Peter Schiff Mortgage Bankers Speech 2006 – Transcript, part 2

Continuing with the transcription of Peter Schiff’s speech from 2006, here is part two.

You can view the second part of his speech on YouTube on the following link:

Read more for the transcription of part 2/8 of his speech.

[And eventually] the bubble burst. The NASDAQ lost 80% of it’s nominal value and many of the companies lost 100% of their value. Now, I had predicted this in advance. In fact, when I used to speak to clients and potential clients in 1997, ’98, ’99 and tell them that the NASDAQ was going to loose 80 or 90% of it’s nominal value, people used to think that there was no way that could possibly happen. I mean people used to tell me that the government won’t let it happen. Well it happened. I lot of people in the real-estate market have the same idea when I tell them that property prices are going to drop 50, 60, 70, 80%. They don’t think it can happen. They don’t think the government will let it happen. Well, it happened in the stock market and it is going to happen in the real-estate market. There is very little difference.

Anyway, we had the bursting of the technology bubble. Also that coincided with the election of George Bush. Comes into office 2001 and the bubble that happened under Clinton burst, as soon as he is on the job. Now, we are quickly to explain business-cycles and how they work- Contrary to what people think, the boom is the real problem. The bust is the solution. A boom is like an artificial high, you know when you take heroin – you know you shoot yourself up with heroin and it feels really great, at least that is what they tell me. But anyway, that’s artificial, you want to get healthy, then you have to go to rehab or detox and you go cold-turkey, and you go through withdrawal. The withdrawal symptom is very unpleasant. Very painful – again that is what I hear. Again it is necessary if we want to remove these toxins from your system and get healthy. The same thing happens in a business-cycle. When you have a central bank, and the central bank made the same mistakes as it did in the 1920’s. When you have a monetary policy that is too inflationary, you create a credit bubble, you create malinvestments, the malinvestments need to be purged, the economy needs to be balanced.

It’s like in the internet bubble – let’s say I ran a small restaurant and a circus comes to town. And all of the sudden there is a lot more demand in my restaurant and I misinterpret this. There is a false signal – I don’t understand where this demand is coming from. So I expand. I hire more workers. I build on the restaurant. I think there is a real increase of demand. And the all of the sudden they pull up the stakes, and the circus leaves town. Now it exposes the malinvestments. Now what do I have to do? I have to fire some people, I have to sublease a space, we go through a recession. That is what is necessary. That is the cure. The problem were the false signals that were sent that were misinterpreted during the boom.

Same thing happened during the 1990’s. We had lot of investments that were made based on false economic signals. A lot of tech companies and start up internet companies with lots of cash from IPO’s were spending a lot of money. That was not real demand, there were no profits there. You know companies like Intel and Lucin[?], Nortel vendor financing all these companies. And I mean, it was all a hoax, it was all a fraud. And when all these companies started to go bankrupt, when all these malinvestments were exposed, we were going to go through an economic downturn. That downturn should have been very severe. We should have had a very deep recession in 2002. We should have had a recession in proportion to the boom that preceded it during the 1990’s.

But George Bush didn’t want that recession happening on his watch. He wanted to get reelected. And Alan Greenspan, far from his Ayn-Randian roots from the 1970’s is now a very political person and wants to help his buddy get reelected. So what do they do? They combined with the worst ever combination of irresponsible tax and spending and monetary policy in our nations history. You know, Barry talked about the problems of the 1970’s. Well the reason we had the 1970’s is because of the 1960’s. The 1960’s was the Lyndon Johnson guns-and-butter administration that had us fighting a war in Vietnam, sending a man to the moon, fighting a war on poverty while at the same time running a big deficits to finance it all. Ultimately having to leave the gold standard in the early 1970’s and as a result of all the inflationary monetary policy and the big government deficits that were monetized in the 1960’s and 70’s we had oil prices going up ten times, the Dollar loosing two thirds of it’s value, gold going from 35 Dollars an ounce to 850 Dollars an ounce. All the problems of the 1970’s had their roots in the 1960’s. Well, what we seen with George Bush and Alan Greenspan is far worse than what we saw with Lyndon Johnson and William McKinley Martin during the 1960’s. And of course, during the 1970’s America was on a lot firmer economic footing as the world’s wealthiest creditor nation, as a manufacturing power. The fact that now we are in such a lousy position economically, what we are about to experience in the decade ahead is far worse than anything we experienced in the 1970’s.

Anyway, so the recession we didn’t have in 1982. Technically we had two quarters of negative growth. But during that supposed recession, we had record car sales and record home sales. Now, that doesn’t sound like any recession that I’ve experienced. Normally in a recession, these things go down. Also a curious thing happened, at the end of the recession, consumers had more debt than when it began. Now that also doesn’t make sense for any recession. Because in a recession, debt is paid down – people take on too much debt during the boom, they pay it off during the bust. During this bust, we went deeper into debt.

Now, what happened? What this irresponsible monetary and fiscal policy did was to create the biggest consumption binge in world history, where American consumption – now greater than 70% of GDP – kept us from really having a recession. But all it did was to push of the recession to some later day. After the re-election of George Bush, which is what they really cared about. We don’t care if we create a bigger disaster, we just want to have a bigger disaster later. Because then somebody else might be in office.

So this is what they did, and even though we had our down-turn in the capital goods sector, the consumer went into debt and basically pushed off this recession until – maybe starting in 2007. But it is going to be far worse as a result of the unproductive debt that has been accumulated during the past seven years.

We are now running trade deficits of 65 billion dollars a month. Over 850 billion dollars a year in debt. And what are we borrowing all this money for? We are not borrowing it for the same things we borrowed it for as a nation 100 years ago or 200 years ago. We are borrowing money to buy imported consumer goods. We are borrowing money for non-productive, depreciative consumer goods. Or we are borrowing money to just buy food or gasoline, we are borrowing money to take vacations, to remodel our kitchens, to put granite countertops in there.

All this stuff is going to have to be paid. American consumers are now loaded up with debt, and the very nature of that debt – you know, a lot of people in this room understand that because you are in the mortgage industry. You know how many people own a-just-low-rate [?] mortgages. And how many people have been able to extract equity from their houses as they have been appreciated. See the dynamic behind this whole perverse situation was that as Americans spent money, we sent Dollars abroad, to pay for all the goods that we could no longer produce ourselves, foreigners were accumulating their IOU’s. Because we didn’t have any goods that we produced that the Chinese or the Japanese wanted, they were stuck with all this paper. And so their central banks kept buying it. And what did they do with the Dollars? They bought US treasuries, they bought mortgage back securities – they kept interest rates artificially low. Because in America, we should not have low interest rates. We’ve had negative saving rates for years. We have hardly any savings. Interest rates is the supply and demand of money, so we have minimum savings – everybody is trying to borrow. Interest rates should be high. Why aren’t they high? Because the rest of the world is loaning us their savings. And that’s what has kept interest rates low. But as money kept coming back to the United States and buying our mortgage-backs and buying our treasuries, that kept real-estate prices rising. The higher real-estate prices rose, the more money Americans could borrow against their houses, the more imported goods we could afford to buy, the more Dollars we sent abroad – and it was a process that kept perpetuating itself. And of course, now the Chinese have over one trillion Dollars in foreign reserves. And that’s just the Chinese…