's going to be a contest when the banks start to lend that money again, when they feel confident enough about the ability of borrowers to repay that they're, again, willing to make loans in a normal commercial fashion.
On a large scale, then that situation you described comes into play.
Well, now, so how between a rock and a hard place are we?
I mean Charles Goyette, my friend, radio show host from Phoenix, recently wrote this great book, The Dollar Meltdown.
Have you had a chance to read that yet?
No, I haven't.
It's actually really good.
I think you'd like it.
I wonder what you think of it.
He basically is saying that, look, the amount of debt now and the amount of paper money already, the fact that the dollar is breaking overseas already, like the Indian Central Bank spending a bunch of, I guess, American currency, buying gold from the IMF a couple of weeks ago, these kinds of things.
These are signs that the dollar meltdown is unavoidable now.
It's already too late.
The damage is done.
And that it's time for people to start spending what Federal Reserve notes they have on wheat stocks or something.
I'm not quite so alarmist as that.
I wouldn't rule out the possibility that the dollar may be doomed, but I would at this moment attach a low probability to that.
I think a great many things can be done to back away from the situation that's been created.
And so I wouldn't jump to the conclusion that the dollar is done for at all.
It may be, but if I were making bets, and of course I am and you are and everybody is making bets by the way we are conducting our affairs and the way we're holding our money, I would not right now put my bets on hyperinflation or the dollar being totally ruined.
It may come to that, but I don't think that's in sight at the moment.
So you're expressing faith in Ben Bernanke to use his tools to prevent that?
To some extent I am.
I'm saying that yes, those tools will have the effect that Bernanke expects them to have.
The question is partly one of magnitudes.
The amount of retrenchment that is required at the Fed is so great that I think it's inevitable at some point that this dilemma arise between the Fed needing to take actions that raise interest rates and a tremendous political pressure opposing that action.
And without being a prophet, I can't tell you how that dilemma will be resolved.
In the past, what has happened is that when inflation in this country has become fairly high, that is 10% or more, then political actors have been willing to tolerate the Fed raising interest rates enough to bring on a recession and contain the inflation.
But who knows what will happen the next time around.
And I think there also are some differences this time around from any past times.
And one is that the globalization that has proceeded so far in financial markets and the U.S. government's indebtedness to foreign lenders is so much greater this time around that it's not any longer a policy question that will be resolved simply by actors in Washington, D.C.
The important actors now include the Chinese, the Japanese, the Arabians, and other people who are big lenders to the United States and the U.S. government in particular.
And all of these decisions are going to be reached as a kind of resultant of a lot of different forces coming from all around the world.
So it makes it very difficult for anyone to forecast exactly how these dilemmas will be resolved.
Well now, I guess the ultimate nightmare for an Austrian economist is the crack-up boom, right?
Where everybody realizes that, oh no, today's the day, and everyone in the world tries to dump their dollars before it's too late kind of thing, right?
Well, of course, Austrian or not, that's a good nightmare.
But again, I don't see us in a position right now to have crack-up right around the corner at all.
I think there are many things that can be done to prevent that.
As I say again, they may not be done, or it may turn out that the job is too big, that the Fed has got itself in too enormous a problem by its actions a year ago.
But I don't think we can say at this point.
We've never been through a situation really comparable to this one, and so it's very hard to forecast.
Well, thank goodness for that, that there's enough doubt to not be as worried as possible.
I always like room for not having to predict the worst.
My problem is, without really understanding the economics of the situation on the level that you do, Bob, is that I just don't see what's stopping these madmen who are in charge of the empire.
It seems like they might as well be a bunch of KGB agents or something on a deliberate plot to destroy America or something like that.
I think that's one thing you want to remember, Scott, is that it's really not in their interest to wreck the world.
Well, then why do they keep wrecking it?
Well, because so far they've served their interests.
If you go back and look at the people who are important in politics, the public was clamoring, do something, do something, so they did something.
That's what political actors always do in a perceived crisis.
And they get scared like anybody else.
And last September, when it looked as if a lot of credit markets were way out of whack and some of them were more or less drying up or making credit available only at unusually elevated interest rates, they became alarmed about the interest they serve in the commercial banking industry and related financial industries.
So they pumped liquidity in there to save people for the most part.
They let Lehman go down, but for the most part they saved the powerful actors and allowed those investment banks to become bank holding companies so that they could get access to various public assistance and Fed assistance.
And the politicians passed the October 3rd TARP bill and so forth.
So everybody served his interest.
That was good.
They were happy for the time being.
It's true the recession went on, but they continued to make noises as if they were doing something about it.
Now, in the process of all these things that were done, especially by the Fed, they probably way overshot.
And so now they've got a different kind of problem on their hands.
How to unwind this situation they got into by overreacting late 2008.
And this time around they'll do the same thing they did before.
They will act in a way that serves their interests.
It may be that this requires them to tolerate high rates of unemployment for a while that they might otherwise temporarily lower by goosing the money supply, or it may require other actions.
But what is not in their interest and what you sometimes see people talking about is destroying the world economy.
That's where their wealth lies.
And they may destroy it, but they certainly aren't going to destroy it by design.
So I think it's not sensible to suppose that these guys are simply agents of destruction and they've crept into our midst to destroy the world.
It's their world.
They own this damn world.
They're not going to try to destroy it deliberately.
Yeah, yeah, I guess.
Well, you know, for me it's just a metaphor.
It seems like they're blind enough.
You know, I used to, I guess, kind of believe the conspiracy theories about the New World Order and a one world government after the American empire falls.
And I thought, well, the people who run the American empire, they must be doing this on purpose.
They must be destroying America on purpose because everyone knows that all empires fall.
Why would they take the empire and run it off a cliff like this and completely destroy it?
It must be on purpose.
And then what I've learned since then, Bob, is that they're stupid.
And like Gareth Porter teaches, the higher in power you get, the dumber you get.
And the more narrow-sighted you get.
In fact, over my peripheral vision is Judd Gregg cross-examining Ben Bernanke.
I mean, it's like Jim Bovard says.
It's like watching drunks fight in a bar.
They swing and they miss.
None of these people know what the hell they're talking about at all.
You get a better education listening to chaos radio.
Well, they are in some cases not very smart.
But at the same time, they are often smarter than they let on, Scott.
There's a public face and a private face for all of these kinds of high-level actors.
And very often the things they say in public that the rest of us listen to and say, Well, what idiots?
Well, those are just words.
You think they secretly understand the Austrian theory of the business cycle?
I doubt it.
But even without understanding that, I'm not saying they understand how the world works perfectly.
I'm simply saying that they may not be as dumb as they let on, because a lot of this is for public relations and political purposes.
And very often they are much more knowledgeable than they want to reveal to the public eye.
And so a lot of them just say the conventional kinds of things for people in their position.
There's a wonderful passage in a book that Bill Simon wrote back in the late 1970s after he had been Secretary of the Treasury and left office.
And he's talking about when he was the energy czar, and he would go to these congressional hearings.
And at one of them, some congressman just went on and on and on, screaming at him, screaming at him over and over, saying, can you guarantee that every American will get the fuel he needs?
And Simon would reply, well, you know, we're doing everything we can, sir.
You know, I can't guarantee.
And the guy would just scream again, can you guarantee?
And this is like a madhouse scene that he's describing.
But the punchline was that at some point, it was late in the day, and the news people there had to get their film footage to the studio to make the 6 o'clock news.
So they turn off their TV camera lights and leave, at which point the screaming congressman closes up his books and walks out of the room.
And so it's very clear that this is all an act.
It's posturing.
It's being done for a reason.
It's public theater.
And it doesn't mean this congressman was dumb.
It probably meant that he was smart in knowing how to get himself reelected.
So we need to remember what they're trying to do and sort of how they go about doing it without letting the public look inside the box.
Well, let me ask one more thing here.
I've already kept you over time, and I've really got to go, and I know you do.
But this is so important.
When you talk about, you know, eventually they'll do what they need to do in order to continue owning the world the way they need to do.
That basically reminds me of, in my limited knowledge, the example I think of is Paul Volcker's term at the Fed in the 1980s.
And, of course, he was one of the guys who helped engineer taking us off the gold standard in 1971 in the first place.
But then he was brought in to finally, I guess, give up on the failing Keynesian economics of the 70s and the stagflation that it had caused, the high unemployment and high inflation.
And he was brought in to lick inflation, and he cranked the interest rates up and basically put the American economy in a headlock because any growth with fractional money means more inflation.
So he had to shake out not just the bad debt, but even, you know, who knows, good projects got destroyed too because he had to force the recession that they had tried to stimulate and stimulate and stimulate to prevent all along.
Is that what we're headed for again?
Of course, the working people get screwed either way.
High interest rates or inflation, you know, one or the other.
Well, that's what working people are for, Scott.
They're there to get screwed.
Yeah, to carry our emperors on our backs.
One way or another, they're going to get screwed.
So you can just take that to the bank, but, you know, you might or might not be reassured if I remind you that Paul Volcker is a high-level advisor to the president again now.
Well, and he's just a guy from the Chase Manhattan Bank, right?
J.P. Morgan Chase now.
When you think about the Fed, you may think, well, they're just guys from Goldman Sachs and J.P. Morgan Chase and Bank of America.
That's what they are when it comes to decision-making.
So that's what we can hope for then, right, is that some new Federal Reserve czar will come in and force a horrible recession to protect us from the horrible inflation that Bernanke and Greenspan have caused.
We cannot rule it out at all.
Yeah, well, and that's our best hope, really, at this point, is that really?
I don't know if that's our best hope.
You know, it's a question of how severe the problem is.
There are tradeoffs that will have to be made, but since we've never dealt with magnitudes like those we face at the moment, we don't know how severe the tradeoffs will have to be.
We don't know whether the choice is between another Great Depression and hyperinflation or some much more muted versions of recession and inflation.
You know, we can all pray that my first option there is not what we're really facing.
Well, I sure do appreciate the fact that I can turn to you for analysis of all this.
So, thanks.
You're welcome, Scott.
It's a pleasure to talk to you.
All right, everybody, that's Robert Higgs.
He is senior fellow at the Independent Institute and editor of the Independent Review, author of Crisis in Leviathan, Against Leviathan, Resurgence of the Warfare State, Depression War, and Cold War.
Other books, a million great articles.
Go and look them up at independent.org.
