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July 14, 2019 - Freedomain Radio - Stefan Molyneux
28:44
The Real Causes of the Great Recession | True News
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Music. Music. . .
Hi everybody, it's Stefan Molyneux from Freedom Aid Radio.
I hope you're doing well. This is just a little short tidbit of a presentation on what actually is causing and continuing the Great Recession.
It's a force that has failed, though the blame always gets placed on freedom.
So, as we probably know, the primary cause of the Great Recession was bad investments in residential real estate valued from $3 to $8 trillion.
So what happened was the Greenspan put that started in the 90s is when the chairman of the Federal Reserve and Ayn Rand betrayer par excellence Alan Greenspan cut interest rates and printed money whenever the economy showed signs of slowing down.
And this is pretty catastrophic.
Economies are supposed to slow down as capital and resources get reinvested into new and more productive areas as old forms of machinery or investment become less productive or profitable and new ones become more productive.
It's supposed to shift. They're supposed to be An upward trend, but it's jagged, not smooth.
And the Fed, of course, wants to smooth it out for political purposes.
So what happened was the government poured huge amounts of money into the economy, and this tended to cluster for political reasons around housing.
And what happened was this changed people's perceptions.
Of houses. Rather than being consumption goods, they were perceived as investment goods.
This is fundamentally false.
So, like, if you buy a computer to run your business, that's an investment good.
It's producing value on the other side.
If you buy a computer to play video games, lots of fun, but not an investment good.
That's a consumption good.
And the idea that you can borrow to become rich by investing in consumption goods is fundamentally false.
And what it did...
When houses were perceived as investments rather than consumption goods, it shifted trillions of dollars of economic resources over a 10-plus year span into the housing sector, away from manufacturing.
It meant people were borrowing to consume when they thought they were investing and the market corrected that over time.
When you have a 10-year malinvestment in massive portions of your economy, I mean, it's catastrophic in terms of lost future income.
Whatever you consume now, of course, you can't invest and consume in the present.
So for instance, when you have a bubble in housing, it draws workers into construction and away from manufacturing.
Now for manufacturing to compete with the increased wages available, the artificially high wages available in construction, they have to offer higher wages in manufacturing.
At the same time, as China and India are attempting to suck all of the manufacturing out of the United States, this is one of the reasons why manufacturing has left, is it couldn't compete with the bubble and the resource draw towards construction.
That's a huge problem.
Houses, of course, don't create jobs after they're built, whereas if you take money and you invest it in a factory rather than building a house, then you end up with jobs being created after the factory is built.
This is one of the reasons why unemployment remains so high.
It takes a long time to undo a decade-plus malinvestment in a consumption good and turn it into an investment into a consumer good.
Of course, any time you reallocate resources to consumption rather than investment, you negatively impact your future standard of living.
And this is not to say anything is right or wrong about this.
We have to consume in order to live, but we have to invest in order to grow.
And you can see just with the U.S. savings rate plummeting from the late 90s up until recently and now...
It's beginning to increase again.
This has huge costs if you don't save.
If there's less money to invest, if all the money that's out there to lend is going into the housing industry, which is a consumption good, you're not investing in upgrading worker productivity and you're not investing in improved machinery and training and so on.
This is going to impact your future standard of living, which is, I think, what the U.S. is living through now.
So this malinvestment, it's not just in houses, it's in all of the workers' skills.
I mean, you have about 10 years of people making decisions to learn how to make houses, to learn how to build houses, to learn how to maintain houses.
10% of the US housing stock is fundamentally vacant at the moment, which means that there's been a wrong direction investment And that's not something you can simply turn back from, right?
Like if you go five miles the wrong way, then you could have got there in five miles, but you actually have to drive, you end up driving 15 miles to get there.
You go five miles the wrong way, five miles back, and then five miles to get to where you want to.
It's even worse when it comes to workers.
So everybody's skill set who oriented their productivity, their personal capital investment, their skills development, their training development into construction has to find some way to reorient.
And sometimes that's possible and sometimes that's not.
But this is a huge cost to the economy, which is often underrepresented or under understood.
Now, as I mentioned, so the construction jobs are competing with the manufacturing jobs, drives up the wages of manufacturing is one of the reasons why manufacturing has left the U.S. in droves.
And also, when you get this artificial bubble in housing, people, as Michael Moore said, they think of their houses as ADMs.
They think that by buying a house, they're investing.
They're not. They are putting their money and their resources into a consumption good, which is a problem for the future.
So what drove this bubble?
Well, anybody who doesn't talk about the Federal Reserve is not serious about anything to do with the U.S. economy, because that is the entire ocean that all the aquilife swims and floats in.
As you probably know, the Monetary system of the U.S. was nationalized in 1913.
It's hard to think that we had a 20th century fight against communism when the very essence of the economic system was communized, nationalized, socialized, fascistized, whatever you want to call it, in 1913.
When money is nationalized, when money becomes socialized, nothing really is private.
All the value that you have in your goods and all the value that you have in yourself relies upon trade, relies upon money.
And when money is nationalized, nothing really remains private anymore.
A nationalized monetary system can only have the vestiges of A free market system behind.
So a lot of people look at the U.S. and say, well, this is a problem with the free market and so on, which is like looking at a guy whose body is riddled with tumors and saying, well, there are three little toes who don't have tumors, so that's a healthy body.
Well, no, you have to look at the tumors.
And the tumor in this case is the control of money supply through the Federal Reserve and the control of interest rates as well.
So when something goes wrong in the economy as a whole, the first place to always look is the currency.
And anybody who's not talking about currency is just performing an evil Soran-based magic act to distract you from the real issues.
We have become so used to inflation that it's something that we really can't remember a time without it.
I mean, in the 19th century in general.
Prices steadily declined, which is kind of what you'd expect.
When an economy is becoming more efficient, when people's self-investment, capital knowledge and all of that, human capital is improving and so on, you would expect prices to decline.
I mean, when I first came to Canada in 1977, a candy bar was a dime.
Within a few years, it was up to a buck, and it's kind of stayed there ever since.
It's hard to remember that prices used to be like computers.
They'd get better, faster, and cheaper over the time period.
So, of course, the US had a huge national debt.
The 30% of GDP in 1869 declined to 3% of GDP in 1913, for reasons we'll get into in a bit.
The Federal Reserve, although this was proof by Milton Friedman decades ago, the Federal Reserve now admits that its own policies caused and exacerbated the Great Depression, something which most people think, well, we need a bigger government to solve the Great Depression.
The reality is that it was the government policies that created and exacerbated the Great Depression.
The US dollar has lost 98% of its value since 1913.
This is par for the course.
There are hundreds and hundreds of fiat currencies, in other words, currencies that roll off the printing press, that are not constrained by being bound to any material or finite good, like gold or bitcoins or whatever.
It is a huge problem.
You can just print as much as you want.
I was at a conference in Belize giving a speech recently, and a guy was handing out the trillion dollar bills from Zimbabwe saying, welcome to the day after tomorrow.
Now, inflation and interest rates are really, really important to understand.
So basically, we have interest rates because we die, right?
So interest rates is the price of money.
It's the price of borrowing money.
If you rent a car, then you pay a price, which is less than the full price of the car.
And if you borrow money, if you rent money, then you have to pay someone to lend you the money.
Otherwise, they could have gone and invested it somewhere else and so on.
Now, if you're in debt, you always want inflation.
Because if you have 10% inflation and you borrow $100, you basically pay it back with about $90 in a year.
It saves you a lot of money.
So the government is always really interested in promoting inflation because it owes so much money.
If you have deflation, We're good to go.
In fact, I mean, one of the reasons that the economies in the Eurozone in Europe are having such problems is because they have a unified currency, they can't pull the old trick of just printing money to pay off their debts.
So this is one reason why they're kind of hitting the wall and actually have to think about remotely cutting the increases in government spending growth over the next little while.
And the other thing, of course, I mean, the government basically knows that the minimum wage It destroys unemployment opportunities for those whose economic value is less than the minimum wage.
So if they keep pushing inflation, they drive down the minimum wage without politics being a problem.
So, of course, as I mentioned, every time since the 90s there was a problem, he printed money and cut interest rates, and this has created this perception of the steady growth, the steady boom period, and so on.
And you really have to go back to the early 90s to sort of experience the last real estate crash, but that was mostly in the commercial sector where there's really not the liar's loans, the pay-what-you-want I mean,
you might as well get casualty figures from Pravda in the Second World War.
It's all nonsense. I mean, they exclude gasoline, they exclude food, they exclude housing, except for apartment rents.
Now, of course, when there's a housing boom, apartment rents are artificially depressed because everyone's leaving to get the houses dirt cheap, or at least dirt cheap relative to the income that they can claim.
And so it's artificially suppressed.
It's all nonsense.
It's all lies. And again, anybody who doesn't talk about this openly is just blowing smoke up your ass.
Now, one of the most catastrophic decisions is between 2000 and 2003, the Federal Reserve created negative real interest rates.
In other words, you could borrow at 2% when inflation is 3%.
The price of borrowing money has to take into account inflation in any rational or free market enterprise.
If inflation is 5%, nobody's going to lend to you at 5% because they're not going to make a penny.
In fact, they're going to lose money from all the paperwork and all that they have to do to get you to have the money in your hand and get it back, election agencies risk, and so on.
So this could never occur in a free market.
This can only occur in a socialized, communist, government-controlled environment.
This is really catastrophic.
When inflation is 3%, but you can borrow at 2%, a lot of people want to borrow, and then a lot of banks want to lend, especially when they want to lend to people who are buying houses.
If houses are appreciating at 5% or more every year and you can borrow at 2%, inflation is only 3%, it seems like a no-brainer to lend to people lots and lots of money.
But this has nothing to do with the free market.
This is all artificial nonsense that is created.
Now, in early 2006, Bernanke rapidly increased interest rates and created what's called an inverted yield curve.
An inverted yield curve is when normally a longer-term investment has to pay you more than a shorter-term investment, obviously, right?
So if you have a 10-year bond, it should pay you 4%, and a one-year bond should pay you 2% or 3%, and so on.
on.
What happened was an inverted yield curve is when a long-term bond is paying you 2% or 3% and a short-term bond is paying you 4% or 5%.
These historically have almost always triggered recessions.
So that's a big problem.
Banks, of course, as I mentioned, one of the most essential indices that they need to run their business is interest rates.
Who on earth could have imagined or anticipated?
And certainly nobody in the Fed or any mainstream economists predicted this a 425% increase in interest rates in a short period of time, right before the crash.
This is what, you know, this has nothing to do with the free market.
This is all political thumb jiggery manipulation.
You know, we are all, you know, puppet masters of the money.
We are all puppet men of the money masters.
And that is something really, really important to understand.
So high correlation between inverted yield curves and recessions.
And I mean, It's important to understand that what the Fed does with interest rates is just price-fixing.
Except it's not price-fixing for one commodity or another commodity.
It simply is price-fixing for everything and creates a wild environment that nobody can predict what is happening next.
You go to most economists, they'll say, well, price-fixing doesn't work, right?
I mean, whatever you do to fix the price, you will simply mess up the market system.
This has been proved by Mises, it's been proved by Hayek and tons of other economists.
It's a mainstream view.
This is not a libertarian or Austrian economics view.
Price fixing doesn't work. And yet you go to the people in the Fed and say, well, how can price fixing work in interest rates, which is the most important thing to fix the price of?
And they'll come up with some other excuse because, well, people like power, right?
So here's some other things that have occurred.
So the Federal Deposit Insurance Corporation is something that banks are forced to pay into, sort of created after the bank runs of the 1930s, which were themselves the result of faulty government policies.
So this guarantees bank accounts up to $100,000, but you can pool your family and you can get a couple of hundred thousand.
So for most depositors, what it does is it means that they don't care about the financial stability of the bank anymore because it's perceived to be guaranteed by the government.
The perception of government guarantees for your outstanding loans or liabilities is huge in the marketplace.
If you are perceived to be backed by the government, your business advantage is overwhelming.
So a traditional business loan, right?
A financial institution needs 8% of the loan for a traditional business loan, but the government changed the rules.
Only 4% do you need for a home mortgage loan and 1.6% for a highly rated home mortgage-backed security.
Right? So what this does is it means, I mean, as a bank, you want more money to lend and less money you have to keep in the vault in case lending goes bad.
And the rules set up by the government mean that it's much, much, you mean much fewer dollars in backup for a mortgage-backed securities or home mortgage loan than a traditional business loan.
Traditional business loan is what is used to invest in stuff to make the future productivity of the economy better, to raise people's standards of living.
The mortgages are consumption goods.
They do not raise the standard of living in the future.
They're a fine thing to live in for now, but they do not raise the standard of living in the future.
So this is a huge, strong current pushing money into consumption goods and away from investment goods at the cost of future growth.
Now, if you buy a government bond, of course, you don't need any money in reserve with the idea that if the government defaults, money is worthless anyway.
And again, this has a huge incentive to push banks towards lending to the government, and it's nothing to do with the free market at all.
Okay, as I mentioned, you simply can't become wealthy by borrowing for consumption.
You simply can't.
An Amex card on extravagant meals out.
You may be having a lot of fun and there's nothing wrong with it, but it's not going to make you wealthy.
You cannot become wealthy by taking out massive loans to buy a fleet of cars to sit in your driveway.
They're going to lose value because they're consumption goods.
So you become wealthy by borrowing to invest in productive growth, by investing in factories, by training yourself to become a higher value employee or whatever.
But this is very, very important.
Now, I've mentioned before, I had a video I did a couple of years ago called House MD. Fannie and Freddie are two government-sponsored enterprises.
90% of mortgage loans end up at Fannie or Freddie.
This is really, really important.
These are susceptible to political manipulations that are in almost entirely political organizations.
So Bill Clinton set the goal of getting Fannie and Freddie to have at least 50% of their loan portfolios in subprime loans, and you saw massive increases in loans among blacks and Latinos, a smaller proportion among whites, only about 30%.
There was a perception of racism.
It was a faulty study, and it was quickly disproven, but nonetheless, it's used as a way of buying votes by driving home ownership into people who aren't ready for it or can't sustain it.
And so what happened was people lent a whole bunch of money to people who wanted to buy houses and then they resold these mortgages to Fannie and Freddie.
So before the Federal Reserve, sort of the 19th century, early 20th century, banks had one to two to one leverage ratios.
You lend 500 bucks, you keep 500 bucks in the vault or at the most… You lend $1,000, you keep $500 in the vault.
That's more of a free market environment.
Banks tend to operate at 10 to 1.
Fannie and Freddie were operating at a 1,000 to 1 leverage ratio.
And this is only possible because their liabilities were perceived to be guaranteed by the government.
So this is like having a net worth of $10,000 and owing $10 million.
I mean, you understand this is insane.
This is not possibly sustainable.
These combined entities had $5.5 trillion in liabilities and $2 trillion in subprime loans.
How were they able to get away with this?
Well, no politician wanted to be responsible for people getting foreclosed on, so they just kept pumping money at it.
And between 1998 and 2008, Freddie Mac spent $94.9 million.
Fannie Mae spent $79.5 million to lobby Congress.
You can buy a lot of pounds of flesh for that.
Now, at the same time, During the same time period, Fannie and Freddie failed to report $2 trillion in subprime loans.
They artificially rated these loans as higher than they were, and so when the ratings agencies came to assess the risk of the subprime loan market, they couldn't see through $2 trillion of it.
The size of the market has a huge effect on the amount of risk involved in entering that market.
It's one of the reasons why the subprime loans were misidentified in terms of their risk.
So, when people began to default after the interest rates were artificially jacked up, well, everything that happens with interest rates is artificial these days, then loan losses totaled about $500 billion.
But because banks operated 10 to 1, that's $5 trillion in lost liquidity.
Now, banks were able to borrow some of that money, you know, get investments, sell bonds, and so on, reduce that to $2 trillion or $3 trillion, still quite a lot of money.
One thing that happened in September 2008 that scared the living crap out of everybody involved in finance was Washington Mutual was illiquid, and the FDIC, Federal Deposit Insurance Corporation, sold it.
And what happened was they paid all of the uninsured depositors.
All of the depositors got paid 100%.
They did that by taking money away from bondholders, the people who'd lent money to the bank.
This was illegal, but it signaled to everyone that you were in full panic mode.
There was no rule of law anymore.
And what this did was it closed the bond markets to the banks because the banks said, well, wait a second, if the government can just seize any bank, pay off the depositors, and screw the bondholders, why on earth would I lend to a bank?
So at the same time as the banks were experiencing a huge amount of loss, they couldn't get bonds, and this created an additional set of catastrophes.
Again, it's all government stuff, all government nonsense.
So what happened with the rating agencies?
This is another thing to say, ah, well, the rating agencies were corrupt because they were free market institutions and they were greedy and blah, blah, blah.
No. So, Standard& Poor, Moody's& Fitch are the major ones, and these are government-approved oligopolies.
They're not free market institutions.
They were originally, but they're not anymore.
So the Securities and Exchange Commission only allows these three companies to rate bonds for ERISA, which is a retirement savings agency designed to protect government pensions.
I mean, the amount of government money that's in the stock market and the pensions and investments in bonds is staggering and has a hugely distortionary effect on what's used to be the free market.
So, of course, the rating agencies gained this artificial credibility because they're approved of by the government rather than paid for by the consumers.
And they were misled by the Fed.
The Federal Reserve said everything was fine, that there was no housing boom.
You have to go back to the people who were talking in 2006, 2007.
You know, Peter Schiff, a couple of other people...
We're able to predict this, but most of the people of the Federal Reserve said that there was no problem.
Everything was great and fine and wonderful.
So bankers listen to the Federal Reserve.
They're not all free market Austrians.
So the rating agencies were misled by the Federal Reserve.
They were misled by Fannie and Freddie who underreported the risk of their subprime loans.
Now, another thing that's important, I know this stuff sounds kind of detailed and historical, but it's really important if you want to understand what happened.
So, rating agencies used to charge buyers for the ratings of the bond.
So, if I wanted to go and buy some bond, they'd take a small charge to tell me how much that bond was risky of its safety versus its danger and so on.
But then in the 1970s, what happened was the SEC forced the rating agencies to now get paid by the sellers of the bonds so that government pensions wouldn't have to pay because government pensions were a major buyer of bond ratings, and they didn't want to pay that because they have lots of guns on their side.
And so in the 70s, the SEC changed the business model, forced a different business model, not the one that had been developed over centuries by the free market.
They forced one where the sellers of the bonds paid the rating agencies to rate them.
This is, I mean, a ridiculous conflict of interest.
No sane human being would ever advocate this, and no consumer would ever fall for it if it wasn't enforced by the government, because...
Whoever is selling a bond wants it rated as high as possible.
And if they'll shop around, if they won't get a good rating from one agency, then they'll just go to another agency.
So it's the wrong person to be paying.
And again, this is something mandated by the government.
Just to touch on it briefly as well, one of the reasons that banks failed or were in danger of not just being illiquid but bankrupt...
It says this thing that was imposed just two years before the financial crash called Fair Value Accounting.
What fair value accounting is sort of on every quarter or every year, you have to change your books to reflect the current value of your assets, whether you're selling them or not.
And this is all nonsense.
So it's like if you have a million dollar house and it's currently only worth $500,000, but you have no intention of selling it, are you going to hang on to it and so on, then you basically have to declare a $500,000 loss.
And what that does, of course, with a 10 to 1 ratio, it takes $5 million for a bank out of the lending market, which causes lots of other problems for people who want capital.
So fair value accounting was briefly tried during the Great Depression, but it was considered to be adding to the woes of the Great Depression, and it was brought back in just two years before the crash.
And so when banks had losses, like if they had bonds that went down in value because of the inverted yield curve, They had to declare those losses, even if they had no intention of selling it, were happy to hang on to it, and therefore to cover those losses, they had to increase the amount of cash they had on hand, which drew stuff out, drew a lot of money out of the lending environment and so on.
So again, this is just another government-imposed thing that made things worse.
Again, everything I'm talking about here has nothing to do with the free market whatsoever.
I mean, just because there's profit and loss doesn't...
It doesn't have anything to do with the free market.
Free market is when people are trading in the absence of compulsion.
And saying that there's a price for something that nobody has any intention of selling is ludicrous.
I mean, price is only established in the moment of transaction.
There is no theoretical price at all.
What is actually a price is only in the transaction.
If you have a million dollar house and your neighbor panics and sells it for half a million dollars, your house is not now worth half a million dollars because you haven't sold it.
It's worth whatever it is when you sell it.
There's no loss. You're just sitting in your house.
Again, it's all nonsense and made up and so on.
So let's – I mean, I want to keep this kind of brief, but so those who couldn't predict it can't assign blame.
I mean, everybody in the government wants you to believe that there was greed and Wall Street and the bankers were the problem and so on.
Everyone wants you to believe that regulations were cut and so on.
This is all – Nonsense.
Regulations only increased under the Bush administration.
You could really argue, make a strong case that the U.S. financial industry is the most regulated industry in the world.
And the regulators had no idea that any of these problems were occurring.
So either the regulators are liars or the regulations don't work.
Either way, a lack of regulation can't be blamed for any of this.
And of course, A lack of regulation.
Bailouts are a form of regulation.
Guaranteeing losses is a form of regulation.
It's a form of interference into the market.
And it has a huge effect on people's business decisions.
Like one of the reasons why so many So many mortgages end up at Fannie and Freddie was that the savings and loan industry in the 70s and 80s, which was the primary area to get mortgages and had sort of local knowledge of people in the neighborhood and the neighborhoods themselves, where it was decentralized, this was all destroyed basically by the Johnson policy of attempting to wage a war on poverty and on the Vietnamese without raising taxes, which is why Nixon had to break the gold standard in 1971 and we've just had this monopoly money whirlwind ever since.
So just whoever's pointing fingers who didn't predict it and doesn't – like it's just saying the stuff that makes sense according to people's prejudices.
It's just, I mean, there's a liar and a cheat.
I mean, just don't believe them.
Look into the facts. I mean, heck, don't believe me.
Look into the facts as well. I'll put a reading list in the low bar here.
And please, don't confuse what's left of trading in the free market with actual free markets.
You know, people bought and sold stuff in Nazi Germany.
People bought and sold stuff in Soviet Russia.
People made profits in Mussolini's Italy.
Just because there's profits in buying and selling doesn't have anything to do with the free market.
People bought and sold stuff in...
Ancient Egypt, for heaven's sake.
They bought and sold slaves. Does that make it a free market?
No, of course not. A free market is when there's no initiation of force to interfere with the free operations of trade.
That's what a free market is.
And money is just another commodity.
It's just another good. It's another service to be provided like anything else.
And wherever the money is socialized, freedom will fail unless the money is privatized again.
So if you'd like more information, please check out freedomainradio.com.
This is Stefan Molyneux saying...
Hang on to your hats. It's still going to be a pretty wild ride.
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