For Antiwar.com and Chaos Radio 95.9 in Austin, Texas, I'm Scott Horton.
This is Antiwar Radio.
And now our next guest is Robert Higgs.
He is a senior fellow, the senior fellow in political economy at the Independent Institute.
That's independent.org.
He is the editor of their quarterly journal, The Independent Review.
And he is the author of a bunch of really important books.
Not just great books, but important books for you to read.
Depression War and Cold War, Opposing the Crusader State, The Decline of American Liberalism, Neither Liberty Nor Safety, The Challenge of Liberty, and of course, Crisis and Leviathan, and Against Leviathan.
Welcome back to the show, Bob.
How are you doing?
I'm fine, Scott.
Well, I really appreciate you joining us on the show today.
My pleasure.
No, mine.
I get to ask you stuff and then learn things when you answer.
It's going to be great.
All right, so here's your article.
No recovery until America invests again.
But TV says that we're in a recovery right now, so you must have it wrong.
Sometimes when I read the news, Scott, I get the impression that a lot of people in the media desperately want to convey the idea to people that all is well, that we're on the road to getting back to normal and so forth.
But there are some indications that the recession has hit bottom and begun to turn around a little bit.
The gross national product estimate improved in the last two quarters last year, and they didn't bring the economy back to where it was for GDP prior to the peak.
But they indicated some recovery.
But, of course, employment has continued to decline up to the present, and the unemployment rate, which is not precisely linked to the number of people employed but is related, the unemployment rate has been stuck more or less around 10 percent.
And so the job market has not significantly improved so far.
And when we look into the data on the gross domestic product, we find some interesting aspects of them when we take apart the GDP into its components.
What we find is that there's been a big increase in the government component.
Government purchases of goods and services are defined as part of GDP.
And that part of GDP has been growing rapidly, but private consumption has grown a little bit, and private investment is still stuck very, very far below its previous peak, almost 30 percent below where it was at its peak in 2006.
So, yes, there's some indication of recovery, but there are many other indications that we're stuck at the bottom of a recession.
And it's certainly not going to be a so-called V-shaped recession.
It's going to be U-shaped if it ever gets to a recovery at all.
Let me see.
I guess – well, let me take it back in time a little bit for maybe a little context.
There was a big crash in the NASDAQ and the stock market in 1999 and 2000.
And George Bush took office with a recession setting in, and then he stimulated the economy.
And there was, as we know – well, anybody who reads independent.org or lourockwell.com or mises.org knew all along, but as everybody knows now, it was all a big fake prosperity, a big credit bubble in retail goods and housing and things like that.
But so, in a sense, it seems like the recession – like they papered over it.
Like if the recession is a big hole, from the popping of the bubble creates a trough, and they fill that up with money.
And then they print even more money, and that inflates the value of at least certain sectors of the economy, and then they call that prosperity.
So I guess, if that's right, are they successfully doing that again?
They're trying to.
I think we need to remember, Scott, that the way you and I think about business booms and busts is not the way that mainstream economists think about them.
They don't think in terms of expansions that are unsustainable, because they may be the result of the Feds pushing interest rates below free market levels, and thereby encouraging malinvestments, as the Austrian economists call them – investments that are not permanently sustainable.
Mainstream economists think that whatever you do with fiscal or monetary policy to make gross domestic product rise is good.
Whatever you do.
And so, if you pump it up by, say, hiring a lot of people on government payrolls, or by having the Fed dish out a lot of new bank reserves, which the banks then lend, maybe even lend to what Austrian economists would call malinvestment projects, they're not worried about that.
They simply think in terms of aggregate ups and downs.
They think if you keep output growing, then ultimately employment will be dragged along with it, and everybody will be better off.
We'll be producing more total output, and they don't worry too much about what that output consists of.
And they certainly don't worry about the fact that we may be certain, if we're people who understand Austrian economics, we may be certain that many of those projects that are part of the boom are not going to be profitable in the end.
That they're going to ultimately go bankrupt and have to be liquidated.
Well, you know, I wonder if I could arrange somehow an interview between you and James K. Galbraith on this show.
Would you be willing to do that?
Oh, I'm sure I would be willing to do that.
Actually, James might be willing to do that, too.
I bumped into him briefly last year at a meeting in New York, so he seems like a friendly fellow.
Okay, good deal.
Well, you know, I'm going to see if I can get that arranged, because I'm reading this thing that Bill Anderson blogged on Lou Rockwell's blog yesterday about an article that Galbraith had written in The Nation called In Defense of Deficits.
And I mean, I really am amazed here.
I mean, he really says that the government can just print an unlimited amount of money.
I think he says, you know, if you're Argentina, you can't do that, because you have to pay back your debts in dollars or something.
But for true sovereigns, bankruptcy is an irrelevant concept.
I think Jim may be in for a shock before long.
He's going to find out the hard way like everybody else, huh, Bob?
We're beginning to look more and more every day as if the U.S. Treasury's debt, which has always been viewed as a kind of proxy for riskless securities, is no longer viewed that way at all.
Some of the big holders of U.S. Treasury debt, such as China, are very nervous, and the Chinese have actually reduced their holdings a little bit recently.
And they've certainly made the noises about their apprehensions that the Treasury will find itself in trouble with servicing the debt and as a result will monetize it, will basically have the Fed goose the money stock, so that in fact, although the Treasury pays back what it promised to pay, it'll be paying it back with dollars worth much less than the lenders expected them to be when they made the loans.
So the Chinese are not idiots about these things at all, and they're worried, and I think they're worried for very good reason, and they're certainly not the only ones who are worried about the same thing.
The U.S. deficit is so big, as projected now for the next decade, we're looking at trillion-dollar deficits for years and years on end.
I mean, only a few years ago this would have been utterly unthinkable to most economists, and now this is more or less being swallowed as the new normalcy, and yet there is a limit, there is a limit on how much debt governments can take on and still service that debt, especially if it turns out, as I think it is turning out, that we do not have a robust recovery, that we may be stuck in a kind of stagnation situation for years and years on end, and that means, of course, that the Treasury cannot rely on harvesting these abundant tax revenues as economic growth takes place, because there just won't be robust economic growth.
All right, now, basically, I think this is pretty much going to take the rest of the interview.
I've got two different directions I want to go here.
One of them, I guess the second one, will be about the crack-up boom and the rock in the hard place and whether we're necessarily on the path to the complete destruction of the dollar and so forth.
But first of all, I want to ask you something, Bob, about, well, I forgot the famous quote, but it's something to the effect of how amazing it is that people tend to be ignorant in ways that benefit themselves and how the whole establishment on Wall Street and in Washington, D.C. and in all of academia and everything, they all believe, apparently, in every kind of silly economics except Austrian theory, plain old, as Peter Schiff says, real economics.
He doesn't even call it Austrian economics.
He just calls it just economics.
Everything else is a bunch of nonsense, he says.
But at the same time, though, that I see, for example, Ron Paul dealing with these idiots in Congress who just cannot internalize his lessons whatsoever.
I see things like this article we were talking about earlier on the show where the ex-governor of the Bank of England said back in March 2007 that, yes, we did deliberately fuel a consumer and housing boom in order to forestall an economy.
And, of course, in fact, Ron Paul just yesterday in Congress asked Tim Geithner, do you understand the Austrian theory of the business cycle and how it is that you people are the ones who cause this?
And Geithner said, oh, yeah, of course.
Yeah, I'm with that.
And Ron said, well, where do you disagree or what?
Why do you keep doing it then or something?
And he gave non-answers besides that.
But he admitted that, yeah, I've read Bob Higgs.
What am I, an idiot?
I know how it goes.
So I guess my question is, you know, stupidity or the plan.
It's sort of like your book Crisis and Leviathan.
Don't they know that every time that they create a crisis that they gain in power?
And don't they create crises on purpose in order to end up enslaving us all?
I suspect, Scott, that for the most part they are not trying to create a crisis, at least this kind of economic crisis.
But they are deliberately stealing our money, though, aren't they?
They, I think in most cases, honestly believe, certainly I think Ben Bernanke honestly believes, in the kind of mainstream macroeconomic theory that I was sketching a few minutes ago.
They think in terms of big aggregates.
Whether they say they understand Austrian economics or not, they pay no attention to Austrian ideas about the boom and bust cycle.
They really don't believe them if confronted with them.
And they are always putting out today's fire.
I think that's the important thing to recall when we try to understand why these people do what they do.
They are in the public eye, you know, people such as Geithner and Bernanke, very much in the public eye.
There's a news flood every day of new things.
There are new data coming in all the time.
And they feel tremendous pressure to do something about today's fire, putting out today's fire.
How can they do that?
And so in a sense, these people always live in the very, very short run.
Now, we understand, of course, that if you're a member of Congress, your horizon is two years.
Because you need to do something that makes you look like the better candidate in the next election.
But if you're a Secretary of the Treasury or a Chairman of the Federal Reserve System, your horizon, I think, is actually much shorter than even a member of Congress has.
Because you are constantly being faced with short-term events to which you're expected to react.
These people think of themselves as fine tuners, and they're constantly reacting to today's data.
Now, what that means is that if they can do something, and they often can, do something that makes matters look better tomorrow than they look today, they've accomplished what they were trying to do.
But of course, if you continue to make policy that way, you may simply be putting yourself in greater and greater jeopardy of arriving at some kind of a bust that you can't offset at all, which is what happened, of course, in 2008.
And then they flounder around and tell us we're on the verge of another Great Depression, unless they exercise unprecedented powers and spend unprecedented amounts of money.
And it's those kinds of crisis episodes, those panics, that give us these big spurts in the power and size and scope of government.
Yeah, I guess the thing that drives me crazy about it is that old Thomas Jefferson quote, where he's basically talking about the Bank of the United States that, I guess it's the second Bank of the United States, that Hamilton was successfully created in the first Washington administration there.
And he was talking about, well, what we now, I guess, would call the cartel arrangement between the private banks and the central government.
And he was saying, if you let them do this and let them control the issuance of the currency, they will, by inflation and then deflation, screw everybody out of all their property until they're homeless on the land their fathers conquered or whatever.
So even back then, this was the Jeffersonian theory of the business cycle, that you have all things being equal, and then you have politicians dumping giant supplies of new credit into circulation, new money into circulation, and it distorts everything.
And the rich people always win, both ways, because they're the ones who get to create the money out of nothing, and they're the ones who get to make all the money off the high interest rates when the price inflation hits.
And they get to buy up everybody's bankruptcy for pennies on the dollar.
It works for them over and over and over again.
Well, they live in their own world, Scott, and they tend to think, I think, quite naturally, that things they do that benefit them are good for the system.
When they talk, they talk constantly about stabilizing the financial markets, about restoring growth of output, about things that are hunky-dory for almost everybody.
Now, I'm sure they understand, or certainly many of them understand, that there are some people who are integral in the process, like the big banks or the big financial institutions that work very, very closely with the Fed, including working with them in carrying out open market operations for the Treasury.
And these people surely understand that there are things that will benefit them especially.
But again, they're used to being in that situation, and I suspect that for many of them, they really don't think of themselves as robbers.
They think of themselves as occupying critical positions, and they think of their institutions as being key parts of keeping the whole economy working soundly.
And much of this is not so much self-interest as ignorance of perspectives and ideas that you and I know about.
And that doesn't mean that we're more brilliant than they are.
It just means that we haven't passed through the same educational and institutional experiences that they have, experiences and education that have shaped their outlooks.
I think there's a great tendency on the part of a lot of people in the libertarian camp to conceive of these people as villains.
They're villains.
They know they're villains.
They're out to loot us and destroy the world.
And frankly, I think this is a very incorrect understanding of what these people are doing and why they're doing it.
I think we need to, in a sense, do what every historian, if he's a real historian, tries to do, which is put ourselves in the place of the actors.
And I very much doubt that many of them think of themselves as looters.
Now, I think they end up looting in many cases.
I think somebody like Goldman Sachs is a de facto looter, and when they run to the Fed or to the Treasury for bailouts, they are, in effect, socializing their screw-ups and their losses at public expense and redistributing income and wealth in their favor.
But again, it's possible for people to think of this as what needs to be done to keep the system from smashing.
And so some of them may honestly think of it that way.
Well, so it's really what you're saying, it seems like, is it's not conspiracy but consensus.
I think there is a lot of consensus.
Now, in a way, there's conspiracy also.
I mean, that's the thing, too, is you have, for example, Goldman Sachs selling a bunch of AAA-rated air and then betting against it and all these credit default swaps and all this fraud.
I mean, a lot of this is really just criminal behavior on any given day, isn't it?
Well, that's right, Scott.
I think there are a lot of things they do.
They realize there's a big gain in it for them, and they also realize that this is certainly not the sort of thing they want transparency for.
So that's the sense in which I say, yes, there's conspiracy, too.
And, of course, the Fed right now is fighting tooth and nail to keep its deliberations secret.
And it will be interesting to see, ultimately, what the courts say on these cases that have been hanging for a couple of years now, actually, to make the Fed open up the records of its deliberations on policy matters.
But at all events, they certainly prefer to act in secret, and that means that the number of people contributing to the policy deliberations remains small and to some extent unknown, although we can be quite certain that, in the case of the Fed, the big financial institutions are very much involved in the Fed's deliberations.
All right, now, I like to pretend, because I guess I have no hope otherwise, that Geithner and Bernanke at least have a little Ron Paul standing on their shoulders, screaming at them about inflation.
And at the very least, he has to have, after all these different cross-examinations in the House Banking Committee there, he has to have taught them a little bit about the dangers of inflation.
And they must be keeping in mind that they are kind of in danger of breaking the dollar.
And I guess the way I understand this is, and you explained this earlier, but if I can rehearse it in my own language here, basically the debt is so much that they can't raise interest rates basically ever, because then just the interest on the debt would be enough to bankrupt us.
We'd have to go further into debt just to pay the interest on the debt.
It's already too much, so the only way to pay it off now is to destroy the dollar.
Well, it's not that stark yet, Scott.
Of course, if interest rates get high enough and the debt gets big enough, that's the end of the game.
I mean, we're paying about half a trillion a year just in interest on the debt right now.
The debt is serviceable right now.
The government can service its debt, and certainly it will have more trouble doing so as interest rates rise.
And they're sure to rise sooner or later.
That's one thing we can be confident about.
They're so low right now that interest rates on the government's own securities especially are so low that they basically have only one way to go, and they almost certainly will rise sooner or later.
But there's still wiggle room here.
If you look at other big industrial countries, they have carried bigger debt loads relative to GDP, and they've done so at higher interest rates in some cases.
So it's not that it can't be done.
It's just that it can't be done increasingly.
You can't continue to run up the federal debt by a trillion dollars every year forever.
When interest rates rise, there will come a time when we run into the kind of dilemma you've described.
We're not there now, and it's not something that happens all at once.
It happens little by little.
And what that means is that it gives the Treasury and the Fed sort of warnings ahead of time that they have to take action to stay away from the brink of the cliff.
They know this.
They're not so foolish.
They don't appreciate this danger.
In fact, Bernanke has spoken in several speeches in recent months, quite frankly, about the danger that exists because of all the bank reserves that were created in late 2008 and early 2009, especially that the banks now hold more than a trillion dollars of reserves in excess of the amount they're legally required to hold.
And if they were to lend all of that over the next year or even two, the result would be very high rates of inflation.
Now, of course, they're not so far lending any of it.
They're actually curtailing the volume of their outstanding credit in recent months.
But the reason they're doing that is because of apprehensions about their own balance sheets and apprehensions about the riskiness of lending to people in the economy as it now is operating.
So the banks are very nervous about their own solvency.
They're very nervous about the ability of borrowers to repay loans that the banks might make to them.
And so they're sitting on all this money.
Now, Bernanke understands that when they start lending this money, when they feel more confident that they can do so profitably, that it's going to create a problem of potential accelerating inflation.
And he's already describing their plan, as it were, for how they're going to control this situation.
But they expect to do it in degrees.
They expect that as it asserts itself, then they act a little more vigorously.
If it asserts itself more, they act even more vigorously and so forth.
And the main tool, as he calls it, they expect to use, it seems to me, is the payment of interest to banks for holding reserves with the Fed.
Okay, so now you're talking about the Fed basically paying interest on the bank's deposits at the Fed to keep them from loaning the money out.
They know if they did loan all that money out that it could cause massive price inflation very quickly and that kind of thing.
But I was watching Max Kaiser on the Kaiser Report the other day, and he was talking about how there are still, I guess in his words, I think he said something on the order of bazillions of dollars' worth of bad debts that still need to be deleveraged, that all this money creation that they've done this whole time has helped to prop up prices and to prevent bankruptcies that should be taking place.
And then, of course, you have loans that are set to reset in commercial properties and the next waves of subprimes and all those things.
And that basically, I guess what my question is, would I be right to interpret all this to mean that basically there's such a big black hole that Bernanke and them, all the money that they've created, most of it is basically they're just filling in such a deep hole of bad debt that it's not yet kind of overflowing into the rest of the economy?
Because then we would have that pseudo-recovery at least, and that money would start being loaned out, right?
Well, I think that's a correct way to think about the situation with regard to the commercial banks themselves.
As I said, one reason they're holding so many reserves right now is that they're worried about their own solvency, their own balance sheets.
A lot of these banks are probably zombies, Scott.
If they valued their assets correctly and their liabilities correctly right now, they would be bankrupt.
Now, because they haven't made the appropriate changes to their balance sheets to recognize, in particular, the deterioration of a lot of the values of assets they hold on their books at higher values, they look as if they're solvent, but because the managers of these banks understand their situation, one of the things they can do to help protect themselves is to build up their cash reserves by holding these huge reserves with the Fed and earning a very small rate of interest for doing so.
Now, they're in the business to make money by lending and making investments, so you're not going to see banks forever living by holding reserves at the Fed at one quarter of one percent rate of interest, which is what they're getting now.
Especially if prices start to go up again, all you've got to have is some positive rate of inflation to wipe out a return of one quarter of one percent.
So at some point, they're going to start to lend unless things continue to deteriorate.
Now, things may continue to deteriorate.
You described some problems that may grow in commercial real estate, and there may be other areas in which we have yet to see a lot of liquidations that will have to be made at some point.
Now, if that stuff surges out, then the banks are going to be even more leery of making loans.
We saw this back in the early 30s.
Many people don't understand that the Fed, despite what the monitors saw, was taking very active moves in the early 30s to ease monetary conditions.
But notwithstanding what the Fed was doing in the early 30s, it was being overwhelmed by the fact that people were exchanging their bank deposits for cash, and when they did that, it reduced what economists call the money multiplier.
It means that any given amount of reserves that the banks were holding gave rise to less potential money stock.
And so the money stock kept falling, even though the Fed was increasing bank reserves in the early 30s.
So we could have something similar to that happen again.
We could have the Fed making credit very available to the commercial banks, and yet they could continue to constrict their loan volumes because things were going to hell in the outside world.
That's a possibility.
Now, right now, I don't know.
I don't have any good reason to think that we're going to have a very severe second dip in this recession.
I know there are a lot of gloom and doom guys that are constantly predicting some kind of utter collapse out there, but they have no credibility with me.
They predict utter collapse every year, so when it comes along and we have a recession or something, they look like champs.
But to me, they're chumps, because they've always predicted this, and in most years, nothing of the sort happens.
So I don't take them terribly seriously.
It doesn't mean they can't be right at some point.
There may be a time when we have another huge collapse, but in my view, we're not facing one right now.
The bigger threat right now to me is real stagnation, because there are so many things working against a robust recovery in public policy.
And the other real threat to me is that the banks will start to resume their lending, and the Fed will be unable to get a grip on that, and we'll have rising rates of inflation.
And it won't take a whole lot of bank lending and investing to set that in motion, because there's such an enormous amount of reserves now in the banks' accounts at the Fed.
Well, my favorite predictor of doom and gloom is Ron Paul, and he has been saying the same thing for 30 years, but he never has said it's coming real soon.
He's always said, we don't know when it's going to be, but we do know it's basically all a big pyramid scheme and that eventually we'll be too deep in debt and the whole thing's going to go bust.
But lately, I mean, heck, I think on my show a few weeks ago, he said he thinks it'll be within a few years, that we absolutely are at some kind of breaking point here with this debt.
Well, I'd say nobody really knows, Scott.
Everybody's got a hunch about this, but nobody knows the future.
There are just countless variables that go into determining how the whole economy operates, and not all of them are within the control of policymakers in any event, especially nowadays, because the world is so tied together financially and through trade flows.
So a lot of things can be done outside the United States that will have a big effect here, and vice versa, of course.
So it's very hard to say.
I don't ever pretend to be a prophet myself.
I just have my best guesstimates of where I think we're heading, but I never make precise predictions about such things, because I don't think I can, and I don't think anybody can.
But when we look at what people are doing with their own money, what we see right now is that people who manage great sums of money are, in very large part, placing their funds in cash hoards or in very short-term, low-risk kinds of investments.
That's one reason the interest rate on Treasury bills is practically zero, is that so many people have been willing to buy these things recently, just running away from higher-risk uses of their funds.
But again, they're not going to be content forever to let their money sit in the kinds of investments that yield negative rates of return if there's any inflation at all.
So that won't persist.
But whether there's some kind of a huge crash out there, I don't know, but I don't think so right now.
I just think a much more likely outcome will be a very poorly performing U.S. economy for many years.
Well, forgive me, but I think I could interpret what you're saying to mean that Ben Bernanke is really a hero.
I mean, it was Greenspan who lowered the interest rates over and over and over again.
It was Bernanke who finally raised them, and too bad the bubble was so big that it deflated in such a spectacular fashion.
But then he intervened, he prevented a systemic banking crisis and the unraveling of the global financial system, which was what was going to happen.
And even now, as you say, the danger of inflation could still be probably head off.
He hasn't really blown it yet.
And what he did do was he saved capitalism.
Yeah, no, I don't espouse that interpretation at all myself.
I don't think he was a hero.
I think his policy actions were very bad.
I think Greenspan and Ben Bernanke were responsible for allowing that boom to develop the enormous dimensions it developed.
They weren't the only ones involved, but I think Fed action was almost a necessary condition, if not a necessary condition, for everything else wrong that contributed to that enormous, unsustainable boom, particularly in real estate.
But even though Bernanke was not a hero, in fact, I think he was supporting and pursuing bad policy for years.
And I also think that the policies taken in the last two years have been bad in the sense that they've propped up a lot of zombie enterprises and they've propped up a lot of firms.
They've propped up a lot of firms that should have gone bankrupt, that should have been liquidated.
And if that had been done instead of having the Fed and the Treasury come along and prop up these enterprises, then by this time we would perhaps have cleared enough of this debris away that we would be in position to have a resumption of something like healthy economic growth.
So I'm not at all an interpreter of Bernanke as a hero, either before 2008 or since.
But at the same time, that does not mean that a financial or economic apocalypse is waiting for us.
If you think back to our economic history, in a sense, there have been repeated screw-ups similar to this before by policymakers.
And now it's true that in one case, those screw-ups resulted in the Great Depression.
And the problem we have now is that we have a kind of similar configuration of policy responses.
That is, what made the business decline that started in 1929 turn into a Great Depression was that the government tried to do so many counterproductive things all at once, more or less.
In a very short period, at least, the government undertook these huge policies that crippled the operation of the price system and created enormous uncertainties for investors and created actual hostility toward some of the most important movers of the economic system, particularly the big investors.
Now, right now what we're seeing is, again, a lot of destructive policies, monetary policies, fiscal policies, economic control policies, regulatory policies, all these things coming in a kind of near-perfect storm of destruction of the operation of the price system.
And that's what worries me, Scott.
I think that if we load enough burden on private enterprise, and it's certainly burdened very heavily already, then we cannot expect it to perform well, if indeed it performs at all.
And right now, I think we're in that situation.
But we need to remember that people don't just roll over and die when these things happen.
They keep making the best of a bad situation.
Well, I think, Bob, wouldn't Time Magazine, the man-of-the-year choosers over there, wouldn't they say that what you're skipping over is – I mean, if you just take the bailouts and isolation, for example, all the new regulations and everything aside, they would say that if you had the entire banking system unravel, that it would have taken us down a deflationary pit so deep that it would be much harder to recover from that.
Much harder than to recover with the counter-cyclical spending and the saving of the banking system the way it's worked out now.
So it may take a little bit longer, but maybe not.
That maybe if we'd gone all the way down with all the banks declaring bankruptcy and everything, that for everybody to go on, as you say, would have taken massive efforts beyond what we have now.
They would say that, but I would part company with them in that I do not believe that without the actions that the Fed took and the Treasury took in 2008, everything would have come unraveled.
I think that was the scare story that was always given out to justify policy actions, but I have absolutely no reason to believe that the economy was so fragile in 2008 that it was going to go into a black hole unless we bailed out those big banks.
I think that those big banks had a lot of assets that were still worth something, worth a great deal.
In fact, let's remember here, over 90% of all the people with mortgages are up to speed repaying those mortgages.
More than 90% of them.
So even if you have mortgage-backed securities, there's a big income stream associated with those.
And the problem was that these derivative securities had such convoluted, complex contracts that it was difficult for anybody quickly, when things started going south, to know exactly what they were worth.
They had to, as it were, separate the worthwhile components from the worthless ones, but that was difficult to do in these complex financial instruments.
Well, if they had not had the option of just having the Treasury come along and pay them more than these things were worth, which of course they greatly preferred, if they had had to figure out what they were worth and market them and turn these assets over to new management, they would have done so.
People don't leave perfectly good income streams lying there unmolested.
They're willing to buy them.
And so if we had had people forced into sorting out these screw-ups associated with derivatives and credit default swaps and all the rest of it, they would have done that.
The people who created this stuff are smart enough to recreate them when they had not worked out properly.
But they didn't have to, is the point, because the government rode in and saved their cookies.
And if the government hadn't, I'm quite sure that even though we might have had a severe recession, it would not have been a Great Depression, it would have not lasted forever, and we would not fall into a black hole.
That is not how the world works.
Even in 1933, we did not fall into a black hole.
Yeah, that took until 1937.
We continue to operate the economy.
It continued to produce.
It produced less.
But I think sometimes people talk about these doom stories as if they don't even bother to say, well, what happens when doom comes?
It's as if the screen goes black.
But the screen doesn't go black on human history, Scott.
People keep moving.
They keep doing the best they can.
Yeah, well, and there's all kinds of wealth in America.
If you took out all the inflation and all the flim-flammery, there's a lot of infrastructure and a lot of skilled people and a lot of raw materials and every reason to believe that America could be a wealthy society for the indefinite future.
Exactly.
We could just get rid of the central bank.
What we're talking about here is not an unimportant thing, but we need to keep it in perspective.
The GDP fell during this contraction by 4%.
That's about the amount that would have taken us back a year and a half during the boom.
If 2009 is so horrible, why was 2006 so great?
They had identical GDPs.
It's the case, of course, that when people make a lot of deals and enter into commitments based on the expectation of continued economic growth or continued increases in asset prices, it's very upsetting and disappointing if that growth turns the other way.
There's a reason why recessions create so much trouble, but at the same time, we need to remember that they don't take us into black holes.
They just remove the gains of the last few years, and that's a far cry from going to hell in a handbasket.
Yeah, well, it's actually a good thing when the gains of the last few years were a bunch of flim-flammery.
Well, in a way, it is.
When these malinvestments get liquidated, however, there are good enterprises that get pulled down with them, at least in the short run, because there are too many things interrelated in our economy for ever to just throw out the garbage and keep all the good stuff intact.
That's sort of the grain of truth in Keynesianism, that when you start liquidating stuff, there are costs of doing so, and in the short run, you have a lot of dislocations and losses that have to be borne while you sort things out in a way that is efficient and viable.
But notwithstanding that, it's still the sort of thing that, historically, our economy and other economies did quite well.
We never had these long, sustained recessions or depressions until we got to the point in the 1930s where governments started to think they could do something about them.
It was the government's intervention in these processes that made them so horrible.
Surprise, surprise.
Yeah.
All right.
Well, thank you very much for your time on the show today, Bob.
I really appreciate it.
You're welcome, Scott.
Everybody, that's the great Bob Higgs.
He's the author of Crisis and Leviathan Against Leviathan and Neither Liberty Nor Safety.
He's Senior Fellow in Political Economy for the Independent Institute.
That's independent.org.
And he's the editor of their quarterly journal, The Independent Review.
