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April 24th, 2013 
Peter Nolan ANNOUNCER:
This is the Lew Rockwell Show.
ROCKWELL:
Welcome. And for the first time, we’re delighted today to have
a guest, Professor Joe Salerno. Joe is head of the graduate business
program and professor of economics at Pace University in New York.
He’s a senior fellow at the Mises Institute. He’s editor of our
quarterly Journal of Austrian Economics, and a real expert
on money and banking, which seem to me an important subject for
these days. We’re seeing bank runs, we’re seeing all, you know,
the bailing out of Fannie Mae and Freddie Mac, all the other financial
troubles that the country is in.
But I wanted
to ask Joe a specific question today.
You know,
we know that General Motors is in deep trouble, maybe even is
about to go bankrupt. Nobody would say that that would bring down
the whole automobile industry. In fact, Toyota and Ford and Honda
and Chrysler might even be happy to lose a competitor. Why is
it, Joe, that if a big bank goes down, let’s say, Indy Mac had
been allowed to go bankrupt as it would have without the Fed stepping
in, why does that, indeed, threaten the entire banking industry?
Why is the banking industry so unstable in a business-cycle situation
like this?
SALERNO:
The problem, Lew, is that banks, as they’ve come to evolve today,
are what we call fractional-reserve institutions. That is, most
of the depositors’ money, money that they can withdraw at any
time on demand, is loaned out, approximately 90 percent; that
banks really only have instantaneously available for withdrawal
about 10 percent of the money that they owe their depositors.
Now that money then is loaned out at interest. We see that money.
Obviously, we don’t want to keep that money and keep paying interest
on it without spending it. So it’s invested in various investment
projects and so on. And in the natural course of economic activity,
some of these projects can go bankrupt and there are losses.
Now if G.M.
invests in something that goes bankrupt, G.M. and its stockholders
bear the full loss of that. But if a bank has loaned money to
some project or to an individual to invest and has gone bankrupt
that person now cannot repay the loan, which means then there
would be insufficient funds for the depositors to withdraw.
Now that
happens and, in a normal situation, there is federal deposit insurance,
and so most people do not pay attention to the sort of normal
bankruptcies that occur, the normal losses that a bank might suffer.
But as you
pointed out, in a business-cycle situation, when we have a cluster
or errors, after the Fed has lowered interest rates and really
spurred this false investment, investment that really cannot be
completed because sufficient savings do not exist, in that situation,
when many people make errors, many people start going bankrupt,
many different businesses spread out through many different types
of industries, then there begins to be problems with the banks
paying off.
And it’s
at that point that one or two big banks, IndyMac, and then later
on, big financial institutions like Fannie Mae and Freddie Mac,
begin to go bankrupt and the Fed has to step in and bail them
out.
Now the
reason why they do is because if depositors actually went and
were able to – or to find that they were unable to withdraw all
of their deposits, it would be what we call contagion effect.
That only exists in banking. It does not exist in any other industry
in the economy. The contagion effect is that others, some other
banks, depositors in other financial institutions will suddenly
start to worry about their own deposits. So even if these banks
in some sense were responsible in their lending policies, they
still only have 10 percent of the liabilities that they owe their
depositors on hand. So this effect can spread very rapidly and
bring down the entire financial banking system and then also the
financial system.
ROCKWELL:
Well, Joe, I noticed that Jim Cramer, the Mad Money Guy on television,
the other night, was laughing at the fact that the FDIC has about
$50 billion and that’s, by the way, before what they pay out for
IndyMac, which he thought would be $8 to $14 billion . They’re
saying this is going to be sufficient to take care of all banking
troubles. He was predicting that it was going to need $1.2 trillion
to bailout the banks that are going to be in trouble. And then
he said, “We’ve got to have massive inflation.” He said, “Let
the dollar drop, drop, drop on the international exchange. Let
the prices go up, up, up.” We were all going to have to suffer
and pay vast taxes, vast inflation to preserve the banking industry.
It seems to me a politically dangerous position to be taking.
This, of course, is the position of the Republican Party, the
Bush administration, the Democrats, Pelosi, Reid, and all the
rest of them, Obama and McCain, that the American people should
be punished to bail out the bankers.
So I just
might ask you what – do you think somebody like Cramer is right?
I mean, is it that – are we in that sort of danger? This is, of
course, moving away from economic science, but what do you think
is going to happen?
SALERNO:
Well, I think it’s politically and economically very dangerous
what he’s advocating. He’s right about the positive analysis,
meaning that he’s correct that the FDIC has no more than one-half
a percent of all of the deposits that they insure. And if you
include savings accounts along with checking deposits, that’s
well over $3, $4 trillion, if you look at M2, for example. So
the piddling $50 billion that they have to cover these liabilities
in the case of a massive bank run certainly would not suffice.
So the next step would be either to allow these banks to fail
or to inflate, have the Fed inflate massively.
And by the
way, inflation cannot take the place of the wave of a hand in
the face of a huge bank run. When we have a bank run, people trust
currency; they want their money back. So it would take time to
print up this currency and distribute it throughout the country.
During that time, what may very well happen is that the Fed and
other government agencies would put controls on the amount of
deposits that people are able to withdraw from their accounts,
and so that we could have a situation that developed in Argentina
where there wasn’t sufficient currency to carry on the transactions
of the country. This was only in 2000 that this occurred. And
in Argentina, some people were actually taking recourse to barter.
So it’s an extremely dangerous situation.
The silver
lining is sort of what you pointed out at the end there, is that
people, I think, have come to see this as a bailout of one small
group in the economy that has benefited since the Fed was put
in place in 1913, OK? And that’s the bankers and the allied financial
firms, Wall Street firms that also benefit.
ROCKWELL:
Well, really, for those of us who have – you especially and some
of the rest of us, critical of the Federal Reserve, of the inflation
that it was founded in order to produce, the business cycles that
it brings on, the recessions and depressions, the artificial booms
and the busts, now is the time to educate people about it. Now
is the time for people to understand, first of all, to understand
how they’re being ripped off, why they’re being ripped off, and
maybe have a chance of preventing future rip-offs.
What would
you tell people to read? If you want to understand what the heck
is happening in the economy, what might you read?
SALERNO:
There are a few books that I would read. One of which, and probably
the first of which is Murray Rothbard’s What
Has Government Done to Our Money? – which is a wonderful
and very insightful but plainly and clearly written exposition
of what money is, where it comes from, and how it’s manipulated
and eventually destroyed by governments throughout history.
Another book,
on the Fed specifically, is the book by Murray Rothbard –
ROCKWELL:
The
Case Against the Fed, you’re thinking of?
SALERNO:
Yes, that’s the book I’m thinking of, The Case Against the
Fed. I think those two books together are sort of good primers
on what’s going on today.
You might
also want to take a look at various essays that Murray Rothbard
has written – Economic
Depressions: Their Cause and Cure,*
on the cause of business cycles.
So these
are things that I would recommend to the reader who wants to learn
about the basics of the problems that we’re having.
ROCKWELL:
Joe, I couldn’t agree more. And, in fact, if you look at the front
page of LewRockwell.com, down on the left-hand side, you’ll see
a link to the Rothbard collection. These books are available there.
I’m also
going to mention one other book that Joe was responsible for that
he edited and wrote the introduction to, and that’s Rothbard’s
History
of Money and Banking in the United States: The Colonial Era to
World War II. And I would especially recommend his long,
fascinating essays on who set up the Fed, why they set it up,
who benefited. Of course, if it were taught in our civics classes
in the government schools that institutions like the Fed come
about because smarter, more public-spirited people than we decide
this is good for America. Of course, if you know anything about
government, you realize that you’re constantly being ripped off
and that institutions like this are set up to further rip you
off. And Murray shows how the Rockefellers, the Morgans, the other
big banking institutions hired a Harvard economist to write the
Federal Reserve Act, and exactly why they wanted this, and all
the various interest groups then and now that benefit from this
currency system. By the way, that’s not you, the average person.
Joe, do you
have any other – what’s your thoughts, if I might just ask you?
You know, they’re saying we have a downturn. They don’t want to
say “recession.” They certainly don’t want to use the word “depression.”
But it looks to me like there’s a serious Western world, really
world-wide, long and deep recession here. And maybe, I mean, with
all these bailouts, are we risking global hyperinflation as well
as a global depression, meaning the worst possible of all economic
worlds?
SALERNO:
Yes, I think we already see significant signs of what’s been called
stagflation and what’s better referred to as inflationary recession
with the huge increase for June in the CPI and also in the producer
price index, OK, which are both in double digits now.
Now, of course,
the government downplays all of this by saying, well, if we take
out energy and if we take out food, then we still have inflation
under control. They’ve been continuously manipulating these numbers
since the early 1990s to make inflation look like it’s less than
it really is. But now we see with their own figures that we have
inflation at the same time that we have severe signs, or signs
of severe recession, and a recession that’s likely to get worse
because the financial problems have not been solved, because the
credit markets have dried up because businesses are afraid to
invest. So I think we have more of both on the horizon. The Fed
is going to try to inflate our way out of these problems but the
fact that the financial system is so weak, may not be conducive
to having inflation solve the problem.
ROCKWELL:
Joe, I just want to mention that as we face these problems, as
most of us are going to be getting poorer over the next few years
because of what the Federal Reserve, the banking system, the federal
government in general have done, we need to remember who to blame.
We need to educate ourselves.
Joe mentions
Murray Rothbard’s What Has Government Done to Our Money?,
the Case Against the Fed, Murray’s History of Money
and Banking in the United States, all of them available from
LRC, again, on the front page under the Rothbard collection. Educate
yourselves.
But as Murray
always advocated, what’s happening to us, in this particular circumstance
as in previous circumstances, is not a result of economic error.
It’s not the case that the Congress and the president and the
Treasury and the Federal Reserve have made mistakes. We are being
ripped off. We have been ripped off. We’re being ripped off.
And I’ll
just end up by mentioning – you mentioned about how they finagle
the CPI figures. It actually goes back before the ’90s. I remember
when the Reagan administration took purchased-housing out of the
CPI on the grounds it was going up too fast. Of course, maybe
they’d like to put purchased-housing back in now that its going
down – (laughing). So maybe we’ll see them do that.
But, Joe,
thanks a million for coming on. I hope you’ll come back. And it’s
great to hear from an actual expert on money and banking as versus
most of the boobs that the media presents to us.
SALERNO:
Thank you, Lew. It was my pleasure.
ANNOUNCER:
You’ve been listening to the Lew Rockwell Show, produced by LewRockwell.com,
the best-read Libertarian website in the world. Thanks for listening.
ROCKWELL:
Well, thanks so much for listening to the Lew Rockwell Show today.
Take a look at all
the podcasts. There have been hundreds of them. There’s
a link on the upper right-hand corner of the LRC front page.
Thank you.
*The title
of this book was corrected and will differ from the audio.
Source Article from http://lewrockwell.com/salerno/salerno18.1.html
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