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March 21, 2008 - Freedomain Radio - Stefan Molyneux
23:01
1017 False Currency, Real Control (The Housing Bubble)

A free market analysis of the housing bubble.

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Hi everybody, it's Stefan Molyneux from Free Domain Radio.
I hope that you're doing very well.
It is the 21st of March 2008.
I don't mean to shock you, but we are in fact going to do just a little bit on current events.
Now, I'm no economist, though I do occasionally play one in my podcast, so take this with all of the caveats.
My economic education occurred mostly in the history of economics, particularly in the Middle Ages at a graduate school level, but I am certainly no PhD in economics, so take this for what you paid for it.
But I think that we can come up with some useful stuff, which is an anarchist analysis of the housing crisis and the current financial problems that are unwinding in the United States.
So let's take a tour through an article that popped up.
Which, for a lot of people, and this is from the Telegraph Co.
UK, and it is an article entitled Foreign Investors Veto Fed Rescue.
And let's just tool through a couple of the phrases in there and see if we can unpack a little bit about what on earth is going on.
As feared, foreign bondholders have begun to exercise a collective veto of no confidence in the devaluation policies of the U.S. government.
The Federal Reserve faces a potential veto of its rescue measures.
Asian, Mideast, and European investors stood aside at last week's auction of 10-year U.S. Treasury notes.
It was a disaster, said Ray Atril from Forecast Web.
We may be close to the point where the uglier consequences of benign neglect towards the currency are revealed.
The share of foreign buyers in direct bidders plummeted to 5.8% from an average of 25% over the last eight weeks.
On the Richter scale of unfolding dramas, this matches the death of Bear Stearns.
Now... I'll post the article in the YouTube description.
But what are they talking about?
What is going on here? And for those of you who are just hearing the vague rumblings of economic meltdowns, catastrophes, disasters, and so on, here's probably the quickest and hopefully at least the reasonably accurate assessment of what is happening and how it all came about.
From 2001 to 2004, the Federal Reserve cut its rate, and that is the rate at which institutions lend to other institutions.
Cut its rate significantly. Why in 2001?
Well, of course, it had a lot to do with the attacks on New York and fears of investor confidence that might be resulting from that.
And why did the Federal Reserve lower its rate?
Well, the lower the amount of money...
The important thing is that money is a commodity.
Money is a good. Money is a thing.
Money is like a couch or a car or a TV or a computer.
Money is a commodity.
And, of course, when the price of any commodity or good or service goes down, all other things being equal, the demand will rise.
This we all know, right?
So, when the price of money goes down, The price, sorry, the consumption of money, the demand for money goes up.
Now, what is the demand for money?
Well, the demand for money is in terms of borrowing, right?
So, if Maseratis suddenly went down to a dollar a piece, we would all be lining up at the Maserati dealer to pick one up, or two, or ten, or a hundred, even if we didn't really need them.
And, of course, because the price was so low, A huge demand would be set up for the Maserati cars, which would draw all of these resources and people and goods and services and capital and equipment and so on.
It would draw them away from all of the other car dealerships.
It would draw them away from making washing machines or movies or any of these kinds of things.
So, when the price of money is driven down, when the price of the good called money is driven down, the demand for money increases.
So, of course, when the Fed pushes or sets the interest rate artificially low, Then what happens is the demand for capital, for money, goes up.
And the way that this translated into the US economy was in increased loans to subprime mortgages, which is mortgages below prime, also known as subprime in terms of the people's ability to pay them back.
The rules for lending money to people, to your average low-income home desirer or home wannabe, homeowner wannabe, the rules for lending money to these people were relaxed considerably.
And the question, of course, to ask, if you're interested in this kind of stuff, is why?
Well, why?
Just because the price of money goes down, just because interest rates go down, does that mean that people are going to take enormously high-risk loans?
Because it's important to remember, when you're lending money, I mean, in a sort of free market scenario, in a sort of ideal, non-coerced, non-regulated by the government, self-regulated economy, If you put out a loan, you are making maybe a percent or two on that loan, right?
So, if I lend you a thousand dollars, I'm going to be making, you know, not much, you know, when it comes back.
I'm going to be making 10 or 20 bucks a year on the loan payback.
So, what that means, of course, Is that every single time a bank lends someone money, they're making a percent or two on the loan.
And what that means is that they cannot have loan defaults to any great degree at all.
The business of lending money, they used to call it the 363 rule of banking, you know, borrow at 3%, lend at 6%, go to play golf at 3 p.m., But this idea, if you're making 1 or 2% on loans, then if 1 or 2 people out of 100 default, or maybe 3 or 4 default on the loan, then the rest of your profits are completely wiped out.
It is a highly, highly leveraged business.
It is a tail wagging the dog kind of situation.
So the question is, why did all of these organizations decide to start lending money to highly risky people?
Because aren't they taking on the risk themselves?
Just because the price of interest, the interest rates or the price of money has gone down, doesn't mean that you are automatically going to start lending to all of these uncredit-worthy people or untrustworthy people or people who can't sustain the payments or whatever.
Well, of course, what occurred was that they were able to separate the risk, right?
And this has a lot in it.
It's all a complicated mess, which we don't have to get into particularly.
But what happened was they packaged, so these companies would go out and lend to a whole bunch of people who were barely scraping by in places where there was high instability, economic instability, high unemployment, and job insecurity, and so on.
So they would go out and they would lend all of this money to people to buy a house.
These people would then go out and buy a condo or a townhouse or a house.
And then these institutions would repackage these loans, bundle them all up in these big derivative monsters, and then they would sell those as income generators for other people.
So, they basically passed the risk along to other people.
Now, you may say, and well may you say, what on earth is the point of that, right?
I mean, why would you want to take on Somebody else's loan when you don't even know what the hell is going on, right?
I mean, at least the company that has made the loan has some skin in the game, right?
They're actually out there assessing the risk and lending the money.
Why would some person in the middle of nowhere, somewhere out in the international financial ecosystem, why on earth would they want to pick up these loans when they couldn't assess the value or the...
I mean, it's really, really risky.
So why would they want to do that?
Well, of course, the reason that they would want to do that is that the government, and this is not just true of the US government, but other governments as well, have created these situations where you can peel off the profits in the short run and you can put them into other companies.
So what happens is you basically swallow these big risky loans where you are making a fair amount of money in the short run.
You peel off those profits and you put them in some offshore or some other company.
And then what happens is when your original company, if those loans default, no problem.
You've already taken the profits and put them elsewhere where the collapse of the original organization Doesn't affect them.
So the government has created this ability to hive off.
This is the Enron thing too. Hive off these profits.
Put them elsewhere where they are immune from repercussions if your original corporation, the one that's actually absorbing all of these things, goes down.
So, I mean, this is an entirely state-created and state-generated and state-sustained situation.
The government has the power to set interest rates, to print money, and so on.
And so, because it printed so much money, it failed to regulate any of the loans, which of course it always does, right?
And then it created the ability for these people to hive off these profits.
And, of course, that is in return for financial contributions to people who are running for office.
I mean, this is the Wall Street and Washington bear hug which, you know, causes the middle class's head to explode for the most part.
So, in the short run, sort of what happens is people make a lot of money and they hive it off.
They carve it off, right?
So, if you can make a lot of money in the short run without exposing yourself to any substantial risk in the long run, why wouldn't you do it?
I mean, this is amoral, of course, but economics understands and appreciates the fact that people are motivated by maximizing their gains in the short run.
So what happens is, of course, the profits have all been siphoned off from these large corporations, the Bear Stearns and so on.
And then what happens is when the House of Cards begins to collapse, right?
When the government's printing of money and artificial suppression of the interest rates can no longer sustain the basic realities.
Because, of course, what has happened is when you artificially lower the interest rates and make it very possible for people to make an enormous amount of short-term profit, Selling houses in an unsustainable way to mostly poor, lower middle class people and to some degree middle class people.
What happens? Well, there's this huge tsunami or tidal wave of capital and resources and labor and energy and so on that goes from every other industry into the housing industry, right?
Because that's where the money is.
Building and selling houses is where you make the most savage and crazy-ass profits on the planet.
So what happens is people no longer lend to manufacturers.
People no longer lend to service industries.
All the money is going into construction and financial services.
So what happens? Well, somebody who has a job in a manufacturing organization or a service organization or something like that buys a house because interest rates are low, but because everyone is buying a house, all of the investment is going to the housing market, which means that his job is at risk, right? Because when all of the investment is going elsewhere, it means that there's less investment for actually productive sectors of the economy.
And not to say that housing is not.
We all need a place to live. You know, relative to how it would be in a free market situation.
So, because everybody's out there buying houses, the capital all goes to the housing markets, the labor, the investment all goes to the housing and the financial services, there's less available for these other areas, which means that they start shedding jobs.
Everything that you see that is a visible bubble is the result of a crater.
That you can't see somewhere else.
Economics is all about seeing the hidden losses behind particular aspects of transactions, right?
So when the government subsidizes jobs, you see the thousand jobs that were created.
You don't see the 5,000 jobs that weren't created because the money was forcibly shoved into one particular area.
So these people then default on their housing.
They simply can't afford them.
Which, of course, is not good for the bank, right?
Because the bank has lent the money to the person to buy the house on the expectation that the money will be paid back, of course.
And then it has resold this as a glommed-up Gordian knot of financial derivative services or instruments to other people.
And this default begins to cause problems, right?
So... And this is sort of the bubble thing, right?
Because you lend money also to people when housing prices are going up based on the fact that they're accumulating value in their house because house prices are going up.
When lots of defaults start to happen, what happens is the price of houses, of course, begins to go down, or at least it stops accelerating upwards.
So all the projections about how much money is going to be made out of buying a house It goes down, which means that these companies have to take a write-down because the assets that they have in terms of houses are no longer as valuable, right?
Because you have the assets of the house which you're selling off month by month to the person with the mortgage.
So those assets then become a lot less valuable.
What happens? Well, you begin to have a financial catastrophe, again, completely created and completely sustained and completely dominated by state-run institutions, the Fed, the SEC, the financial regulation sector, and so on.
And it's got nothing to do with protecting the consumer.
It's got nothing to do with protecting you.
It's all about rewarding friends and punishing enemies, as is the case with all uses of political violence in the form of regulation and taxation and coercion and so on.
So, what then begins to happen?
Well, these financial institutions become unable to pay their bills.
Now, again, this doesn't mean that the people at the top who were able to skim off the profits, pay themselves hands and bonuses, put that money offshore in ways that can't be accessed by regulators or the government.
Those people are doing fine.
I mean, those people, thank you very much, have had a fantastic ride.
They're perfectly happy. They're perfectly satisfied.
And you know, of course, I mean, this is a complete indication of when a bubble is occurring.
When people begin to get paid commission for the transaction rather than salary in the long run, you know that a bubble is occurring, right?
So the people who would make these mortgage loans to poor and lower income people would get paid for the transaction.
They wouldn't get paid in terms of long-term salary for the long-term success of that loan, which meant that they just would sign anybody up in order to get paid their commission and to help with the long-term consequences.
I mean, this has all been evident for quite some time, let me tell you.
So, when these financial institutions are unable to make their commitments, everybody gets scared, right?
The government gets scared, because if there is a perceived instability or core value absence right at the heart of the U.S. financials industry, well, then, as you can see from this article that I started reading, foreign bondholders don't want to buy U.S. Treasury bonds.
Now, I mean, again, I want to get overly complicated, but treasury bonds are basically the government will take $100 now, promising that in 10 years it will give people $110, right?
So basically, it's a total screw you to future taxpayers, right?
It's pillaging the future to pay for the malinvestments in the present.
And of course, government itself is fundamentally a complete and total malinvestment.
So, the government, and this is Bernicke, I think his name is, the new Fed guy, But he just, bam, not elected, just appointed, has no say.
The people have no say in what he does.
Not that the people have any say, really, but they don't even have the illusion of a say in what this guy does.
He just injects $200 billion into a couple of financial companies.
How is it that he gets the right to spend $200 billion of future taxpayers' money?
Because it's a screwed up and evil system.
That's why. I mean, because it is a completely exploitive system.
We are tax livestock to our financial masters.
You know, this is not just me making stuff up.
This is not just crazy, paranoid, anarchistic ranting.
That's just a fact. I mean, we don't have any control over the most foundational instrument of interactions, which is currency.
And it's certainly not run for our benefit, but it's run for the benefit of the people who have access to power.
It's not you, and it's not me, and it never will be.
So... The US government, of course, is desperate to keep having foreigners lend it money, right?
Because another one of the reasons why the Fed has kept the interest rate low is because it keeps an artificial demand for goods and services going, again, particularly in the real estate market, which covers up all of the problems that are caused by the massive amount of spending that's going into the The genocides in Iraq and Afghanistan, right? Because murder is a highly profitable business for state allegiance organizations, right?
And the mercantilism of death is staggeringly profitable, and I use that word profit in a completely non-free market way, in the way that a mugger profits from his victims.
So, the US government has had a huge problem, which is that it is running the Iraq War in order to prey upon the last remains of public finance potential, right?
In the same way that the Russian government in the 1980s was running the Afghanistan War so that it could pillage the Treasury as much as possible.
So, given that we sort of can understand that the war is being run to pillage the treasury, it's got nothing to do with them, because they just invent reason after reason, weapons of mass destruction, bringing democracy, it's like, hey, what will they buy today that I can put forward as a justification for this war?
Which means that the real justification, of course, is not being talked about, and the real justification is that war...
It's by far the most efficient way to pillage the public purse.
There's just no better way because people simply will not stand for, because they are patriotic and they support the troops, they will not stand for reductions in public spending or controls in public spending during a time of war.
So if you want to pillage the treasury, you start a war.
This is why wars get started.
The most efficient way to steal things, right?
So, given that the average American citizen would not be a big fan of the war, if he got a couple of hundred bucks bill in his mailbox every month, they have to make sure that the true costs of the war are hidden from the American public, so that when the disaster finally hits, or the financial meltdown finally hits, it will be years after the war has started.
We just passed the five-year anniversary, so...
They have to hide these costs, and what that means is they have to get foreigners to buy U.S. government bonds, right?
So basically they're selling future generations to foreigners, and what is it, like, over 65% of the U.S. national debt is held by foreigners, the number one being Japan, and the reason for that, of course, is that America is still, 60 years after defeating Japan by nuking it unjustly, the U.S. is still occupying Japan and Okinawa and has nukes actually offshore in ships, And pretty much can get the Japanese government to do whatever it wants.
So one of the things that it says is, you know, buy our bonds or bad things will happen to you.
It's a shakedown, of course, like everything that the government does.
The US government needs constant infusions of capital from foreigners to pay for its ever-escalating spending, right?
So basically, we're being sold to people around the globe so that our tax lords can become rich in the short run, and of course, they're going to escape with their capital intact, and we're going to be left holding the bloody bag, right?
So, the US government goes out and tries to sell all these treasury bonds, and what people are saying in countries, and you can see here, it says it's gone down to 5.8% from 25% of foreign buyers, indirect bidders.
It means that people no longer want to buy.
The U.S. bonds.
And what it means is that they don't believe that the U.S. has at least...
It's certainly less than ten years to go before it is unable to repay its obligations.
I would actually be interested to see what happens with five-year bonds.
About three years ago, I said it was going to be five to fifteen years before the shite really hits the fan economically in the U.S. I may have been a little optimistic.
It probably will only be four.
But I think a year off is actually quite good.
So that's what it means when they say, well, it's a disaster that European and Middle Eastern and Asian investors are not interested in buying US bonds.
What it means is that the US is going to find it very hard, if not impossible, to pay its bills.
And it will try printing money.
Of course, recently the Fed has stopped reporting how much money it's printing, which is why people are getting particularly...
Leary. And this, of course, is why the US dollar has fallen relative to other currencies.
Like any commodity, and particularly, of course, money is a weird commodity because it represents all the other commodities, right?
So if you have 100 units of goods and 100 units of dollars, then $1 equals 1 goods.
One good. If you have 100 units of goods and 200 units of dollars, then $2 will represent one good and that's just inflation, right?
So each dollar becomes worth half what it was before and that, of course, is what is happening.
So another thing that's occurring and probably one of the reasons why nobody wants to buy these 10-year U.S. Treasury notes It's because when you factor in the deflation of the US dollar over 10 years, they'd have to have an interest rate of something like 20%, I would imagine, which they can't possibly offer with any credibility, because the dollars you're going to get paid back within 10 years will be worth vastly less than they are now, Clearly, people believe that the Fed is going to try and inflate its way out of this situation.
But of course, the reality is nobody's trying to get out of the situation anymore.
Nobody's trying to create a sustainable situation.
All that's happening is that the people at the top are realizing that the gig is almost up, and they better grab everything they can from the public treasury before the door comes down, as it did in the Soviet Union.
So, I hope that this is a helpful, semi-rapid analysis.
And thank you so much for watching Free Domain Radio, an entirely voluntarily funded philosophical educational organization.
And so, if you'd like to donate, if you found this information to be helpful, if you'd like to donate, I would hugely appreciate it at freedomainradio.com.
And thank you so much for watching.
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