2196 FBF: The Housing Boom and Bust in America with Economist Thomas Sowell of The Hoover Institution at Stanford University

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Hey. Welcome to another edition of the Creating wealth show. This is Jason Hartman. Welcome. Where we talk about creating wealth through the most historically proven wealth creator income properties. Yes, income properties in diverse markets purchased correctly at or below the cost of actual construction can make you very, very wealthy. Make sure you check out a whole bunch of our new properties@jason hartman.com properties. We have a lot of new inventory in Dallas that you might find particularly interesting. That is a new relationship, a new vendor that we just brought on board who is doing some excellent rehab properties. I was out to visit them a coup of weeks ago as I mentioned before and I think you'll really like what they have. There's some good product there and we will have them on the show very soon. I actually recorded an interview with them when I was in Dallas and we will air that very soon. Today we're going to interview Thomas Sewell, the author of Basic Economics and many other books. We're talking to him today mostly about his latest book, the Housing Boom and Bust. And Thomas Sewell is a consummate academic. I used to read him in Forbes magazine years ago and really always liked what he had to say. He was very reasonable and logical and interesting and did a great interview for us. Before we get to the interview though, I want to mention that the Creating wealth event on the day before my birthday, October 3rd, I just had to throw that in there, is going to be cancelled. We are probably not going to do the Creating wealth seminar anymore. What we've decided is that it's just not long enough and we need a bigger event, a more robust event. So we're probably going to turn that into sort of a boot camp, if you will. More to come on this, but our big event, which is only twice a year, is coming up and you must attend this one. It is the Masters Weekend, very special event where we have guest speakers flying in from all over the country on many different aspects of investing, asset protection, etc. Here's a little info about it right now. Good morning everyone.

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So as you can see, the Masters Weekend has been a highly acclaimed event and you must join us for it. It is a fantastic event. We had a comment also on our prior show about Green Hell and I just wanted to mention it to you because one of our listeners who that he very much enjoys the show but didn't really like that one that much because he thought it was a little bit unrelated and lacks specificity to some extent. And a couple things I want to say about that. Number one, I appreciate the comment. Number two is that on the show. When I interview these guests and I talk to them, we don't have time to go into a whole bunch of detail. We're talking many times on a kind of a conceptual level, as you've noticed, especially about a topic this broad as environmental policy and so forth. But I really want to mention this to you with these fires that we're having today in California. And as I was thinking about it today, I went to bed last night and this huge, huge fire that's burnt, I guess about 42,000 acres just in the time I was sleeping, doubled in size to where it's about 85,000 acres now. And that was when I woke up this morning. Hopefully they've gotten a little more under control now, but who knows? I haven't listened to the news all day. And part of the reason, and I'm not saying that's the reason for this fire, but many fires have occurred because of environmental policy, because of Green Hell. And that was the name of the author, the book that I interviewed, Steve Molloy on, on the last show. And the cost of these kind of radical environmental policies are in every aspect of our lives. They influence the price of gas that we pay at the pump. They influence these wildfires that are happening constantly in California and in other places around the nation, around the world. One of the reasons, I remember years ago one of the big fires we had where I had to evacuate my own house, at the time I lived in Irvine in an area called Turtle Rock and had to evacuate. And part of the reason that fire occurred is because the environmental movement would not let people clear brush. And the reason they wouldn't let people clear brush, which is the fuel for these fires, is because it would disturb the habitat of some little rodent or some bug or something like that. And I'm not saying this is all bad, everybody, I, I'm taking a middle ground on it, but I, you must understand that most of the stuff we hear seems like this harmless, kind hearted kind of thing. And it really is not always couched with the best agenda. One of the comments on my Facebook page after airing the show I thought was really applicable. It was Dave Toombs, our broker here at Platinum Properties Investor Network, made a comment, something to the effect of. In the dying days of the Soviet Union when they were looking for a way to keep things under control, there was a movement within the Soviet Union in environmental movement and they were thinking that they could exert a lot of policy and a lot of control over people through the green movement. And another saying came out of that saying that green trees have red roots.

Welcome to this week's edition of Flashback Friday. Your opportunity to get some good review by listening to episodes from the past that Jason has hand picked to help you today in the present and propel you into the future. Enjoy.

Okay. Red meaning communism or socialism. So I just really encourage you to, whenever people talk about the environmental movement, to really, really think beyond what is on the surface. There's a lot more to it than that. It affects real estate, it affects your financial life, and it related to creating wealth. Okay. One of the things you're going to hear on this show is when Thomas Sewell and I discuss how people in wealthy neighborhoods, and that's true in my own neighborhood right here in Orange county, in Irvine and Newport coast and these beautiful kind of upper end areas, they use environmentalism as a way to exclude people. They use it as a way to keep people out. You know, it's kind of like that concept of we used to have these bumper stickers you'd see in California back in the 80s that said, welcome to California, now go home. And it's kind of like that old riddle that I say in my Creating wealth seminar. What do you call a developer? Someone who wants to build a house in the woods or someone who wants to build a house at the beach? What do you call an environmentalist? Someone who already has a house in the woods or at the beach. Okay. And there's a lot more to this than I think most people think about. And that's why I wanted to do that show, because I just want you to see both sides of that issue. And Thomas Sewell discusses that how in Northern California they use this as a way to exclude people from living in their areas. You'll. You'll hear him talk about it here. So let's go to the interview with Thomas Sewell. Enough of my pontificating. I apologize if you don't like that, but occasionally I just want to bring it to your attention. Thomas Sewell, as I said before, is the consummate academic. He has taught economics at Cornell, ucla, Amherst, and other highly acclaimed academic institutions, and his basic economics book has been translated into six languages. He is currently a scholar in residence at the Hoover Institution at Stanford University. He's published in both academic journals in such popular media as the Wall Street Journal, Forbes Magazine, and Fortune, and writes a syndicated column that appears in newspapers across the country. So here's the interview with Thomas Sowell.

It's my pleasure to welcome Thomas Sowell to the show. He is the author of the Housing Boom and Bust just listed on the New York Times Expanded Bestseller list. Thomas, thank you for joining us today.

Thank you for having me.

Tell us a little bit about your perspective. It looks like from the book, you are saying that both parties are to blame. So this is a pretty bipartisan effort, it sounds like.

Yes. In fact, I've often said long before this crisis that things that are partisan are usually twice as bad as things that are partisan. The Democrats did take the lead in this, but the Republicans contributed too much to it for them to try to blame Democrats alone. The fundamental problem with all of this is it's a very complicated story when you get into all the derivatives in Wall street and this and that. But the fundamental problem is that the money that financed all the fancy Wall street derivatives and so on all came from people, millions of people paying their monthly mortgage bill. And when that monthly mortgage money started not coming in, when people started being delinquent and defaulting on their loans, then it really didn't matter what the clever people in Wall street were doing. If the money wasn't coming in, it just wasn't coming in. So the real question is, why was there suddenly all of this delinquency and default in the mortgage market? And the answer to that is that banks and others were pressured into lending to people who did not meet the standards that had been in use for decades. You know, things like the 20% down payment and verified income and so on. And under pressure from the government, and more than pressure, there were actual quotas set up for Fannie Mae, Freddie Mac.

Now, when you talk about that pressure, are you referring to the cra, the Community Reinvestment Act?

Yes, but not by itself, because that act was passed in 1977, and it really didn't do an awful lot until the 1990s. And what happened then was that people began to use that act as the criterion for deciding whether the regulators would allow banks to make business decisions of a sort that unregulated businesses make all the time. For example, if a bank wants to acquire another bank or a bank wants to go into some other Social Security, for example, as the later laws, or allowed, then only those banks whose lending practices and other practices under the Community Reinvestment act met the government approval would then be approved to make acquisitions, mergers and other kinds of transactions.

These banks were under an enormous amount of pressure, would you say, to make bad loans for political correctness reasons?

Yeah. Well, yes. For example, there are a number of banks who were accused of discrimination. They were accused they were not proven anything. And on that basis alone, the regulators could simply hold up any decision that they had until the legal case was disposed of. Well, as you can imagine, running a business where you're not allowed to make decisions that your competitors are making until such time as a legal case is settled, which can be years and which in some cases can be more than a decade, obviously is a crippling power. And so you cave.

It's just amazing to me how people throw around words like racism. You know, I was talking about this on my show, just saying that, you know, look, these banks made such imprudent loans and someone sent me a question saying, you know, well, you know, I don't want to think you're being racist by saying that certain people didn't deserve to own a home. And I'm thinking like, that is the most ridiculous statement. Why would you even ask me such a question? The determination should be whether or not you can afford the property and whether or not you have good character in making payments in your past.

I mean, yes, well, of course, it seems so obvious that you wonder why people don't see it, but many don't. And the media do very little to clarify the situation. Once the accusation is made, it's tantamount to conviction.

Right.

And many, many of the studies have been done. I've looked at the studies in some detail. And if you are serious, you wouldn't convict somebody of jaywalking on the basis of this kind of evidence.

Right.

One of the, one of the problems that's not been mentioned at all, I think, is that there are interest rate ceilings. Now, the lower the interest rate ceiling, the higher the credit rating of the people that you're going to lend to. I mean, if you bring this interest rate ceiling down low enough, you will lend only to millionaires, and if you bring it below that, you'll lend only to billionaires. So the very fact that there's a ceiling means that there'll be a disparate impact on people of different income levels. And if you're talking about low income minorities, that virtually guarantees that there will be differences in loan approval rates under those conditions. I'm not saying that was the only reason. It was by no means the only reason. When you look at the borrowers, you discover that credit scores vary by group. That is, blacks and Hispanics don't have as high a credit score scores on average as whites, and whites don't have as high an average credit score as Asian Americans. And in fact, what was fascinating to me was how the press, in pushing their case that this was a question of white racism causing blacks not to be approved as often, even though blacks, like whites, most of them were approved anyway. If you look at the very same data and the very same studies, you find whites weren't approved as often as Asian Americans. So now, since most of the lone people are white, you're going to tell me that they're discriminating against whites and in favor of Asian Americans. They're in the business of making money. And many of the very people who are forever talking about corporate greed don't seem to understand the implications of that. That is, if you're in business to make money, you're certainly not going to turn away people who are going to pay you back with interest.

You know, one of the radio show hosts that used to be here in the LA market, he was very popular and he endorsed us on.

Radio advertising, our commercials. He was, you know, reading our commercials a lot. And one of the things he said when I saw him speak once is he said, can you imagine the conversation that would happen when people accuse companies of discrimination? Some executive is sitting at the breakfast table who runs a huge company talking to their spouse, and their spouse is saying, you know, let's get a bigger, better, nicer home. And the executive would be thinking, well, gee, I don't want to sell to people of a certain race. Can you imagine they would turn down money?

I mean.

They never have. And moreover, this is not a question like person at the bank or the lending agency is probably going to see this applicant one time.

Right. Or maybe they never see them at all.

I mean, that's right. In many cases, you don't even see them because you do it over the phone. And their contact with them in future will just be checks arriving in the mail. And the idea that this guy's going to be sitting and saying, oh, I know this guy is black and I hate to see his check coming in this month. Yes.

Well, just on the face of it, it just doesn't make any sense because everybody goes for the green, you know, everybody likes the money. Well, besides the Community Reinvestment act and other similar pressures, what else went on with the housing boom and bust? I mean, in your book, you break it up into the economics, the politics, and then some mystiques and housing mistakes. Tell us about that.

In addition to the pressures on the banks to lend, there was also the pressure on Fannie Mae to purchase mortgages from people of low to moderate income, as they put it. And in other ways consistent with The Community Reinvestment Act. And so the bank can then lend, really to people, whatever race they might be, of low credit rating that they would never lend to if they were themselves going to collect this money. What the banks do in this case, they can make the mortgage, sell the mortgage to Fannie Mae, collect their money now on a 30 year loan and let Fannie Mae worry about what's going to happen while these people will pay this thing off for 30 years. And so you. It was government subsidized moral hazard. And Fannie Mae, of course, had the taxpayers to back them up. So risky mortgages carry higher interest rates. Fannie Mae has every incentive to buy these risky mortgages because if they make a profit, then Fannie Mae profits and if they make a loss again, they have the taxpayers to fall back on.

Yeah, and then they also have the printing press to fall back on too, with the Federal Reserve, right?

Yes. Now, the politics of it was just unbelievable because all sorts of people, not only in the United States, but even overseas, the Economist magazine started warning some years ago that there are all these risky mortgages out there on American houses. People overseas were buying securities based on those mortgages and the whole thing looked very shaky. So they not lack for warnings. The head of the Federal Deposit Insurance Corporation warned them. Secretary of the Treasury Snow warned them. Alan Greenspan warned them about Fannie Mae. I even did a piece in the Wall Street Journal. I mean, it's joining the mob. I mean, you could just name barons, Fortune. All sorts of people warned them. And the answer was always the same, that to the extent that you emphasize safety and they pooh, poohed the danger. To the extent that you emphasize safety, you're going to reduce the ab of the banking system to make housing affordable. There was just no telling them anything until the whole thing burst.

Yeah, it was a big house of cards and moral hazard. And you know, this is the problem, Thomas. When government gets involved, it becomes a special interest nightmare if the government just stays out of the way. All of these special interests and all of these people that have their own agendas that are contrary to really the public good in most cases, at least on the long term, public good, sometimes in the temporary, temporary. You know, they, they slap a band aid on problems, but they never really seem to cure them. They create dependency, they create animosity, they create class hatred. You know, it seems to me like when you're talking about this issue we started off on of CRA and race and underserved populations and things, it seems to me that if the government really wanted to be neutral, they'd stop counting and stop asking. I've sort of always wondered why they even ask what race I am on the census forum and. And on a loan application. I know on the loan application you don't have to answer it, but why do they even count this stuff?

Because there's political mileage in it.

Yeah.

One of the other aspects of government here in this case would be state and local government. There was a very false premise. Quite aside from the racial aspect, there was a fundamentally false premise behind this whole drive for creating more affordable housing, and that was that there was a national problem of unaffordable housing. Housing. It's just clear beyond words. I cite the sources and so forth in the book the Housing Boom and Bust, but there was never. There was not a national problem of housing becoming unaffordable. What there was were particular areas of the country. Coastal California being the classic example, where housing was indeed enormously expensive. Average house in California sold for some multiple of the national average. I happen to live in one of the areas where.

At one time, the San Mateo county. The average cost of a house during the boom reached over a million dollars, and the average size of the house was less than 2,000 square feet. So we're not talking mansions.

Yeah, no, these are $500 a square foot. I mean, it got worse than that. High rises in Miami and Las Vegas at the peak were $1,000 a square foot. I mean, at least ask. You know, some people bought those. It was just crazy. It was so out of sync. And one of the things I always say to people is that in a country as large and diverse as the United States of America, there is no such thing as a national housing market. There are about 400 distinct markets. And they really are quite different, aren't they?

They are. And the places where housing was very expensive, for example, in California, many places where the average person taking out a new mortgage would pay one half the family income just to put a roof over their head now. But those were very few places. And you can see that this is where the housing prices shot through the roof. This is where the housing profits fell down through the basement after the bust. I saw a statistic recently, something like. I think it's five states where over 60%, or about 60% of all the defaults occurred in five states. And I think if you looked at it more closely, you'd see that they incurred in particular areas within those five states, even in California. There are some places further inland where housing prices are not astronomical. The government was determined that there was a national problem, and therefore they created this national program, which then created a very real problem that we're still living with.

So when you say they created the national program, to what are you referring, Fannie? Mutual.

I'm referring to the affordable housing schemes. The fact that banks were under pressure, so they had to pay. They had to submit those statistics that you mentioned about race, income and all that kind of stuff in order to get permission to do the ordinary things that businesses do because they're a regulated industry.

Yeah. You know, Thomas, it just seems to me like the whole concept of Fannie Mae or Freddie Mac is acting contrary to its supposed goal. Because if you think about it, it's the whole concept. I mean, it's right in Fannie Mae's mission statement. Their goal is to promote housing and home ownership. Well, by obvious result is that whenever you promote anything, it becomes more popular, and by the basic rule of economic supply and demand, it becomes more expensive. Doesn't.

Does. Except in the case of housing. I think the Federal Reserve has gotten a little bit more blame than it should have in the sense that they did create the expanded credit that allowed this to happen, promoted this happening. The fact is, when there's been in places where there's been an increased demand for housing, even when you double or triple the number of houses within, say, a decade or so, the housing prices do not rise if the suppliers are allowed to supply the housing. The key to the California situation is you have all these open space laws, historical preservation laws, farmland preservation laws, and they're not allowed to expand the housing. And so therefore, the most modest increase in demand for housing will shoot the prices up through the roof.

Right. And that's the old concept of that riddle. You know, what do you call a developer, someone who wants to build a house in the woods or at the beach? What do you call a environmentalist? Someone who already has a house in the woods or at the beach. Right.

Oh, it really does send my blood pressure through the roof because the prices are just out of all proportion. There's no reason why any family should have to pay half of their income just to have a house. If you look at the places in the country where the politicians have not intervened in the market, places like Dallas and Houston, those are the places where the housing is most affordable. In fact, there have been international studies showing the same thing that you look at the most expensive housing markets around the world. In almost every case, it was because there are severe limitations on building. And when you Cut back on the supply, fall in demand, then you're going to have prices shooting up.

So a couple great examples of that. First of all, I'm here in Orange County, California, which is completely overpriced, and it's a very unhealthy market. You know, we have something here called the Coastal Commission. Oh, yeah, The Coastal Commission is like the Gestapo. You cannot build anything on this coastline. It is. If you can see it from the ocean, on the ocean, and you want to build it, it is very, very difficult. And it really bugs the heck out of me because here I pay for this enormous cost to live in this supposedly beautiful place, which, you know, it's beautiful in many ways, but there's no good restaurants on the ocean. We've got this gorgeous ocean out here, and you go down to Mexico, and there's all kinds of beautiful dining on the ocean. But here in Orange county, there's about three places where you can dine on the ocean. You know, I want to sit there and have a beer and a dinner and overlook the sea and the sunset, and you just can't do it. It's ridiculous.

I twice have gone to actual meetings of planning commission, and I just wish that I'd been able to tape it, because it is like Alice in Wonderland. I mean, you find people there, members of the commission, saying things to the developer like, well, you know, this landscaping could be nicer. Of course it could be nicer. And after he's made it nicer, it could be nicer than that still. It's just that he's trying to build what people are willing to pay for. And, you know, it's easy to sit on the planning commission and want all kinds of things. I must say, I got so upset, I almost walked out to the back of the auditorium and I said, no, no, I'm doing this for my research. I need to sit down and just suffer through it. And I did. But I certainly wish that this stuff had been taped.

You are so right about that. The hypocrisy is amazing. You've got all these armchair bureaucrats that dictate things under the guise of let's preserve the beauty of the land and so forth. And certainly there's something to be said for planning and prudent things here. Obviously, there's a. There's a place for that. I'm sure you would agree, too. But you look at a place like Aspen, Colorado, right? Under the guise of preserving the environment, housing has become so expensive. All of the service people that work in the restaurants that Clean the homes of these zillionaires who already have their home there. They have to live down the valley and commute in. I mean, and they talk about the environment. How good is all that, that road traffic for the environment?

We have exactly the same problem here in Palo Alto, right near Stanford University. As you know, only 7% of the palo Alto policemen live in Palo Alto. And they're probably chiefs and officials who bought their homes 30 or 40 years ago. But you're right. And the other thing especially ironic, and you have all the emphasis on race and low income and so forth, these are precisely the people who are forced out of these areas because of these restrictions on building. The black population of San Francisco today is less than half of what it was in 1970, even though the population of the city as a whole has gone up. And that's true of a number of counties in California. Another group that gets pushed out are low income people. San Francisco, in a period of about two years, they lost about something like, oh, I think 16,000 families earning less than 150,000 a year moved out of San Francisco and 17,000 earning more than 150,000 moved. And so you're making it impossible for the very people that these places say they're interested in. Another group that gets very hard hit are people with children, small children, school age children. So they're constantly closing schools because if you're old enough, if you're young enough rather to have school age children, chances are you have not yet reached your peak earning years. And only people who reach their peak earning years can afford to buy the kind of housing that you have. After all these restrictions, do you think, Thomas, that.

That the people, the powers that be here, do they know that this is happening? Do they know that their designs are either corrupt or have unintended consequences as they do, or are they just oblivious to it?

I suspect they're oblivious at best because they have no incentive to find out. The utter hypocrisy in all this is that the environmentalists who push this stuff are constantly talking as if they're trying to save the last few patches of greenery from being paved over. In point of fact, over 90% of the land area of the United States of America is undeveloped. So that all the histrionics they go through is an utter farce. San Mateo county, for example, over half the land in the entire county has nothing built on it. And yet they're constantly saying, oh, we need more open space. And what they really mean is they want a cordon Sanitaire around these affluent communities so that only other affluent people can move into them.

Exactly.

It's called, you know, preserving the character of the community. And it's a farce in the housing market because housing turns over. Areas that used to be for the rich are now working class neighborhoods. Harlem for example was once a middle class Jewish neighborhood. It became a working class black neighborhood. Many places the opposite occurs. Places that were once run down have now been gentrified. It happens with commercial properties. The original walled off Astoria Hotel was torn down so that the Empire State Building could be built on that site. I mean housing turns over. What happens is that affluent people who like the way things are now use the law to freeze that and deprive other people of the rights that they themselves exercised earlier.

You know what, you could not possibly be making more sense when you say that. That is so true. It reminds me of the bumper stickers you used to see in California. Welcome to California now go home. When the state was getting inundated with so much immigration. And I live in an area right here in Orange county where there's a state beach, Crystal Cove State beach. And it is completely undeveloped. And there are all these people who want to save Crystal Cove State beach and make sure nobody can ever build there. And the fact is nobody ever goes there. It's just we. And if you do go down there, you know it's beautiful. There's sand and you know, waves crashing and rock formations and stuff and it's very nice. But it would seem to me that all of these so called inclusive, tolerant, fair minded, environmental liberal type people would want to let that land be at least somewhat, and I'm saying prudently, I'm not saying let it run amok, let it be prudently and smartly developed so more people could have access to it rather than the way it is now because there is less supply. You have multi zillion dollar homes on either end of Crystal Cove. And because they don't let any more supply be created, they just wall off the community, just like you said. So it is theirs. And they keep other people out under the guise of what is best for the environment.

They don't want to face that. Some years ago my wife who did a local wrote about how you can't be keeping everything off limits to building without and at the same time think that you're helping the poor or for that matter in Palo Alto, even the middle class can't live there when the prices have gone up so high.

Yeah, it really is just another Example of restraint of trade. And it's sort of a trust in a way, isn't it? It's an antitrust violation.

Oh, absolutely. But there are certain kinds of antitrust violations that the government is not interested in and dealing with.

Yeah, that's true. Well, what is your prediction of what does the future look like and what is a strategy for our listeners?

Oh, heavens. I avoid giving personal financial advice.

And making predictions, but the general trend seems to me to be a sort of a replay of the New Deal. That is, this is enormous sums of money that are being spent. Spent really don't show much promise of getting us out of the recession quickly. And I don't believe that's their purpose. I think, as with the New Deal and Rahm Emanuel, the president's chief of staff, put it very clearly, you don't want to let a crisis go to waste, meaning that while people are panicked in a crisis, the federal government can do things they couldn't get away with politically, otherwise.

Yeah, that's the old concept of the false flag. I mean, even if the crisis is legitimate, which this is on various levels, but the crisis is created so they can then go in and implement all their new policies. And I mean, that statement of Rahm Emanuel right at the beginning of the Obama administration was very scary to me.

It was. But the media typically didn't say much about it. I think the tip off was this huge spending bill that was rushed through in two days. Thousand pages, and no one could have read it.

You're talking about the Paulson one or the Obama one?

No, the one during the Obama administration. Two days. And then it sat on the president's desk for three days while he was off on the hol. So the question becomes, why is it necessary to rush such a bill through, particularly since everyone agrees that the actual money will not even be spent by the end of next year. And the answer is you have to rush it through not in order to get out of the recession, but to get the government more power before people have a time to think about it, have hearings and any opposition to develop for it.

Right.

And so they accomplish their purpose. Similarly with the General Motors saying, someone ask, if General Motors is going to go bankrupt, why does the federal government need to pour tens of billions of dollars into General Motors and then they still go bankrupt? Why not let them go bankrupt without the tens of billions of dollars? And the question is, well, the tens of billions of dollars do not buy for General Motors or for the economy. What that buys is the power of the federal Government to tell General Motors what to do, as exemplified by the president getting the head of General Motors fired.

Sure. And now at the end of this, the government will of the company.

Moreover, the government will also subsidize General Motors in other less visible ways, such as buying these kinds of cars that they're going to tell General Motors to bill if nobody else buys them, which is a very likely thing, that they will not be publicly popular.

We are really on a socialist tract, aren't we? In the good old yosef, we're on.

A fascist track and the socialists want government ownership with a means of production. The fascination would allow the owners to stay owners, but the politicians would dictate to them. And that's much, much better politically for them in the sense that when something goes wrong at General Motors, now Obama can say, well, General Motors didn't have good management practices. And so you can kibit from the sidelines, force them to do things, but when they don't work out, then you can dump the blame on the owners.

Yeah, that's a good idea rather than a. It's still a centrally planned economy, but it's. There's like one step removed with fascism because then you have the corporatocracy indirectly or. Well, directly, but they're just a puppet of the government. Right, right. Yeah, very interesting. Well, so what is coming up? You don't give predictions, but give me some broad thoughts that you have. You know, we won't hold you to it, but do you think inflation is coming?

Oh, I would bet the rent money on it. I mean, I don't know when. When governments have run these levels. Well, our government has never run these levels of deficits excep wartime. And you can't just keep doing that without inflation. I mean, you're conjuring up money out of thin air one way or another, and somewhere down the road somebody's going to pay for it. And who's going to pay for it will be posterity. And as far as the politicians are concerned, that's fine because posterity doesn't vote.

Right. It seems like we're going to have a big attack on our assets. And inflation is such an efficient means of wealth redistribution because it takes anybody who is holding assets. Their assets become devalued in, you know, in real dollar value. You know, so if they have equity in real estate, if they have stocks, bonds, mutual funds, and on the other side of it, all of those who owe money, the debtors, they benefit because their debt becomes cheaper to repay.

Doesn't it it does, but I think there's. The real redistribution is from the private sector to the government. President Obama has said that, you know, there's not going to be any tax increase except for those, the rich, however that's defined. But inflation is the broadest base tax of all. The poorest person in America will find the value of his paycheck or his welfare check reduced as a result of inflation.

Yeah, no question about it. And if the government maligns the numbers by which they report inflation, they can say that the CPI only increased at 4% when maybe it really was 12 or 15%. I'm talking about the future. Now they're essentially making the spread on that aren't.

Well, it's going to be very hard to convince people that there's been no inflation when they're paying more for everything they buy. Because a lot of the taxation will come through putting prices, raising costs, really, for private businesses, and those costs will be passed on to the people who buy their products.

Sure. Any thoughts on China vis a vis the US in terms of China buying our debt or objecting to buying our debt and their fears about us destroying the value of our currency?

Oh, well, China has already expressed those fears and they hold a very large amount of debt. The old Keynesian notion that we owe it to ourselves has long since gone by the board because more than 40% of the privately held national debt is held overseas. So that means that our children and grandchildren will end up having to produce billions of dollars worth of products that will be sent overseas free of charge as repayment for this debt that this generation is running up. It's one of the most irresponsible things imaginable. You run up huge deficits during say, something like World War II because you don't want to bequeath to posterity a Nazi government. But the posterity is gaining nothing out of this stuff. Who's gaining is the existing administration, which gains tremendous amounts of power and tremendous amounts of good publicity by handing out goodies to all sorts of groups, many of whom have nothing to do with the general health of the economy. And then this will be left to be paid for by other people who have no vote right now.

Yeah. That's so unfair, isn't it?

It is.

You look at the state of California and I mean, I am so grateful that the smart people finally voted a couple of weeks ago and they didn't go for any of these stupid tax increases. But this state is so broke. I mean, decades and decades, decades of irresponsible dependency Creating spending.

Yes.

Are we looking at a federal bailout pretty soon? Is Obama gonna be running California too?

More than likely. I can remember it wasn't that many years ago that California had a multi billion dollar surplus. But as you say, they had to hand out goodies to people and particularly in the form of low electricity rates. And so they then ran the electricity industry into the ground. We had blackouts and so forth and they ended up having to dump billions of dollars to rescue that situation. Many people seem to think that if they don't pay for it in cash right now, they're not paying for it. But of course you're paying for it in higher taxes. So whether you pay in one form or another really doesn't matter except politically.

Right. You might be paying not just in higher taxes, but in devaluation of your currency.

Yeah. Well, in case of the state. The state can't issue its own currency. I shudder to think what would happen in California if the state were allowed to issue its own currency.

Imagine if each state had a Federal Reserve of its own. And so.

Oh my gosh. Oh, it would make the inflation in the Weimar Republic look like a child's play.

I saw an article, it was interesting. I think it was just last week it ran in Bloomberg that inflation in the US may approach Zimbabwe levels.

I mean, I. Oh my God.

I don't even think it's going to get that bad.

No, I hope not.

A lot on the horizon, but, you know. Any thoughts on what the rate of inflation might be, when it might start to hit? I think we're about to. Two years out.

Oh, heavens. I'd be surprised if sometime in the next decade or so it doesn't get into double digits.

Yeah. At least past what we saw in the 70s probably. I think. And I think that's going to increase pressure on mortgage rates. We're going to see much higher mortgage rates in the future, aren't we?

There is that, but also with inflation, I don't think the Federal Reserve, with what little independence it still has, going to let the inflation go on forever. And you end up diving into what Volcker did when he was head of the Federal Reserve reserve in the 80s, have this very sharp cutting back on the money supply, which in turn forced all kinds of people into bankruptcy.

Right.

It just occurred to me, you know, probably the average American has no memory of what happened in the 80s.

Right.

And fighting inflation because half of them probably weren't born.

Volcker now historically looks kind of good in my opinion. I mean, he's the Guy who broke the back of inflation. He made the country take the tough medicine. But, you know, I'm sure if you were one of those that had to file bankruptcy because of his policies, you weren't very happy.

Well, he was one of the most hated men in America. And even though Ronald Reagan had been elected, was a very popular president at first, when he supported what Volcker was doing, Reagan's popularity dropped like a rock. But I greatly respect Volcker. I think Federal Reserve chairman should not try to be popular. I think it was McChesney Martin who said, you know, my job is to go to the party. And just when people are starting to enjoy the punch, take the punch, enjoy the spiked drinks, take the punch bowl away.

That's exactly what a Federal Reserve is supposed to do. You're right. Yeah. So it's odd to me that Volcker is advising Obama because that's odd to me too. They would seem completely contrary in my opinion. You know, Obama needs loose money to pay for all of his social programs and bailouts, and Volcker is sort of a tight money guy.

Well, someone has pointed out that the policies followed by this government are the opposite of the policies advocated by Summers when is outside of government. So I'm not sure to what extent these people are really people whose advice the president is seeking or whether they're simply window dressing to make his administration more palatable. So sort of like Jean Marshak in the early days of the Hitler regime that the people said, well, Jean Mart Shocked is a very sound man and therefore we can rest assured that they're not going to do any crazy things. Well, they did crazy.

Yeah. Well, I say to listeners, watch what they do, not what they say and watch what they do not with whom they affiliate.

Yes. Especially with this administration, because Obama is really a very smooth talker and he knows what people want to hear and he says it. And even if it is totally contrary, you know, when he introduced this Sonia Sotomayor by talking about he's for the rule of law.

No, she's an activist judge. She rules from the bench.

Oh, absolutely. It really does take a statement amount of talent in a certain kind of person to say things like that. I mean, you have to be able to look up at the sky and say it's orange instead of blue and say it with conviction.

I guess that's the definition of a con artist, isn't it?

It is. It is.

Yeah. Well, thank you so much for joining us today. The book is called the Housing Boom and Bust by Thomas Sowell. Anything you'd like to say in conclusion for our listeners.

No, I think that it's hard to summarize a book that's very compact as it is is, but I think you'll find that, as I say at the beginning, there is plenty of blame to go around, so there's no point. So all the finger pointing, especially the finger pointing outside of Washington, is just a charade?

Yeah, it sure is. The special interest have taken over, that's for sure. Thank you so much for joining us today. We really appreciate your words of wisdom and your insights.

Thank you. Bye bye.

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