Welcome to Newport Beach, very, very wonderful location. It's not often  that we have a seminar across the street from a open Ferrari dealership  Of course, I did notice some vacant space right next to it, so I don't know  what happened there, but things are pretty, pretty good here in Newport,  and this is certainly a lovely location. The Mises Institute goes way back  here in Newport. In fact, even at the Balboa Bay Club, February in 2001  we had a conference. In fact, we had the last conference that was held at  the old Bal bay of Bo club, Balboa Bay Club, before it was renovated into  this, into this facility. So we go way back, and our last Mesa circle was  held in Costa Mesa, and the sponsor for that, for that event is the same  sponsor that we have today. The way to have one of these events is we  need a sponsor. Need somebody to write a check. And a lot of people talk  about doing Mises circles. Not many people write checks. But Lou  Carabinie Is today's sponsor who has stepped up. He's the founder of  Monex, America's premier precious metals dealer since 1967 so please  help me. Thank Mr. Luca. By the way, he's a man of many talents. You  may have noticed that the He is the author of the book that was on the  chair as you came in, inclined to liberty. So he is not only a successful  entrepreneur, but he is a writer and a thinker. And in fact, I would direct  you to the Mises website, where he wrote an article for the Journal of  libertarian studies that we just posted, had an article entitled Bastiat.  Bastiat the broken window, a critique So, and he also cooks a wonderful  dinner. So he is not just a pretty face. Mr. Luke Carabinie is indeed a  renaissance man, so we thank him for his sponsorship, and he is very  much a friend of the institute. Now, when we have these events, I assume  most people know about the Ludwig von Mises Institute, but it occurs to  me that occasionally people get drugged here against their will. It's a  Saturday afternoon, honey. This would be a great thing to do. Why go to  the beach? Why to go to the football game when we could go hear some  great economics and so for those who don't know who we are, we were  started in 1982 by Lou Rockwell, who started the institute with his  typewriter and his checkbook, as he describes, but now we are the world  leader in providing educational materials about The Austrian School of  Economics, classical liberalism and libertarian political theory. Of course,  this movement blossomed into massive international movements,  students, professors, professionals, people of all walks of life. And of  course, coming here today, you are now part of that international  movement. So thank you. We have a number of scholarship students here today, and I would like them to stand please, yeah, whenever we have  Institute events, we offer scholarships to students and and for those who  are members and supporters, you make that all happen. You'll notice  there's some membership cards available to you if you want to join us in 

what we do and the work that we do, and if you sign up with. Us today, you get a special inducement to do that. It's called reassessing the presidency, a wonderful book. We actually have. It's we have a number of authors who contributed to this book, and one of them is here today. Today. He not only 

wrote one essay, but he wrote two essays, as he's told me over and over  again, so if you ask him to sign this, ask him to sign it twice, that will no  doubt annoy him and make me happy. But again, membership cards are  here, please think about joining us as a member of the Mises Institute.  We're not funded by any large foundations. It's people just like you, people like Lou C0arabinie and a number of other great contributors that we have  in the off in the crowd today, James Fogle is here. He's he's at the back,  and he's our director of development, and if you're interested in  disinheriting Uncle Sam or anything like that, not that any of you would  want to do that. But if you have questions about that, James is here to talk  about some of that financial planning sorts of things. Also, we're asked at  these events to have a sign up sheet. People come to these events, they  meet other people that think like they do, talk like they do, and they want  to get in touch with them later. And we have created a sign up sheet for  that purpose. If you don't want to be contacted, don't want to be a part of  this, want to be an individualist. Want to go it alone. It's great. We're all for  you. Don't put your name on the list, but if you do want to connect with  some people who've been here, we have a sign up sheet right out front,  right out with, with Christie Holmes. So please take advantage of that if, if  that interests you. So that's pretty much the the welcome that I have, and I put myself first on the program, not just to get it out of the way, but I have  such an uplifting talk today about debt and despair that I thought I would  get the I would set the tone for today's conference. His book The causes  of economic crisis, Ludwig von Mises explained that easy money, or the  result of politically lowered interest rates, succeeds in bringing about a  booming business, but that this prosperity is artificial, that it cannot last,  and it must lead, ultimately to a slump. Now we've heard this before.  Anybody who's familiar with the Austrian business cycle is aware that first  entrepreneurs borrow at these reduced rates, and the entrepreneur  assumes that the cost structure for the project will remain the same as it  was before the credit expansion. But as credit is expanded, factors of  production are bid to higher and higher. Prices, wages go up, material  prices go up, and the entrepreneur who just keeps borrowing because the  banks are are eager to lend easy money, and that's what we've seen  through the past few years, prices and wage rates continue to boom.  Wrote Mises, everyone feels happy and is convinced that now, finally,  mankind has overcome forever the gloomy state of scarcity and reached  everlasting prosperity. UNQUOTE, well, Mises explained that, in fact, all of

this amazing wealth is really quite fragile. It's a castle built on sands of  illusion, and that it cannot last. There is no means to substitute bank notes and deposits for non existent capital goods. The Art of artificial boom  brought about by cheap money, creates the illusion that certain projects  will be profitable for entrepreneurs, and in turn, the jobs created will be  secure. We often talk about these investors who who invest with cheap  money during the boom, they invest in this money is turned into  malinvestments. Ultimately, the malinvestments are revealed. The values  drop, the debt still remains. And of course, the entrepreneur go to broke,  but if the investor. Entrepreneur and businessman are fooled by the low  interest rates and the potential for profit. So is the average wage earner.  Not only is capital misdirected in the malinvestments during the boom, but  labor and consumer confidence is Corrected as well. How many people  quit their jobs to day trade during the stock boom in the 1990s how many  people went to work selling real estate during the boom? Las Vegas,  where I spent 22 years at the height of the boom, one in every 100 people  in Vegas had a real estate license. How many people have been lured into the financial services industry? Money management firms still report that  they're receiving the same number of applications for entry level jobs,  even though we've had a big, huge bust in that industry, but the financial  sector was 45% of the earnings of the S&P 500 back in 2006 so motivated college students are just we're just following the money. That's how  they've directed their studies, and those are the jobs that they're pursuing.  But much of the earnings by those financial firms was the debt that was  paid not only by corporations and business, but individuals as well, many  of whom worked in that same financial industry, an industry that, with the  help of government, creates this illusion, this illusion of wealth and  prosperity that what Mises spoke about, and as employees believe this  illusion, illusory prosperity will last forever. They take on debt because  getting the money is easy during a boom, this Fiat inflation gives  individuals the opportunity to borrow. Professor Guido Holzman writes,  The mere fact that such credit is offered at all incites some people to go  into debt who would otherwise have chosen not to do so. But easy credit  becomes nearly irresistible in connection with another typical  consequence of inflation, namely, the constantly rising price level back in  1980 the head of Bank of America's credit card division, Kenneth Larkin,  gave a speech quoting two USC scholars. These scholars believe that  people born between 1956 and 1975 would have completely different  values, such as number one, it doesn't pay to save for a rainy day.  Number two, buy now not later, prices will invariably go up, and the  purchasing power of your dollar will invariably go down. Number three,  stretch your financial obligations over as long a period of time as possible. 

Number four, borrowing improves your credit rating. Number five, pay your bills as late as you can without jeopardizing your credit rating. Now, these  truly are the lessons of inflation. Joseph Nocera wrote that in a in a great  book about the credit card industry called a piece of the action. So it's if in  the early decades of the century, it was impossible for a working man or  woman to secure a loan from a legitimate lender. In the 80s, he or she  could hardly refuse one. Jim Grant wrote, The descendants of the clientele of the loan sharks became the valued credit members of leading banks. In  the 1980s the home equity loan proliferated. Personal Bankruptcy lost its  stigma, as credit card executive John Decker explained, to make credit  card lending profitable, you find people who get into debt stay in debt and  always pay the minimum balance on time so household debt reached  $13.8 trillion in 2007 with 10.5 trillion of that being mortgage debt. The  leading edge of the baby boomers turned 30 years of age in the late 1970s just as the usage of debt became began to accelerate. Debt took off like a  rocket ship after 911 with the president urging Americans to spend and  then Fed Chair Alan Greenspan lowering interest rates to 1% imagine a  low Fed funds rate like 1% see we have a Fed funds rate of what a quarter percent or less. Now, at the time, Dallas Fed Governor Robert McTeer told the Chamber of Commerce in Richardson, Texas, if we all go out and just  join hands and buy an SUV, everything will be all right. Preferably a  navigator. And at the time, Bill Bonner and Addison Wiggin wrote thrift can  came to be seen as an enemy of the state, almost as diabolical as Osama  bin Laden. Later, McTeer commented that Americans have been doing  something that's probably irrational from the point of view of the individual  consumer, because they all need to be saving more, saving for retirement, saving for college and all that, but we'd be in bad trouble if they started  doing the rational thing all of a sudden. We're happy they're spending we  wish that they didn't run up a lot of debt doing it unquote. But the problem  was, it's that the money supply has grown 100 since 1980 has grown  460% meantime, the median family income has barely budged. So running up the debt has been the only way for patriotic Americans to keep on  spending. Personal savings rate fell from 11% in 1980 to a negative 1% in  2007 of course, it's rebounded into positive territory, which has analysts on the TV fretting about Keynes, paradox of thrift and nonsense like that. But  in the wake of 911 consumer confidence was supremely confident. That  fall, consumer confidence took its biggest jump in more than a decade.  Consumers kept buying and buying on credit and for the credit card  companies, they put the power of plastic in most everybody's hands. But  for those who didn't have a credit card, well, the payday loan business was there for them. Now I don't know if anybody in the room frequents payday  loan lenders. I'm going to assume not many. But this is kind of the way it 

works. If you want to borrow 400 bucks for two weeks because your car  breaks down, you would write the payday lender a check for $460 post  dated check for the day you get paid when the two weeks rolls around, if  you want to pay the loan off, then they would cash the check and you paid  60 bucks on the 400 which is annual percentage rate of a smooth 390%  now if you can't pay it off, you would flip the loan. You would write a new  check for another 460 or you would, you would give the lender $60 write a  new check for 460 and start this all over again. Of course, states weigh in  on this. States, state governments, local governments, hate payday  lenders, and so they're subject to numerous laws that are growing every  day, but most payday lenders have somewhere between, you know, the  390% rate that I mentioned, or a 650% annual percentage rate. In some  cases, and plenty of people are going to payday lenders, according to the  Dallas Morning News, 2008 the US's largest payday lender. Advanced  America made $4.2 billion in payday loans, and they charge 676 million in  interest and fees. Cash America a pawn shop operator and payday lender  based in Fort Worth, recorded income of 81 million last year, income that's grown 132% in the last four years. Total revenue of 1.3 billion. So plenty of people are going to pay day loans to try to catch up. But as I said, local  politicians hate these payday lenders, but they don't realize that the real  villain here is the inflation making Federal Reserve, but really the largest  source of debt is mortgage debt for home purchases. Till recently, home  ownership was only a dream for most Americans from 1900 to 1940 fewer  than half of all Americans own their homes. Home ownership rates, in fact, fell in the first three of three of the first four decades of the 20th century.  Whereas young people today, they have a job halfway stable source  income, they're immediately going to take out a mortgage and go buy their great grandfather might still have accumulated savings for 30 years and  then bought his house, but today, two thirds of America's own their home  because, as Thomas Segrew says, We are a nation of homeowners and  home species. Laters because of Uncle Sam. Before 1929 the  government paid very little role in the housing market other than mortgage  interest being made tax deductible in the 1913 federal tax code. In fact,  having a mortgage was a case for stigma. Mortgages were hard to come  by with lenders. Lenders wanted 50% down. And on top of that, the  interest rates were high and the term of these loans were very were very  short. They were only three to five years. So there are typically only two  types of homeowners at the time, the wealthy who paid cash and working  folks who built their own homes. As Segrew pointed out, even the richest  rented because they had better places to invest than the volatile housing  market. But that all changed with the depression. As a lot of things  changed with the depression, new housing starts had fallen and Herbert 

Hoover, contrary to what you may read, he didn't sit idly by. He signed the  Federal Home Loan Bank act in 1932 and was the first of many  interventions in the housing market in his first 100 days, FDR introduced  the homeowners Loan Act, which would extend relief to homeowners who  couldn't pay their mortgages. 1000 urban mortgages a day were being  foreclosed on, so he wrote a bill that lowered interest rates and lengthened repayment schedules to help out foreclosed homeowners. Of course, we  see this happening again. Fannie Mae has just announced that if you can't make your payments, you can do a sale lease back with them. They'll take they'll take ownership of the home, and you can pay them rent and stay  there. We see various programs that are very much the same. Now this  homeowners Loan Act actually was was geared for poor and middle class  homeowners. The top loan was only $20,000 but that's the equivalent of  317,000 today. So it did capture. It captured a number of of homeowners  at the time, but then four years later, the big creation was made, and that  was the Fannie Mae Federal National Mortgage Association. It created a  secondary market for mortgages, and it was given the mandate to help  make homeownership more available throughout the United States. Now  these programs boosted home ownership in a hurry. 1950 55% of people  owned their own home. By 1970 home ownership was 63% but beginning  in 1992 Congress pushed Fannie Mae and Freddie Mac to increase their  purchases of mortgages to low and moderate income borrowers. For 1996 the Department of Housing and Urban Development gave Fannie and  Freddie an explicit target. 42% of their mortgage financing had to go to  borrowers with income below the median for their area. That target  increased in to 50% in 2000 and 52% in 2005 then Fannie Mae launched  its American dream in 2000 American Dream commitment I was to provide $2 trillion private capital for 18 million underserved Americans to own or  rent a home by the end of the decade. You know, before Fanny expanded  the American dream, pledging to help 6 million families become First Time  Home homeowners over the next decade. But what this is is really a social engineering experiment, because the thought at the time was one fact.  One survey said that consumer finances found that low income  homeowners had a net worth 12 times that of renters at the same income  level. Other studies found that children of homeowners are more likely to  graduate from high school and college, and they are more likely to go on  and own a home of their own. Also, there was research that showed that  home ownership keeps communities attractive, safe and vital, generating  higher property values and other economic activity. So voila, we need to  make everybody a homeowner, then everything will work out better. This is like the studies that show the college graduates make more money. So we need to make everybody a college graduate, so they'll make more money. 

Well, of course, not everybody can be a college graduate, not everybody  can be a homeowner, but President Bush did his part. December 16, 2003 he signed a law, the American Dream Down Payment Act 2003 help  approximately 40,000 families a year with their down payment and further  strengthen America's housing market. Is what they said. It complimented  the President's aggressive housing agenda announced to dismantle the  barriers to home ownership and putting down payment. Down was, well, it  was a it was a barrier. So the Bush administration said at the time, the  strong housing market is beneficial for communities across the nation. So  the whole down payment idea was very much passe, and because of that,  from 1997 to 2005 the average price of a home in the United States  doubled, and with this doubling, the subprime mortgage market was born  and nurtured. Fannie and Freddie played a significant role in explosion of  subprime mortgages and subprime mortgage backed securities without  the implicit government guarantee of the GSEs, it's unlikely that the  subprime market would have taken off homeownership. Judge from  jumped from 64% in 1994 to 69% in 2004 the result of increased because  of the increased loans to low income high risk borrowers, both Bill Clinton  and George Bush trumpeted the rise in ownership as it occurred. Well,  what's the result of all this? According to a new report from first American  logic, nearly a third of all mortgages are now underwater. Of course, by  underwater, we mean the amount of the mortgage is more than the  amount of the value of the home. A new Deutsche Bank report predicts  that by 2011 48% of all mortgaged Americans will be underwater. But  underwater is no problem for Fannie and Freddie. In July, the two GSCs  received regulatory approval to refinance mortgages at loan to value ratios as high as 125% remember when Alan Greenspan said, go out and get  that adjustable rate mortgage. Well, now the government has, in the words of Grant's Interest Rate Observer, blessed, subsidized and institutionalized the state of underwater home ownership. But the GSEs. GSEs can modify  all they want doesn't mean that distressed homeowners can or will pay.  According to mortgage metrics report published by the comptroller of the  currency in the Office of Thrift Supervision, 28% of all modified loans were  60% or were 60 days delinquent within 60 days of their modification. Now  what that means is that more than one in four people who modify their  loans because they can't pay under the original terms don't make a single  payment after they modify, as analyst David Rosenberg explains now that  lenders have started to respond to their record high delinquency rates by  rationing credit. A mad scramble for cash is occurring to replace loans.  Food Stamp usage is up 22% year over year. Pawn shop business is up  nearly 40% and there's a tidal wave of applications for Social Security  Disability benefits that were not explained alone by workplace mishaps. It's

the lost generation. Business Week says unemployment nationwide is now eight, 10.2% but for young people, it's 18% and for those of you who follow John Williams, Shadow stats.com his his alternative unemployment rate is  22% now, John Williams tracks unemployment the way unemployment  

used to be tracked, before the Clinton years, where they changed the way  some some people were counted. So John Williams may yet have the  most accurate measure of unemployment. Foreclosure crisis affected  nearly 938,000 properties in the last quarter. That was up from 890  properties the prior three months. That puts us on a rate to hit 3.5 million  foreclosures this year, up from 2.3 million foreclosures last year. Personal  bankruptcies rose steadily from 300,000 per year in the early 1980s to  peak at over 2 million in 2005 the reason they. Peaked in 050. Bankruptcy  change were laws were changed in 06, but now we're starting to see more and more bankruptcies. Fact, over a million people filed for personal  bankruptcy in oh eight. That number has already been surpassed through  the first nine months of this year. Now, as Hans Hermann Hoppe pointed  out in his his wonderful book, democracy, the God that failed. It is savers  that initiate the process of civilization by generating a tendency toward a  fall in time preference he and those that exchange with him, quote,  matures from childhood to adulthood and from barbarism to civilization?  Well, instead, what we have now is the reverse the debt accumulation of  government, business and individuals, reverses progress and is leading to barbarism. Professor Holzman explains the net effect of the recent surge  in household debt is therefore to throw entire populations into financial  dependency. The moral implications are clear. Towering debts are  incompatible with financial self reliance, and thus they tend to weaken self  reliance, also in all other spheres, the debt ridden individual eventually  adopts the habit of turning to others for help, rather than maturing into a  economic and moral anchor of his family and of his wider community.  Wishful thinking and submissiveness replace soberness and independent  judgment, and what about the many cases in which families can no longer  shoulder the debt load? Then the result is either despair or alternatively  scorn for all standards of financial sanity, the constant creation of fiat  money, instead of encouraging savings and Thrift, has created personal  fiscal insolvency on a massive scale, and this fiscal insolvency now  threatens to lead this Country and the entire world to moral insolvency.  Thank you. 



Last modified: Wednesday, February 12, 2025, 1:52 PM