Announcer: Welcome to Creating Wealth with Jason Hartman, President of Platinum Properties Investor Network in Costa Mesa, California. During this program, Jason is going to tell you some really exciting things that you probably haven’t thought of before and a new slant on investing, fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible.
Jason is a genuine self-made multimillionaire, who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it. And now, here’s your host, Jason Hartman, with the Complete Solution for Real Estate InvestorsTM.
Jason Hartman: Good day and welcome to Show No. 103. This is Jason Hartman, your host, and I am here with Sara in the office, who is going to be talking about a couple of issues. We are going to interview Thomas Woods today. Thomas E. Woods, Jr. is the author of a very hot book right now that is talked about all the time in financial circles entitled Meltdown – A Free Market Look At Why The Stock Market Collapsed, The Economy Tanked And Why Government Bailouts Will Only Make Things Worse. It’s an interesting interview, so we will get to that in a moment. The forward for the book is by Ron Paul, and I think you’ll really enjoy that interview.
But before we get into it, Sara and I are sitting here and it’s a beautiful day in Southern California – one of those that actually seems like it makes California worth paying for. It’s such a rip-off to live in the People’s Republic of California, but you know today’s kind of one of those days. And then, wouldn’t you know it? Our air conditioning doesn’t work! What do you think, Sara?
Not too good. It’s pretty warm and humid in here. I almost feel like I’m in some of these markets that we’re investing in.
Jason Hartman: You know, people complain about that when we talk about the Houston market. Five, six million people live in the greater Houston area, so people do seem willing to put up with it. But yes, it’s not that bad, but it is a little bit warm here. So, we left the door open – so if you hear some noises, that is the reason why.
Okay, so what we wanted to do is before we get into the interview with Thomas E. Woods, Jr., is talk a little bit about what to expect when you want to purchase a property through the Platinum Properties Investor Network. And the first thing I want to say is that we understand, as I’ve mentioned before in prior shows, that we are a referral network. We are not your real estate agent. We are not the seller of the property. We basically help educate you. We do market research on different markets – we’re now in 41 markets nationwide – and then we refer you to brokers, property managers, developers, sources for good inventory and good property. And we’re area agnostic, so we are not attached to any one market. We move in and out of markets as they make sense. We move in; when they don’t make sense we stop recommending them.
What are the mechanics of the process? A lot of people sort of ask these very fundamental questions that seem kind of just – we take them for granted, I think, a little bit because we do this every day. But what are the mechanics of the process, Sara?
Sara: Well, basically, when I get a phone call from someone, they ask, “Well, what do you do?” And what I tell them is exactly what you said. You know, we’ve gone out; we’ve identified specific markets for investors, taken a look at the different neighborhoods. We’ve met with the ground agents, the property management companies.
Jason Hartman: And most of the time, we’ve invested in the same market ourselves. So we’re practicing what we preach, buying what we sell.
Sara/Jason Hartman: Right and so, that’s a huge help in having a comfort level of going out of state. And I would say that that’s the number one hesitation people have is, “Well, it’s not- I can’t see it. I can’t feel it. I can’t go visit it, if there’s an issue.” And you really are sort of depending on your property manager to take care of those things for you. And that’s what allows it to become a passive investment. So it’s very important.
Jason Hartman: Okay. So, I want to talk a little bit about now, of course, all of the things you said a moment ago, they can’t do with stocks. I mean when someone buys stocks or bonds, how often as a listener do you go to the company, interview the executives? You don’t do that. I know, it’s never done and I know you lose money the vast majority of the time, too because Wall Street has a lousy track record, of course. But people occasionally do go visit the properties before they buy them from us, or through- I should say, not from us, but through our network. How many people would you say go and visit properties – five out of a 100? Two out of a 100?
Sara/Jason Hartman: Usually, maybe a year ago, I would have said maybe three out of 100. Now I think we’re seeing that increase just a little bit – maybe ten out of 100, but not very many.
Jason Hartman: Okay, so ten percent of the people go and actually look at the properties and then you sort of divide that group up into two parts. Some people look before they buy and some people look after they buy.
Jason Hartman: How would you break that one down, if you just had to guess? I know it’s off the top of your head.
Sara: Probably half and half between those two groups, yeah. And you know, for me I never personally saw the property I purchased in Houston – although, at some point I would love to travel. I’ve never been to Texas, so I would love to travel and go see it. And that’s I think the thought of a lot of people- will buy property in a couple different markets and then just go out and look at all of them at the same time.
Jason Hartman: Our broke, Dave, who’s been on the show before, he makes it a point of taking his family vacations where his properties are and he was a client of ours and purchased about a dozen properties before he came to work here and he’s actually the broker for the company, the broker of record. And he’s been on the show before, talking about how he plans his trips to go to the markets where he owns properties. And that gives him a tax-deductible trip to some extent.
Sara: Exactly. Right.
Jason Hartman: So, check with your accountant for the details, of course. So, the process: so some people call up, they email us, they go to the website,www.JasonHartman.com, and they fill out an inquiry. One of our investment counselors gets back to them by phone or email. And of course, we have clients all over the world, so, many times, it’s done mostly by email rather than phone.
Some people come in to visit us. Today, we had a client just walk in to our office in Costa Mesa and I know you were on the phone and the receptionist was at lunch, so I walked up to the front and I said, “Can I help you?” And he said, “Yeah, one of my friends purchased some properties from your company and I wanted to do the same. And I was just over at the Starbucks and thought I’d drop in.” How do you pick a market for a client?
Sara: Well, we do an investor questionnaire and we look at different things. We look at: No. 1 – how much do they have to invest to start? And then we look at what is their risk tolerance? What’s most important to them? Are they looking for future appreciation, which is a little bit more on the speculative side? Are they looking for cash flow? Or are they just doing this for tax benefits? And so, once we have the answers to some of those preliminary questions, we can sort of narrow it down to which properties would make most sense. And, of course, we try and help them diversify if they have the capacity to buy more than one property. We might help them pick one market that’s better for cash flow and one market that’s better for future appreciation. And maybe they have a break-even cash flow between the two.
Jason Hartman: Right. So that sort of balances out. And I’d say the one probably biggest mistake that we’ve made – because I kind of like to air our dirty laundry – that a market didn’t really work out so well and I bought properties – two properties there, is one of the markets we had many years ago in South Carolina, when we were pretty new at this. One of the things I said to one of our investors, who had purchased there as well as many other markets, is, “You know, you’ve kind of balanced this out. This one didn’t go as well as we thought it would. Yet all these other properties are doing great for you.” So, you know that’s the point of diversification is to reduce downside risk and increase upside potential, isn’t it?
Sara: Yeah. And one thing I wanted to add to that, one of the biggest questions we get is, especially for investors looking to invest a little bit more money, they will say, “Well, why would I want to buy several individual properties? Wouldn’t I be better going with 10-20 units?” I had that question today. And that’s exactly it, if you buy all your units in one market and that market happens to have an issue or a downside in the coming years, you have all your eggs in one basket. And so that’s sort of the beauty of diversifying, picking different markets. Yeah, you have to –
Jason Hartman: All real estate is local.
Sara: Exactly. And you have to manage a few different property managers, but that’s sort of where we come in and help you piece all that together.
Jason Hartman: Right and that’s pretty easy. You identify markets. You probably will do a conference call with the local market specialist – that’s the person, the broker that we’ve signed a contract with. We put you in touch with them. Again, they are your agent as the client. Maybe you’ll do a three-way conference call.
Sara: Right. So once we’ve sort of narrowed it down and looked at some of the numbers on the properties, and then the client will say, “Well, you know what? These numbers look really good. I think I can manage this and I’d like to add this to my portfolio.” Well, then we set up a three-way conference call with the local market specialists in that area, answer any preliminary questions, and then if they decide to go with it, we get them pre-qualified for the loan. We used to be able to just let them order the contract and then get the loan, but things have changed. There’s a lot more qualifications. So now, we get them pre-qualified first. Once we have a prequalification letter from the bank, then we really get down to the nitty gritty details. And we stay in the loop. We’re copied on a lot of the emails, so if there’s any questions or uncertainties.
Jason Hartman: We kind of help the client oversee the transaction.
Jason Hartman: And sort of oversee it and help them do that.
Sara: Yeah. And I think we keep our agents on their toes a little bit.
Jason Hartman: We keep them on their toes, definitely.
Sara: Yeah, I think we’re keeping them real busy these days. So, that’s good.
Jason Hartman: Right. That’s good. Yeah. And the other thing is – So, you arrange that conference call. The client picks out a property with the local market specialist – that’s the person in the other market that we’ve contracted with. And then what we do is, they’ll agree on the property and the local agent orders the contract. And then the contract is probably sent via overnight mail to the client. The client reads it over. They sign in the appropriate places. Maybe fill out a couple forms. This is going to take 15-20 minutes to do. And then the client sends it back with an earnest money deposit check. They send it directly back to the local market specialist that we’ve introduced them to.
Then the process really starts. They start going through the loan process. And they may have a mortgage person that they’ve already used and feel comfortable with. We might refer someone that we have done business with before. Or the local market specialist might refer someone. It’s different in every scenario.
Sara: Yeah. And I’d just like to add last year we would use a local lender here in California for many of the purchases or if you already had a lender, you could use your own lender. That’s sort of changed. We almost recommend going with a local lender in the market that you’re buying in. Just because they’ve got all of the appraisers lined up and it just is much- I’ve found that it is a much smoother transaction.
Jason Hartman: Okay. So now I just want to add to that – that is the way it is today. But six months from now, that may change. And it’s always changing. That’s the thing. Like a lot of you listeners – Look we’re on show No. 103 talking to you and I know you usually listen because I get your notes all the time and I love getting your mail, so I appreciate hearing from you always. But just remember that when we talk today, things change. So you go back and listen to the old shows and you may think, “Well, that’s not what they’re saying now.” Of course, it’s not! The market has changed. Some things are different. And all of this stuff that we talk about is subject to change.
Sara: Right. And that’s exactly why we’re here – is to just help you –
Jason Hartman: -keep up to date with the changes –
Sara: -keep up to date.
Jason Hartman: -and manage things and so forth.
Jason Hartman: Yeah. The contract is ordered. The client fills it out and sends it back with their earnest money deposit check. How much are the earnest money deposit checks – maybe $5,000?
Sara: Usually $5,000 max. On some of the smaller bank-owned properties, it’s $1,000. I think the most we’ve seen is like $7,000 on a single family or four units or less. So it depends on the size of the property. The bigger you get the more they require down.
Jason Hartman: Absolutely, so you know, we also have larger commercial properties, apartment buildings, self storage units, mobile home parks, etc, from time to time, and of course, there the deposit will be much bigger. It might be $25,000-$50,000. It just depends on the deal. But on the basic single family homes that’s sort of the rule of thumb, right?
Jason Hartman: Okay. Now, what can the client expect as they`re going through the process? What questions do they come up with? What things trouble them? What are some of the problems that we can just talk through now?
Sara: Well, because we used to do a lot of brand new properties and now we’re not, this is all sort of changed in the last six months.
Jason Hartman: Because the market has changed, so it calls for a different game plan.
Sara: So, you know a lot of our clients now are looking for deals and what comes with the deals is a little bit more work upfront. So a lot of phone calls, a lot of emails, and a lot of different parties involved now, whereas, before, it was just you working directly with the local market specialist and maybe the builder. Well, now you’ve got banks, and appraisers, and contractors because if you’re doing a rehab property. So, just I would say expect a little bit more work up front than maybe you would have last year with a new property. But we have really, really streamlined it for the client. It’s a lot easier than if you were going to try and go out and do it on your own and find your own contractors and that sort of thing.
Jason Hartman: You know folks, all of you listening, I know that sometimes you hear us talk on this show and you think, “Well, I don’t need these guys. I’m just going to look on the internet.” You are asking for trouble. Let me tell you, because we hear about these horror stories all the time. We add a lot of value and it doesn’t cost you anything extra. So, we’re making our money because we are collecting a small referral fee from the local market specialist, who doesn’t have to advertise to get their business. They just do a deal with us and that relationship is very worthwhile to them in getting a volume of business from one easy source, rather than spending a bunch of money on pay-per-click advertising or however they want to get their business in their local market.
Sara: Right, and that’s a great comment that you made because I think that’s another hesitation. People think that they’re paying out of pocket for our services.
Jason Hartman: It’s not going to cost you any more; it’s going to cost you less.
Sara: Once they realize it’s free, they say, “Well, why wouldn’t I use you guys?” And so it’s just a given. We’re just an extra set of eyes and ears for the client.
Jason Hartman: And the nice thing is we’re an area agnostic set of eyes and ears. So we don’t recommend markets that we don’t like. We don’t have any attachment to a market. And I want to give you one example, and Sara you’ve recently mentioned it, is that we’ve been hot and lukewarm and cold on the market in Charlotte, North Carolina. We keep kind of going back and forth because that market keeps changing. Several years ago we were hot on it. I bought property there, made good money on it. And then we got out of it for about a year. We went back in. We were getting clients all sorts of great deals. The banking sector got beat up even more and Charlotte’s the number two banking capital in the United States. And now, what are your feelings about Charlotte?
Sara: You know, I’m sort of on the fence. There are a lot of incredible deals in Charlotte, meaning the prices have come down for some of these bank-owned properties. I mean, I don’t think prices have come down a lot, but there are definitely deals through the bank that you can get your hands on. I had a client recently close in Charlotte. But the issue is are the rents keeping up? And the problem is I’m not quite sure; I think we’re in this sort of limbo with the economy and it’s really hard to tell is this just a temporary thing that’s happening because of all of what’s going on in the economy? Are the rents going to strengthen again because we’ve sort of gone back and forth on that with Charlotte? I think overall, if you’re in this for the long haul, buying in Charlotte is okay. You’re going to do well in the long haul. But if you’re looking for get rich quick that’s- I don’t think that’s going to happen anywhere.
Jason Hartman: Yeah, right. I don’t think it’s going to happen too much anywhere now. The top appreciating markets in the country were three of our markets in Texas last year. And I did say, by the way listeners, appreciating. Can you believe that markets appreciated in the worst economy in seven decades? The stock market that same year lost 42% of its value and we have properties appreciating in value. So this is the great thing about not being attached to any one market. We are just completely disloyal to markets. And when I say that, it doesn’t mean that if you own a property there, you abandon your property. You bought in before the change, so you just have what we call a stabilized investment. You just sit tight and keep running it and managing your manager. What else about the process do people need to know? Just let’s wrap up on that.
Sara: Basically, once we connect you with the local market specialist, you can just expect to be communicating directly with them. They’re very good at returning calls and emails and staying on top of things. Once you go through the loan process, and you’re getting ready to close, they are going to connect you with the property manager that we’ve pre-screened. They’re also going to connect you with the local insurance agent there. And that was one of the recent questions I had from a client. What should I expect from the insurance agent? What kind of insurance do I need to get? And the answer is you know what? It varies from market to market, and I can’t personally advise, “Well, get this type of insurance in this market.” Depend on that local agent because they know what is needed there.
Jason Hartman: The insurance is usually a pretty localized thing. Some people have asked and I kind of asked myself – why haven’t we had an insurance person on the show? Well, the problem is it varies so much from market to market as you cross the country, and it’s really a different game. So this is what we do. We’re talking to these insurance people from time to time. We’re talking with property managers every single day. We’ll make referrals to the people that we found to give good service and good value for the dollar.
Sara: Yeah. And you know what I found with my Houston purchase? It’s that to buy a little extra insurance is not that much more money annually anyway. So, me personally, I wouldn’t skimp on the insurance. Just get the best coverage for the buck and go with it. It’s not going to be a lot more. It’s different than the California market, I think.
Jason Hartman: Yeah, the insurance isn’t too expensive actually. That’s one of the- actually, I think the bargains of insurance is rental property insurance. Make sure you get a landlord’s policy that covers liability for slip and fall of your tenant, that kind of thing. Some policies may cover lost rental income, so check that. Some may not. And so that’s in the case where if the property is damaged and it can’t be rented for two months, you want to check that with your agent. Just kind of shop around, but that’s one of the reasons you talk to us and you have a good local market specialist. Is there anything else on the process? What happens at closing?
Sara: Well, and then when you close, basically, you’re going to have the loan documents most likely sent directly to your home. Occasionally, we have clients come in and do it here. We have notary services available. Typically, they go straight to your home. You have a notary either come out or meet a notary somewhere. You sign the documents, send them back with your check and the HUD, and that’s pretty much it. And then you close. And we have a nice closing check list for you, just sort of a reminder list – “Did you do this? Did you do that?” – that we can email to you. I believe it’s also in the “Members Only” section now. Is that true?
Jason Hartman: I’m not positive about that, but it may be there. If it’s not there, we’ll get it up there. Speaking of the “Members Only” section, if you go to www.JasonHartman.com, it’s totally free to become a member. You can get a copy of our brand new newsletter. We’re giving out free samples. This will be a paid subscription. It’s called “Jason Hartman’s Financial Freedom Report – Financial Self-defence in Uncertain Times”. And that will be in the membership section, and I am very proud of this newsletter. It is a 12-page newsletter, just beautifully done, beautifully laid out, and there are some great articles in here on arbitrage, talking about keeping an eye on Wall Street, a Monetary Policy Update, The Macro View of the Economy, Borrowing from Peter to Pay Paul, which is about the credit markets, and the Four Factors of Real Estate, Inside a Real Estate Arbitrage.
A client of ours, Doug Utberg, I have made him the editor of the newsletter and he’s just doing a great job. He already publishes his own newsletter, called the Business of Life, and so he included a column from that in there on “Gratitude, Guilt, or Entitlement?” and “How Defence wins Championships.” We highlight some of the Creating Wealth shows in there. And of course it’s got a little promo in there for our Do-It-Yourself Loan Modification Kit. A few people have purchased that. There’s an article on “Vaccinating against the Gold Bug”. And then the $5,000 down deal in Atlanta, which we are trying to duplicate in some other markets for you. That’s pretty exciting as well.
So, there’s some great stuff in the Members Only section of www.JasonHartman.com, including a free newsletter and it’s free to join.
Sara/Jason Hartman: You know, one other thing we should touch on is just before you close or when you close, a lot of times you won’t have a tenant right away, so you want to make sure to put the utilities in your name, and also, you can do change of address is another suggestion we have.
Jason Hartman: Oh, yeah. That’s something we really recommend because a lot of times the mail ends up at the property, not at your house. We’ve talked about that in prior shows.
Sara: I think you have, yeah.
Jason Hartman: Okay, good. Anything else they should know about the process? You will guide them through it. You’re an investment counselor here. That’s what you do every day.
Sara: Exactly. Other than that, it’s just connecting with the property manager. Don’t get greedy on your rents. Stay within what is recommended. Do your research. Get your tenant in place quickly, and after that, it’s smooth sailing.
Jason Hartman: Yeah, it usually works out pretty darn well. I’ll give you an example of a great cash flow market of ours. Doug, the editor of the newsletter, he bought in Indianapolis and I believe his first property he brought from us had an RV ratio of 1.4 percent. I mean that’s just phenomenal on a property that’s almost brand-new. So you can’t beat that. Also, I’m interviewing Rich Dad author, Robert Kiyosaki on Monday, so that’ll be great. We’ve been trying to get him on the show for a long time.
Sara: Yeah, that’s pretty exciting.
Jason Hartman: Yeah, so he’ll be good and the next show will be with James West, talking about his movie regarding monetary policy in the Federal Reserve. An upcoming show with David Savlowitz who will talk about the market prediction methods. He’s got an incredibly complicated, but really neat algorithm for predicting markets, and then Larry Parks, who’s going to talk about the crime of the century – just a lot of great shows coming up. Sara, anything else you’d like people to know about this process before we go to the interview with Thomas E. Woods, Jr.?
Sara: I think we pretty much wrapped it up. It’s not as hard as you may think it is. I think a lot of people – the biggest issue that they have is getting started. They’re afraid; which market should I pick? Is this the right area? You know just do your research and don’t be afraid to get your feet wet. I think once you purchase your first property, it becomes-
Jason Hartman: It becomes much easier. Yeah. If you’re a new investor, just start. Start with something. It doesn’t much matter where you start. The biggest mistake you’ll have is not starting because we think inflation is coming and there is no investment on the planet that we know of that beats the special characteristics that income properties offer. It is the most proven wealth creator in the history of America, bar none. Nothing comes close. Tens of millions of people have created significant wealth through income property investments and very few have done it through the stock market, or any other type of method – precious metals, whatever.
Which brings me to another point. I just interviewed – he doesn’t like to be called a gold bug – but I called him a gold bug on the show. I think he got a little miffed at me, but I interviewed Howard Ruff the other day. And Howard Ruff was a very famous guy in the late ‘70’s. He’s an interesting, interesting person, so that show will be coming up too. He wrote the book How to Prosper in the Coming Bad Years in 1978 and I believe it became the No. 1 financial book of all time back in its day. He wasn’t right then. The years didn’t get so bad, but I think he might finally be right actually because things are changing. So that show will be coming up, too.
I want to also mention our new show that we’re launching, HolisticSurvival.com. Go to HolisticSurvival.com. We’re looking at a little proof for a newsletter for Holistic Survival here. And of course the Financial Freedom Report you can get for free in the Members Only Section. I guess that’s it. Let’s go to the interview with Thomas E. Woods, Jr., the author of the New York Times Best Selling book Meltdown. He’s a senior fellow at the Ludwig von Mises Institute and I think you’ll find this show to be very interesting. Here’s the interview.
Interview with Thomas E. Woods, author of Meltdown.
Jason Hartman: It’s my pleasure to welcome Thomas E. Woods to the show. He is the author of a new book entitled Meltdown – a Free Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Just Make things Worse. Tom, it’s great to have you on the show.
Thomas E. Woods, Jr.: Thanks so much, Jason.
Jason Hartman: Tell us what your take is on this. It seems as though very few people right now are standing up for the free market and that is a scary thing to me. And it probably is to you as well?
Thomas E. Woods, Jr.: It’s very, very important at a time like this when we are racing at just a speed I don’t think any of us could have predicted toward just a radical transformation of our society. I mean this is a real watershed moment in the history of the Republic, the end of the Bush years and the beginning of the Obama years. My view is that this conventional wisdom that the free market has failed, so you know it’s important for our over-lords to come in and protect us and- It is so grotesque distortion of the truth, so dangerous for the country.
And so I wrote this book Meltdown that you mention and it came out in early February. And I worked on it extremely quickly because I felt that obviously we’re in for dozens and dozens and dozens of books coming out. And most of them are going to be absolutely dreadful and disastrous because they’re going to be cheering all the developments that Americans should be opposing with all their strength. And I thought it would be kind of fun to get the free market point of view out there, before the anti-market people even knew what hit them and that was the goal.
And so I’ve been glad it’s had some success – it was ten weeks on the New York Times Best Seller List – because I think there are people out there who don’t believe what they’re being told on CNBC and they don’t believe what the White House is telling them. And they don’t know where to go because that’s all they’ve got. They listen to talk radio. They don’t know where they’re going to get to hear the truth, but they know- and they may not know all the arguments, but they know something’s being pulled over on them. You know? Something’s not right about this. So that’s I suspect what the success of Meltdown is tapping into.
Jason Hartman: Yeah, I would definitely agree with you. And you know, conceptually, anybody in their right mind knows that capitalism, it’s a lousy system, it’s just better than every other system. And free markets are great and philosophically, they’re good. But I’ve got to tell you and this is why I’m so glad to have you on the show and so glad your book came out, it seems difficult to defend it right now because everybody on the sort of left side of the spectrum says, “Oh, well you know, all this deregulation, that’s what did it. That’s what caused the problem. That’s what caused the meltdown. It was capitalism running amuck. It was free markets running amuck. We need more regulation. We need more intervention.” What do you say to that?
Thomas E. Woods, Jr.: Yeah, that is I think an extremely superficial way of looking at this. I have an article that’s just recently up – you can do a Google search for it called, “Don’t Know Much about Capitalism,” and then just put my name Thomas Woods there and you’ll get my article – because I was addressing exactly this argument made by Thom Hartmann, who is a host on Air America, the left wing radio network. He gave this whole point of view and I would like to think I pretty well smashed it.
But to make a long story short, I mean for one thing, these are the same people who say that the S&L crisis of the 1980’s was caused by deregulation, which is such, again, an absurd misunderstanding. I don’t think they even know any of the circumstances. They just feel like this is an opportunity to bash capitalism and the facts be damned. I don’t care what the facts are.
So in terms of deregulation, the bottom line with regard to the present situation is, No. 1, major market actors for years had been operating on the presumption of something called the “Greenspan Put,” which was the idea that, “Don’t worry, if your risky investments turn sour, the monetary authority will eventually come in and bail you out.” And this was a view that the Financial Times Newspaper was warning about, that it was encouraging people to take on excessive risk. And when people saw Greenspan bailing out various parties, they came to the conclusion that, “Well, I guess I’ll just carry on just as I am, because if I do well, I keep the profits. And if I do badly, well, old Alan will work out something to bail me out.” So that’s not a free market for one thing.
Jason Hartman: Well, let me ask you a question about that, before you go on if I can?
Thomas E. Woods, Jr.: Yeah, sure. Please.
Jason Hartman: Did that really start back about ten years ago with long-term capital management? Was that the big beginning, maybe, of people thinking they could just act recklessly and a bailout would be waiting for them?
Thomas E. Woods, Jr.: I think that’s probably the best known example. There were other examples, the Mexican bailout, for instance, then his monetary policy around the time of the stock market tanking in ’87. But yeah, there are repeated examples of that, so that’s probably the best known. Remember, if we’re going to claim that deregulation causes the problem, well, let’s remember that the people who are making various investments of various kinds, it’s their money, and presumably, they would know what kind of level of risk or what they should be doing with their own money.
So the question would be – what caused them to make such bad estimates of these investments? Like, why did so many people suddenly start making all these errors? That’s the question that fascinates me. Why did they make such bad investment decisions? And why were so many risks being taken? And why was credit flowing so easily and so readily that every Joe on earth was able to just get a whole bunch of money and leverage up in the course of making various investments? And a lot of this boils down to, once again, Greenspan and the Fed making credit artificially cheap and readily available. Well, sure, anybody’s going to blow it under those circumstances, when you can get it for almost nothing.
So Greenspan’s creating all this money out of thin air and as the Austrian School Economist taught and still teach, the business cycle is caused when the monetary authority creates money out of thin air, that doesn’t correspond to real savings in the economy; that doesn’t actually correspond to real saved resources. It’s just pieces of paper created out of thin air. This tampering with the money supply and with interest rates as the free market sets them, leads to massive errors by investors, entrepreneurs, consumers, you name it.
They can’t see the economy’s real condition clearly. They do things that they would normally do only if the economy had far more saved resources than it really does. Not only do you start to see investments that can’t be sustained in the long run, capital investments that aren’t going to pan out. The resources to complete them haven’t been saved. But also, whenever you get these massive increases in the money supply, there always seems to accompany it a kind of frenzy, a kind of a sense that anybody can make a fortune in the stock market. Anybody can make a fortune in real estate.
You get these get-rich-quick mentalities developing that would sort of rival the kinds of infomercials you see at 3:30 in the morning guaranteeing you a million dollars if you send in your $39.95, except these are real. You see your neighbor flipping houses and making $50,000, but it’s all phony. It’s not based on real savings. It’s just based on some monetary authority manipulating the aggregates and manipulating interest rates.
You cannot create wealth on the basis of manipulation. So this is not a free market. This is dramatic intervention into the free market that skews people in the direction of more risk and more and different types of investments than they would undertake if the economy had genuinely been free.
Jason Hartman: Okay. So, I agree with you completely about Greenspan goosing, if you will, goosing the money supply and just flooding the markets. And when markets are flooded with money, people get reckless. Certainly, we saw this with venture capital in the dot com era. Everybody was talking about the “new economy” and everybody has these incredibly dumb ideas that just had no real substance. I mean some of them were good, obviously, but there were a lot of really dumb ones, too. And venture capitalists and Wall Street were just throwing money at these companies that were just dumb. You know, you put dot com after your name and you’ll get funding. That was the joke at the time.
Thomas E. Woods, Jr.: Right.
Jason Hartman: And so, the same thing happens on a broader level with an economy when you’ve got a Federal Reserve and you’ve got fractional reserve banking operating and a bunch of fiat money being pumped into the system. People become reckless, no doubt about it. So, you’re saying this market is by no means a free market? That is the exact antithesis of a free market, right? That’s your first point it sounds like?
Thomas E. Woods, Jr.: Of course, I realize that this makes determining when you really have a free market – I’ve put up a pretty high hurdle to overcome because what country on Earth doesn’t have a Central Bank intervening. Now, I mean some countries will have central banks that don’t intervene as much as others and there you have more of a free market than you otherwise would. But I would suggest that if you have a central bank, right away, the very heart of the economy, namely money and interest rates – interest rates reverberate throughout the whole economic system.
Jason Hartman: Of course.
Thomas E. Woods, Jr.: If they’re being manipulated, it’s very hard for that to be considered a genuine free market because you are going to have the boom-bust cycle. And then when the bust comes, the free market will take the blame, when it’s not really the markets fault in my view.
Jason Hartman: So the next question I was going to ask you about that is when is the last time we had a free or freer market? Is it pre-1913 Federal Reserve? Is it Pre-1971, when we were on the Gold Standard, before Nixon took us off? It’s probably been incremental the way it’s been ending and more interventions coming right?
Thomas E. Woods, Jr.: I think we can say we can speak, at least in relative terms, that there have been moments and times in the 20th Century when we’ve had much much freer markets. I mean, of course, right now, I think it’s easy to see many times that when we’ve been freer than we are now. I think now if you look at those global measures of economic freedom, I think the United States has plummeted to like No. 8 or something. You know, we used to pride ourselves on being the freest country in the world. Now what are we going to do? Get little gloves that say, “We’re No. 8”? I mean what’s going on?
Jason Hartman: Jim Rogers out – you know when the first bailouts started last fall, he was ranting I should say about the fact that China is a much freer country than the United States is nowadays.
Thomas E. Woods, Jr.: Well, especially when you look at in terms of trends.
Jason Hartman: Right.
Thomas E. Woods, Jr.: What direction are the various countries moving in? And China, by and large, seems to be, on average, moving in the right direction and we’re in the wrong. I would say that in the ‘20’s, you had a relatively, by and large, free market. But at the same time, you also did, especially after – well, especially starting in 1927, you had a very interventionist, activist Federal Reserve that created some unhealthy growth. But earlier in the ‘20’s you had genuine healthy growth and in fact, coming out of – we had a terrible depression in 1920 to 1921 that most people have forgotten about and there, because we had a by and large free market, the Fed stayed out of the picture. The Fed didn’t actually start open market operations until 1922, so it stayed out in ’20 and ’21, and the Federal budget was actually cut in half from 1920 to 1922. So, again, that gives more space for the free market, more resources for the private economy. And we had a very robust recovery out of that depression.
When today, you know, the text books would tell us that, “Oh, my heavens, if you cut the budget at all, much less in half during a recession or a depression, well, it’s just going to make it worse.” Well, to the contrary, we did that and things actually improved. And in fact, after World War II, there were predictions by Keynesians that we would have 8 million unemployed when the war was over because where would all that “aggregate demand” come from? Well, instead, after the war was over, we got the year 1946, which not only did we not have a depression, we instead had the single most robust year that the private economy has ever had in all of American history.
So you would think in light of this track record, the people who take this point of view that government spending is necessary to keep demand going, and this and that and the free market can’t be trusted, well, given that you know we’ve had the market in these cases, more or less adjusts after major shocks. We had massive cuts in government budgets and they were not followed by depression. They were followed sensibly enough as you should expect by prosperity. You know you’d think people would abandon that point of view. But they hold on to it for dear life no matter how many times history refutes it.
Jason Hartman: I know. It’s amazing to me that there really is no real example in world history – at least not that I know of, correct me if I’m wrong – where a big government, centrally-planned economy has worked. I cannot think of one successful example of that. Yet, you see the brightest, most shining example of the freest markets in what was formerly the United States I almost want to say – in the United States of even a few years ago. Of course, there’s been an incremental change. And it’s like why can’t people just see that? It blows my mind. I have debates with people and I say, “Just give me one example. Just give me one example of a big successful, centrally-planned, government economy. And they can’t come up with them. If they really scratch their head and try, they’ll say some of the Scandinavian countries, which, of course, have massively different sets of circumstances.
Thomas E. Woods, Jr.: Yeah, and in fact, in those Scandinavian countries, what’s interesting is that although they’ll have some heavy taxation in some sectors; in other sectors, they’ll have lower taxes – especially on business. And they’ll also have much lighter regulation, just not very well known. So, some of that is kind of misleading for one thing. The way they define unemployment is kind of misleading. So when you factor all this in, there was this study done a few years ago that actually found that the average American black – and blacks are thought of as being particularly underprivileged and not doing as well financially – is actually doing better than the average Swede. So yeah, they try to point to the Scandinavian countries, but, in comparison, it just doesn’t work.
Jason Hartman: It doesn’t hold water. Sure. In your book, you talk about the bailout and how Americans were just vehemently opposed to it. They inundated Capitol Hill with calls against it. You say that America’s sound and persuasive argument against the bailout was met with a scolding from the politicians, “The crisis was just too complicated for the average person to understand.” Why shouldn’t average Americans that aren’t in the financial world trust the “financial experts”?
Thomas E. Woods, Jr.: Well, if they’d called something right in the last few years, it might help. But thanks to the wonders of YouTube, these people are going to have to wear as albatrosses around their necks forever all the remarks they’ve made in 2006 and 2007, saying that “The Dow’s heading for 30,000.” Or, “The best thing you can do is buy up Merrill Lynch,” or whatever. I mean once that’s been said, that can never be unsaid. And so these people have been telling us – and by these people by the way, I include Hank Paulson, our former Treasury Secretary, Ben Bernanke, the Fed Chairman – telling us the economy’s in better shape than they’ve ever seen it in their entire lives all around the world. The banking institutions are super strong and they’re going to remain strong. They’ve been so wrong that I’m not just being facetious when I say, “If we did the exact opposite of what these people called for, it would be a good thing.”
So, yeah, so people need to wake up and realize that they’re being governed by quacks. And that the average American, just in his general sense of justice and his rudimentary economic understanding, can sort of get that the bailouts and all these various – these endless trillions being thrown around – I mean, who thinks this is going to work? I mean, does anybody actually think this is going to work? The average American has a sense that it’s not. Or at least a good chunk of Americans do. So it’s essential for people to be involved in this, to wake up, to read, to learn, but again, to trust their instincts. If you feel like something’s rotten, it almost certainly is.
And as I say, given that the so-called experts have really made complete fools of themselves for years in everything that they’ve said, you would think they would have the decency just to keep quiet for a while, and let us instead listen to those people who did predict what happened to us.
And it’s interesting to note, by the way, that the average Americans who said, “You know this whole AIG thing, why don’t we just let AIG go under? And you know bankruptcy court will sort it all out. The bondholders will probably take a hit, but we’ll survive. You know, we survived when Enron collapsed. That was the biggest energy company in the whole country. The energy markets hardly even noticed the disappearance of Enron. And the wider economy didn’t notice it at all. Just let the thing go. And they were told, “Oh, no, no no. You’re stupid rubes. You don’t understand financial markets.”
And now we’ve got the ex-chairman of AIG coming forward a few weeks ago saying, “You know, on second thought, this whole bailout really hasn’t worked. It probably would have been better to let AIG go bankrupt.” Well, isn’t that funny? You know it turns out the stupid rubes were right after all, as usual.
You would think if our so-called financial experts had any shame whatsoever, they would do something else for a year, or they’d stop writing for a year and they would just wait. But instead, they’re getting appointed to top positions in the government. I mean that’s just the way government works. The more of a blockhead you’ve been, the more we want to give you a big salary. But the more you predicted this crisis, the less we want to talk to you. We don’t want to talk to Peter Schiff. We don’t want to talk to Jim Rogers. We don’t want to talk to Jim Grant. But Timothy Geithner, come on up, we’ve got a job for you.
Jason Hartman: You couldn’t be more right about that. And I tell you on your first statement, the fact that most Americans kind of know just through common sense that the bailouts won’t work, that generally speaking, these stimulus packages will just cause inflation, ultimately. They kind of get it because economics are pretty common sense things. It’s really not as complicated I don’t think as people try to make it out to be. And I mean you’re obviously a very educated man. You’re a senior fellow with the Mises Institute. You went to Harvard. What do you say about that?
Thomas E. Woods, Jr.: Well, I think if you look at the current economics profession, if you flip through the American Economic Review, what you’ll find is a bunch of incomprehensible mathematical jargon. You won’t find real economics being done. You’ll find a lot of crazy models. And earlier in the 20th Century, this type of hyper mathematical economics was viewed as kind of a weird crankish, cultish sect within economics that was sort of tolerated.
Jason Hartman: And now it’s really in, huh?
Thomas E. Woods, Jr.: Yeah, so now the cranks and the cultists are taking over the profession. And they’re using this as a kind of way to make it seem as if this is more complicated than it is. The average person can’t really understand it. You get economists who actually will claim that, yeah, it’s a great idea for Obama to take $800 billion and blow it on a whole bunch of money-losing projects because that’s how you get rich. When the average person hears that, he sort of thinks, “Well, wait a minute. How could be blowing money on money-losing projects make us rich?” And by the way, the reason I say they’re money-losing projects is the private sector would already be funding them if they weren’t money-losing projects. So we’re going to take money, blow it on money-losing projects because that makes us rich. The average person just doesn’t believe that. You can throw all the math at me you want; there’s something wrong in your assumptions, if you’re drawing this conclusion.
But secondly, the average person wants to know where’s that money coming from? If we can just conger up $800 billion, why aren’t we doing this all the time? Now the Keynesians will have a kind of contrived response to that. But that is nevertheless an excellent question. Where does this money come from? What are the opportunity costs of blowing this money? And in fact, of course, in the case of the stimulus, the money is either coming from borrowing from foreigners, or it’s just being created out of thin air.
Well, again, creating money out of thin air that doesn’t change the underlying structural imbalances in the economy. Printing up some pieces of paper doesn’t fix the structural problems we have. It really is like a third-grader’s response, “Oh, let’s just print some more of the medium of exchange.” Well, the problem is your economy because of years and years of manipulation by the Fed and channeling capital into avenues it wouldn’t normally want to go into, it is shot through with imbalances. It’s producing too much of some things, too few of other things, and simply printing up some dollars and throwing it at this doesn’t fix the imbalances. It just perpetuates them.
And this is just common sense, but as I say, the professionals refuse to see this, won’t see it. And partly, some of their livelihoods depend on not seeing it. They want to be consultants to the government. They want to testify in front of government. They want to be the people who are the yes men to the regime. You know it’s said that there are such things as court historians, who write history that governments want to hear. I think there are also court economists.
Jason Hartman: Very interesting – just like an expert witness really in a litigation situation, where you hire the expert witness to sort of state your side of the case and they’re an expert. But they’re certainly not impartial. They’re on one side or the other. But you know, see the thing is Tom, that most people get it about the bailouts, but a lot of people are getting money sent their way because of a bailout and so, obviously, the politicians are buying votes.
Thomas E. Woods, Jr.: Right.
Jason Hartman: And so that’s part of it. You know, if I can feed my family now, if I can have – increase my business now, heck, forget about the long-term. Americans have been notoriously short-sighted, especially the government and the Wall Street side of it, to some extent. And they just have to sort of go with their pocketbook and their instant gratification a lot of times. So there’s certainly the buying votes aspect of it, right?
Thomas E. Woods, Jr.: I think that’s the vast bulk of it, as a matter of fact because people will say to me, “Well, why would they deliberately do something that’s not going to improve the situation?” And part of the answer is some of them just aren’t bright enough to see that it’s not going to improve the situation. Others frankly don’t care. Others think, “Well, maybe it’ll improve things, maybe it won’t. But I want to hang around and if I shovel these new dollars toward my constituents that will be more likely to put me back in power.” And that’s the way they think. They’re not thinking in terms of the long-term. And they’re thinking that this is maybe one last time to really raid the till while the raiding is good.
That’s the mentality. It’s not that they are wise public-spirited representatives who are legislating on behalf of the common good. I mean I don’t want to dignify these people that way. I think they’re ignoramuses and crooks and they’re making Americans poor. And of course, the people who are on the receiving end of the stimulus money, well, you know, it seems great to them.
But the people who suffer from this, the people who either will feel the inflation, or the business leaders now who have to compete against businesses that are getting money from the government, I mean anybody who is on the losing end, well, they don’t always necessarily understand why they’re on the losing end. But people who gain, they always know, “Oh, because the government sent me a check.” So there’s always the tendency to do more and more of this because the recipients understand where their largess is coming from. But the people who are harmed, often times don’t quite understand where the harm is coming from and they’re inclined to blame big business or this or that. And the government tends to get off Scott-free.
Jason Hartman: You’ve just got to almost think what was Greenspan thinking as he was just flooding the markets with money? It almost comes to a point where I’ve got to say was this a set-up? Was this a – I hate to say the word, but was it a conspiracy? Was it set up to make government more powerful? Create the problem, and come in and save the day. I mean, that’s been done throughout history over and over again.
Thomas E. Woods, Jr.: I get this question really all the time when I’m doing talk radio and especially when we take calls, and people just want to know. I’m inclined to think not, but I understand why people are saying this. They’re saying it because they can’t believe – I mean, in a way, they’re actually flattering our rulers because they can’t believe anyone could possibly be this stupid. Stupidity at this level, given that half these people come from Harvard, just can’t be the explanation. So, it’s got to be they’re screwing things up on purpose. And I understand why people would think that because they just can’t imagine that you could have incompetence at this level.
But the reason I don’t think it is that – I mean I do think there are some sinister people involved. And I do think that after the fact, once the crisis hits, well, you better believe the government will exploit the crisis. But, No. 1, I don’t see why any private actor would have it in his interest to destroy trillions of dollars of his own equity just for this. Second, it makes the government look bad and regardless of how many times they try to blame the free market, people do look at this and they feel like government’s got – they may not know the whole argument – they feel like the government’s got a hand in this somewhere. So, it makes the government look bad and they generally don’t like that.
But beyond that, this type of crisis could so easily spin out of the government’s control that what would the point be of conspiring to create a crisis that then you can’t control? So, I think they genuinely don’t know what to do to stop this thing. I think they’re genuinely trying. I think Ben Bernanke is trying everything he’s learned in his text book, and reality is refusing to conform to that textbook. And I think also for people who are inclined to think that this was all just planned, well, think about some of your friends you’ve talked to who are smart people a lot of them on everything else, but yet for some reason when it comes to economics, it’s like I don’t know, the dunce cap goes on. They just can’t get it.
And you don’t walk away concluding these must just be evil people, who just don’t want people to be prosperous. For some reason, some people just don’t get this. And I think these are the types, unfortunately, I don’t think who are voting for particularly smart people. So I think we cannot be too hasty in dismissing incompetence and stupidity. And as I say, once the incompetence and stupidity then yields us a bust and a crisis, well, then they’re smart enough to exploit that on their own behalf. But I don’t think they planned this.
Jason Hartman: Okay, so you sort of take the middle ground on that it sounds like. Like, they didn’t plan the whole thing. It wasn’t that sinister. But once they’re in it, it’s kind of like Rahm Emmanuel said right at the beginning of the Obama regime coming in, “Let’s never miss the opportunity of a good crisis to implement the policies we want to implement.” Right?
Thomas E. Woods, Jr.: Yeah, and as a matter of fact, when you look at some of the stimulus package, for example, and you see how much of it won’t actually go into effect until next year. Well, even if I believed in this Keynesian idea that just the government spending money on any old thing, is good for the economy, even if I believed that, then I’d have to ask the question then why are you waiting a full year to do it?
So, a lot of it is just Obama wants to spend money on certain things. And if he can spend it with the pretext that, “Oh no, listen everybody, this is just to stimulate the economy you understand. This isn’t for partisan reasons.” Well, all the better. But we should go into this with our eyes open, knowing that that’s why he’s spending it. It’s not because it’s going to improve things. It’s because he’s rewarding constituents. And of course, the more sectors of the economy Obama can take over, and the more people he can put on the government payroll, the harder it will be ever to reverse this because you’ll have massive, massive groups of people with vested interests in keeping the government as big as Obama makes it.
Jason Hartman: And that’s what we already have and we’ve been increasing the size of it for decades, obviously, especially since the ‘60’s. And you know it’s just impossible to reverse. Governments don’t get smaller without revolutions. I mean that’s just the only way it seems like. There are too many entrenched interests that want to keep things the way they are because their livelihoods, their power, their egos depend on it, right?
Thomas E. Woods, Jr.: Yeah. Even when you had Ronald Regan, who was extremely charismatic, who I think did understand a lot of this stuff, nevertheless, after eight years of a guy, who could go over the heads of the media and appeal right to the American public and resonate with them. I mean you had an ideal situation. And yet by the end of the decade you’ve got the budget doubling, you’ve got tax receipts going way up, not down. It was good to bring top marginal tax rates down. That was a good thing. But you had an additional cabinet department. Instead of shutting down the Department of Education, the neo-conservatives wanted to keep it, increase its funding, but just make sure conservatives were running it. Well, I’m sorry, that’s not how it works, you know? It’s not going to work like that.
So even, in other words, under the most ideal circumstances that you would think we had, nevertheless, even that couldn’t actually reverse anything. The best it could do in some cases was slow the growth. You’re right, it’s either going to be a revolution, which I think Americans right now are too apathetic to even think about that. Or it would just be a complete collapse of the system, where the system just can’t pay out all the things it’s promised. Or they’ll pay it out, but the money you get in the payments won’t be able to buy anything, because they will have destroyed the money by that time. Then maybe people will wake up-
Jason Hartman: Right, they’ll keep the promises.
Thomas E. Woods, Jr.: Yeah, but then I fear when they wake up, they won’t wake up to reality; they’ll wake up to some demagogue saying, “Well, the free market brought us here. We need more current power.”
Jason Hartman: Yeah. They’ll keep the promises in nominal dollars. It’ll be a Weimar Republic type scenario. And by the way, that’s a big part of our investment strategy is accumulate a lot of debt against hard assets, and if that debt is fixed-rate, it will just be paid off through inflation ultimately. Pat Buchanan, when I interviewed him, he made a great quote. It was just eloquent the way he said it. He said, “Yes, Jason, you’re right. Their debts will be floated away on a sea of inflation.” It’s so counter-intuitive because it seems like that should be such an improper, imprudent strategy, but in today’s interesting times in which we live seems to make sense, doesn’t it?
Thomas E. Woods, Jr.: Yeah and it just goes to show the types of incentives that the institutional structure we live under, if you’re not getting to the heart of the matter which is what the Fed is doing to our economy, you could tinker with regulation all you want, but the distortions created by the Fed are going to be felt somewhere. And the fact is here, if we’re wondering, “Why aren’t people saving? Why don’t Americans save?” Well, one reason was they all thought they had an endlessly appreciating asset, namely their home, so that made saving seem superfluous to people. But beyond that, if the Fed- and we all know the Fed is going to wreck the value of your dollar, you’d be a fool to save. You have to just run out and blow your money, or get into debt so that you can pay it off in less valued dollars.
And it’s because of what the Fed is doing, because the Fed ruins the value of the dollar, it’s destroyed the dollar’s value by 95 percent since it was founded, that Americans feel the need to go into the financial markets. Most Americans have no business being in the financial markets. They don’t know anything about it. Some of it really is a speculative enterprise that Americans shouldn’t be doing it. But they feel like just to hold onto their wealth, just to keep it stable, they’ve got to get into the financial markets one way or another. And to be putting Americans in this position and to be rewarding debtors and punishing savers is absolutely grotesque. And yet, that is exactly the system we have. It’s encourage consumption and punish the borrower.
Jason Hartman: Punish the saver you mean?
Thomas E. Woods, Jr.: Oh yeah, punish the saver – you’re right. And so that’s why the Bank of Japan was being encouraged in the 1990’s by American economists that what it should do to stop the Japanese from saving so much was to threaten that it was going to destroy the yen at x percent per year, so you’d better start spending.
Jason Hartman: Unbelievable.
Thomas E. Woods, Jr.: Now, Harvard economist Greg Mankiw writing in either the Times or the Wall Street Journal, saying that, “What we need is, again, for the Fed to make a credible threat that it’s going to start destroying the value of the dollar and that’ll encourage people to start going out and spending.” I mean this is amazing. These are professional economists.
Jason Hartman: That is unbelievable! Can you imagine? This pseudo governmental entity, the Fed, which we know is obviously not the government, private consortium of bankers, they would make a threat to destroy the wealth of the people who have been having faith in their fake money, in their fake currency, and saving it. And what’s happening right now, Tom is the people are doing exactly the right thing. They’re finally saving some money. And the government hates it.
Thomas E. Woods, Jr.: They’re acting like this is the worst possible outcome, when, in fact, of course, the only way you can have genuine economic growth is through the deferring of consumption, so as to make resources available for investment to make the economy more physically productive so we can produce more things that lower costs and increase our standard of living. Now that one sentence that I just uttered refutes volumes and volumes of absurdities that the experts put out. But that’s what we need and of course, we’re being encouraged to have the opposite.
Jason Hartman: Yeah. You know, in the first chapter of your book, Tom, you talk about how the media isn’t asking the powers that be the right questions. What questions should we be asking?
Thomas E. Woods, Jr.: I think a good example of this was when Ben Bernanke, the Fed Chairman, was on 60 Minutes, like three weeks ago-
Jason Hartman: Yeah. I saw it.
Thomas E. Woods, Jr.: -a month ago?
Jason Hartman: Yeah.
Thomas E. Woods, Jr.: And first of all, I think it was very interesting that he felt it was necessary to go on 60 Minutes.
Jason Hartman: That was a first time ever a sitting Fed Chair on 60 Minutes. That’s never happened before.
Thomas E. Woods, Jr.: I wasn’t sure about that. So I’m glad to hear you confirm that for me. So that shows to me, first of all, that although it’s really only a relative handful of us who are really critical of the Fed for the right reasons – I mean, there are some people who say the Fed isn’t printing enough money, but I’m going to ignore those. But they nevertheless feel the pressure. So that was good. So you’d think, “Alright, well let’s see what the free American media has to ask.”
And if I remember correctly, the questions were all just softballs, like, “So, what’s the hardest part about being the Fed Chairman?” kinds of questions. “What’s the biggest obstacle to recovery?” Like instead of asking things like, “Do you think the Fed may be partly responsible for this?” Or, “Would you revisit you statement a couple of years ago that the mortgage market was stronger than ever? I mean, would you care to revisit that?” Or, “When you said the housing bust would be over last December – do you think you were wrong about that? I mean, why given your track record, where you’ve been making statements that are clearly untrue, or that turned out not to be true, why should we keep listening to you? Why shouldn’t we listen to other people? Why shouldn’t we listen to people who predicted this when you and your colleagues all seemed to think everything was sunshine and lollipops?” I mean questions like that. Or, “What about the Austrian theory of the business cycle that says that the economy moves in this up and down motion because of you, because of what the Central Bank does? I mean, shouldn’t you at least feel it necessary to answer that type of claim, given that Hayek won the Nobel Prize for this?”
I mean, these are the types of questions that would make for an interesting interview, but instead, all our journalists – I say that they’re graduates of the Pravda school of journalism, that the object of the journalist is to flatter the powers that be and to put them in a favorable light, make them look very smart, make them look indispensible, make the American people ask themselves, “Whatever would we do without these great geniuses? Don’t ever make them look bad, or make Americans say, “Gee, these are the bozos running things? I mean, I could do a better job than that.” Never let them walk away with that conclusion.
Jason Hartman: Yeah. They spent so much time on where Bernanke grew up and how his childhood was and all this stuff. It was kind of interesting, but not in the middle of a severe financial crisis. I want to know about what he’s really going to do. And you know what I found interesting about that 60 Minutes interview? How he just sort of blew off the concept of inflation. It was brought up during the interview and he just said, “Well, when that becomes a problem, we have tools that we’ll use to reign in the money supply and solve that problem,” as if they could just solve that problem like it’s no big deal. We’ll just push a couple buttons and turn a couple levers. I think we’re in for some very significant inflation.
Thomas E. Woods, Jr.: Oh, yeah!
Jason Hartman: Now, I don’t know how soon it’s going to hit, but it’s coming.
Thomas E. Woods, Jr.: Well, the Fed has been increasing its balance sheet dramatically and then on average degrading the quality of its assets because it’s buying all these awful mortgage products. So when it wants to go back and sort of in effect buy back all these dollars it’s created, it’s got really crummy assets to do it with. And meanwhile, part of the reason it’s buying these assets is to help relieve some of these financial institutions. So if it just throws them back onto the market again, it’s going to cause still more problems.
And then beyond that, in the short-run, even though it is a healthy thing for the Fed to reverse course, nevertheless, in the very short run, it would be discombobulating for the economy, for there to be all these funds, all this money withdrawn from it. And can you imagine Ben Bernanke, who I’m sure imagines himself as being the successor to Alan Greenspan, who was referred to by the New York Times as the “Infallible Maestro of our Financial System”.
Jason Hartman: What a joke!
Thomas E. Woods, Jr.: I’m he expects to be treated with the same type of reverence. He doesn’t want to be viewed as the stinker who ruined the party. So, I mean it seems extremely naive to expect that these people will be so immune from political pressures that they will just do what is scientifically correct. It just seems implausible. Even if it were easy for them to do it, it seems like they would have every reason not to want to do it.
Jason Hartman: Yeah. No question about it. I mean, the only one that was willing to kind of take the hit for that was Paul Volcker. He sort of gave America the tough medicine. At least that’s my understanding of what happened.
Thomas E. Woods, Jr.: That is at least, even though you know he’s still sees the merits of central banking, all the same, his view was: low interest rates that were artificially low put us in this position in the first place, so more low interest rates can’t possibly be the solution. So what we instead need, given that we have squandered all this capital, we actually need a real rationing of lending going on right now. That was his view around the time of the Carter years going into Reagan. We actually need less lending right now because we need to figure out, we need to step back and sort out which of these investments that have been made are just irretrievably bad and we should just let them go, and which are sound and should be supported. Well, the market needs to sort that out. It doesn’t need to be throwing more borrowed money at everything.
Jason Hartman: Does it surprise you as much as it does me that Volcker is advising Obama?
Thomas E. Woods, Jr.: It surprises me somewhat. But at the same time, I’m sure he’s not going to be listened to.
Jason Hartman: Yeah.
Thomas E. Woods, Jr.: And at some point, he’ll just have to repudiate the whole thing and say, “Well, I don’t want my good name associated with this if they’re not going to do anything I’m asking for.” I think it is a way for Obama to make it look like you know he’s got a wide variety of perspectives, but it’s quite obvious that Obama’s view is more of the same. I mean, we need more inflation to fund the stimulus and to lend. I mean, this is his way of thinking. So I think it’s just window dressing to have somebody like Volcker around.
Jason Hartman: Right, yeah. You know, we’ve talked a lot about the problem. What really is the solution for this? I mean, as specifically as you can give it to us – I mean, you know we talked about what questions we should be asking, which those were great, by the way. What is the best solution for our financial system?
Thomas E. Woods, Jr.: Well, I have on my website, www.thomasewoods.com, a video of me giving a speech earlier this month in which I talk about exactly this because I talk about how the U.S. got out of the Depression of 1920. And then I go on to explain why fiscal stimulus and monetary stimulus are actually wealth-destroying measures. So for more detail, I would refer people to the video.
But for here I would say that now that we know what the problem is, as you say, the problem in my view, from which all the subsidiary problems are really just symptoms, is money creation by the Fed and artificially low interest rates that, according to the Austrians, steer capital into places where it really doesn’t belong, that really should belong only if the economy were actually as rich as the low interest rates made investors think it was. And so what you have happen during the boom years is a misdirection of capital into the wrong channels.
Mises gave the analogy of a master builder, who is building a house, but he’s under a false impression of how many bricks he has. He thinks he has more bricks than he really has. So he’s going to deploy those bricks the wrong way and then eventually when he realizes his error, he’s going to have to destroy what he’s done and start all over again. So the boom phase, during a phony boom like what the Fed creates, is like this home builder, who, while he’s building, that looks like prosperity. Look, he’s working. He’s doing something productive. That’s wonderful.
But we actually realize through the master builder example that actually the boom is the bad time because he is taking these bricks and he’s putting them to a use where they can’t possibly yield any good. And so the bust is when he realizes, “Wait a minute; I’ve been using these bricks the wrong way. I’ve been engaged in the wrong type of investment project” and he rethinks it and he starts over on a firmer foundation. That’s the restoration to health.
So, therefore, what we need now is for the market, on its own, to sort out and figure out as I say which of the investments of the boom years can be salvaged. And which, in fact, like the homebuilder building a house he could never possibly finish, need to be discontinued, so that we can stop squandering wealth on them. Stop squandering, for example, like the bricks in the example that will eventually have to be destroyed. That’s destroying our wealth. So, fiscal and monetary stimulus doesn’t help. Fiscal stimulus, in fact, may keep some firms going that need to go under during the bust because they were bubble firms. Their resources need to be released for use by entrepreneurs who are going to actually put them to use as the consumers want. But yet fiscal stimulus will put a lot of these construction companies to work. We have too many construction companies.
So, in other words, fiscal stimulus is an extremely crude mechanism. It does nothing to correct these imbalances of where the artificially low interest rates make you produce too much of some things, too little of another. Fiscal stimulus doesn’t do anything to solve that. It just burdens the productive economy with more inflation, more borrowing by the government. That’s not going to help. It’s just going to make it worse. And then monetary stimulus, just creating more money out of thin air, well, that’s what got us in the situation in the first place. It’s like saying that the home builder of our example would have his problems solved if we just got him drunk, so that he didn’t notice how few bricks he had left. Well, okay, yeah. That will keep him going a little while longer, but we don’t want to keep him going any longer. The longer he goes the worst the bust will be.
Jason Hartman: Exactly.
Thomas E. Woods, Jr.: So, we don’t want monetary stimulus. We want no stimulus whatsoever, except of the American people, by giving them some of their money back and cutting the spending.
Jason Hartman: Yeah.
Thomas E. Woods, Jr.: That’s the best thing you could do and that’s what got us out of the Depression of 1920.
Jason Hartman: I couldn’t agree more. You know, that’s very true. I mean put the money back into the hands of the people. The people are much more efficient in deciding what is good and what is bad and what is necessary and what is unnecessary in any marketplace, rather than some central planners flying around in private jets and totally detached from the reality of the real world – very good point.
What do you think is the ultimate conclusion of this? I don’t think any of this stuff either of us wants is really going to happen. Although, I think we’re right, but I just don’t see it. The interests are too entrenched and too powerful to really to change it. What do you think is going to happen?
Obama comes out and makes these ridiculous statements like, “We’re going to spend all this money,” as if you know it’s going to prime the Keynesian pump, and everybody’s going to suddenly go back to work and start spending and you know be prosperous again. And then by the end of his term or whatever, he said, “The deficit will be half of what it is now.” You know, that’s crazy! That makes no sense at all to me.
Thomas E. Woods, Jr.: And there’s no evidence that there’ll be a lower deficit. This is just a promise he’s made.
Jason Hartman: It’s never going to happen.
Thomas E. Woods, Jr.: Yeah, the lower deficit will be just a mere trillion dollars.
Jason Hartman: Yeah.
Thomas E. Woods, Jr.: I mean this is absolute insanity. But I think at the same time, people who believe that this means Obama is going to be a one-term president are far too premature in writing this guy off.
Jason Hartman: Oh no. He’s a very inspiring guy and you know what, most people fall for the style and forget about the substance. And he’s just going to buy votes. That’s obviously what he’s doing already.
Thomas E. Woods, Jr.: That’s very true and I fear that the Republicans could well say in 2012, “Look, we tried all the crazy Obama-Keynesian things, which are 30% more intense than the Bush-Keynesian things that replaced them. And they didn’t work. So, we have to try something different.” The problem will be the Republicans have such a bad reputation when it comes to spending and when it comes to government that they just have got no credibility on this. So Obama will be able, I fear, parry these criticisms fairly easily and he could just say, “Well, you know apparently the hole that the Republicans got us into with their free market,” because he’ll still keep putting this crazy view forth that it’s the free market system.
Jason Hartman: Which isn’t even true.
Thomas E. Woods, Jr.: Yeah, “It was worse than we thought. So I just need more time.” You could easily see this coming. I mean if Japan was in the dumps for 18, 19 years, where they would have intermittent little spurts of growth here or there, but still way below where they should have been. I don’t know how many years it will be, but I certainly don’t think we’re turning any kind of corner. I think we have gotten the mother of all asset bubbles bursting and it was pumped up by the Fed. The Fed is doing the opposite of what it should do to get us out of it. So we could be in the doldrums for quite some time. It’s very hard to know exactly how long.
And it’s important now to have programs like yours, to have the internet where dissenting voices can get a hearing. I mean in the 1930’s, you couldn’t really hear a dissenting voice, other than the cranks, like Father Coughlin or Huey Long, whose complaints were, “Roosevelt isn’t radical enough.” I mean we have a chance to actually get a different sort of alternative for the American people, which is why everybody listening to your program needs to get serious and just everybody needs to ask themselves what more can I be doing? Can I write another article? Can I talk to my neighbors? Can I pass this podcast around? Whatever it is, can I donate to a worthy cause that’s promoting free market education?
Every single one of us has to do something. As Ludwig Von Mises said, “Everybody holds a part of society on his shoulders.” And nobody can abdicate that solemn responsibility at a time when we are in a great struggle like this. So everybody in effect needs to engage in what we Catholics call an “examination of conscience,” to just look and say, “What am I doing? What more could I be doing?” We all have this responsibility right now.
Jason Hartman: That is so well said. Just in closing here, do you see any areas of opportunity? In every crisis, there’s kind of an opportunity, as the Chinese say. I see the opportunity here is until the powers that be correct their ill-informed ways, I see get into debt and own hard assets with other people’s money. And pay it back in cheaper dollars. They’re constantly going to be debased. Now, that’s not what I want to happen. But it’s what I see happening and I’m talking about it, but I feel that I’m a small voice in the overall scheme of things. What opportunities do you see? I mean are you a gold bug? Are you a debt bug? I’m kind of a debt bug. Where do you see the opportunities?
Thomas E. Woods, Jr.: Yeah. I know this is a case where you know my head and my heart are telling me different things. My head tells me you’re right about the debt question. Of course you are. But my heart feels like nevertheless, I still enjoy the psychological satisfaction of knowing I don’t owe anybody anything. And there is some psychic value to be gained from that. And that’s just a personality difference. If other people don’t have that feeling, then that’s fine. But I sort of do have that sense that, even though I know it would be good for me, I still just don’t want to do it. But in terms of hard assets and precious metals, I’ve got some and want to buy more. And I feel like you really can’t go wrong, and when CNBC tells you you don’t need to do this, then that means you know you’ve got to get on the phone and do it.
Jason Hartman: CNBC, the precious metals industry isn’t what they’re promoting- I don’t see too many commercials for precious metals for CNBC shows.
Thomas E. Woods, Jr.: You know we’re not looking for get rich quick schemes with gold and silver. We’re looking to hold on to our wealth.
Jason Hartman: Yeah.
Thomas E. Woods, Jr.: And I think that you can rely on them. I think they’re a good buy and you’re never going to go to zero. Like, you never have to worry about a hyper-inflationary situation with gold and silver. That is at least one merit you have. And of course, it’s true, Gary North wrote a great article, something about the “Gold Wars”. You might be able to Google it. And he was arguing that central banks and governments hate you if you own gold. They hate you because you are basically saying by owning gold, “I don’t trust what you are doing.”
Jason Hartman: Right.
Thomas E. Woods, Jr.: And I want to protect myself from what you’re doing and I want to mitigate what you’re doing. And so that’s why a lot of times you’ll hear that a central bank or the IMF, they’ll announce they’re going to sell gold. Now, you don’t normally. If you were a big institutional investor, you wouldn’t make a public announcement, “Hey, I’m going to sell x amount of gold,” because that’ll make the price fall in anticipation of your sale, and you’ll lose profits. So why would these institutions deliberately sabotage their own sales?
And Gary North says the reason is they don’t even care about that. They know that by making these announcements, instead of making the sales quietly in bits and pieces, they’re going to hurt people who own gold. They’re going to push those prices down. And that satisfies them. They want to do that. But you know, they only have so much of it. They can’t keep doing this forever. So, inevitably, you do not want to be in a situation five years from now in which you say, “Ah, if only I had bought some gold, I would be in a zillion times better situation than I am now.” Don’t be on that. Don’t wait until five or ten percent of the American population wakes up and realizes they need to hold gold. That’s when you want to already hold it.
Jason Hartman: Let me tell you where I am on that because I’d be really interested to get your opinion and then we’ll wrap up. I am not a precious metals bug – a silver or gold bug. I own a little bit of it and I think it’s okay. I think it’s better than cash. I definitely want to be as much as possible outside of – I mean have my equity or my wealth outside of the dollar. Because I think the dollar is a failed currency already. It’s just a matter of time before we see that the emperor has no clothes.
But there are five major problems with metals. And No. 1 is that it can’t be financed, or at least not effectively. There are no tax benefits. Nobody will rent it from you. So, it doesn’t produce income, which makes it ultimately a speculative thing. Now, when you say own gold, I do agree with you because I think that the real reason to own gold and silver is to not lose money. It’s a defensive position. And you will seemingly create wealth because the dollar is going to lose so much of it ultimately. That’s kind of where I stand on it.
It’s not that you’re really going to see a ton of appreciation necessarily; you’re just going to see a loss of purchasing power of the dollar and other fiat currencies around the world. No. 4 is I’m scared that it’s subject to confiscation. That can happen in America. They say, well it already did in 1933. And then the fifth reason is the one you really alluded to. It’s subject to manipulation because central banks around the world want to push down the value of gold and silver and make their paper or fiat money more valuable. It’s a war between the real thing, the metals, and the fake thing, the fiat money, the dollar, etc. You know, what do you say to those five things?
Thomas E. Woods, Jr.: You know, I can’t argue with a lot of what you said. In fact, your last point is kind of similar to my Gold Wars point that central banks are going to do what they can to hurt you as a gold investor. But as I say, I think in the long run that the degree to which they can do that is ultimately limited. But I would say that in a non-depression economy, so in other words, in an economy unlike this one, I would view gold as being something that I would hold onto as part of a large basket of things that I would want to hold. But right now, given that I wouldn’t want to be in the U.S. Stock Market for instance, but I feel like as a non-expert in real estate and getting totally conflicting advice on that, I just wouldn’t feel comfortable personally being involved in it. I don’t see where else I can at least guarantee that I can hang on to what I’ve got. As you say, in a normal situation, I’d like to put my money let’s say in certain types of reliable stocks, rather than fly-by-nightie sort of things. And even Peter Schiff’s strategy of foreign stocks is actually starting to payoff in recent months. I would actually consider that. But I just feel like that right now things are so volatile and I think that what we’re seeing is really just a bear market rally, rather than a return of a bull market, that I’m just such a conservative investor right now.
Jason Hartman: This is very interesting. You know, your book is a fantastic book! Where can people get it? I mean book stores? Amazon.com?
Thomas E. Woods, Jr.: And Amazon’s got it a lot cheaper and then at www.thomasewoods.com, I have a free chapter of the book and then I’ve got some videos about all these subjects and articles and so check that out. But I’m not saying that because I want to get people to give me money through my website. There isn’t even a Paypal link. If you try to send me money through that website, you could not find any way to do it.
Jason Hartman: You couldn’t do it! Okay. Yeah, I hear you. No. I appreciate it. I mean you’re definitely doing an important service for people and helping them understand what’s really going on here because, as we talked about in the interview, people are so misled about this. They just think they’ve been sold a bill of goods that says, “Oh we’ve got to regulate more,” and really, that’s the worst thing we can do. We’ve already been regulating like crazy, right?
Thomas E. Woods, Jr.: Right. My view is that the people I consider to be the good guys out there, listening to this, have got to arm themselves with the arguments so they can defend the free people position in the face of this dramatic expansion of government power. And that is what I hoped that Meltdown would accomplish.
Jason Hartman: Excellent. Well, everybody listening go out and get a copy of Meltdown. It’s a great book. The forward is by Ron Paul. Thomas Woods, Jr., thank you so much for joining us today. I really appreciate your insights.
Thomas E. Woods, Jr.: My pleasure, Jason, thanks for having me.
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Duration: 83 minutes