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The Housing Boom and Bust in America by Thomas Sowell

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Jason Hartman interviews Thomas Sowell, author of The Housing Boom and Bust. Thomas talks about homeownership and its benefits, and also its costs and risks. He discusses the Community Reinvestment Act and how the current economic crisis grew out of policies based on good intentions and mushy thinking.

Announcer 0:04
Welcome to the heroic investing show. As first responders, we risk our lives every day our financial security is under attack. Our pensions are in a state of emergency. A single on-duty incident can alter or erase our earning potential instantly and forever. We are the heroes of society. We are self reliant, and we need to take care of our own financial future. The heroic investing show is our toolkit of business and investing tactics on our mission to financial freedom.

Gary Pinkerton 0:36
Hello, and welcome to Episode 151 of the heroic investing show. This is a podcast for all those who serve for firefighters, police officers, EMTs, and other first responders, or active duty members in the military, and veterans of those organizations. Really, it’s for anyone looking to improve their financial future and gain some freedom with better time to teach America’s heroes how to build passive income, spark that entrepreneurial fire and build their startup business, and how to safely grow wealth through real estate and other alternative investments. We help current and prior first responders put protections and systems in place to enable them to build a life where they can focus on their passion, that service or product that they are uniquely gifted to share with the world. My name is Gary Pinkerton, I co host this show with Jason Hartman and today, we’re going to listen in with Jason, as he interviews from a few years ago, Professor, economist Thomas Sewell, from Stanford University’s a fellow at Stanford, comma school is a veteran. He is a Marine, he served a few years in the Korean War. And after that, became a prolific writer, and professor. And at Stanford, he is, you know, participated in many think tanks, he has written many books, the one that we are talking on here, I believe, has current relevance. And that’s why I pulled it out of the archives to bring it in, listen to it and bring some contents to you all. He’s talking about the boom and bust in America. So it’s the housing boom. And bust in America is the name of his book, originally published late in 2009. And recently revised, he talks about in this book, what caused that boom and bust. And it gets a little more broad in this conversation with Jason, about things that cause it more than just that specific one. He credits the Community Reinvestment Act that came around just prior to the bust that we saw there in the late portions of that recent cycle. And that was Congress putting into federal law, incentive requirements for banks and savings associations to help meet the needs of individuals in their communities, including low and moderate income neighborhoods that were not qualifying for loans. And so you’ve heard about the liar loans, you’ve heard about the high risk loans, and low income loans, and all of these things created an environment that boosted up housing prices, and caused people to get into homes that they just no way they could afford. It also caused the creation of the mega homes that you saw in cities like Washington, DC, and all across America, people were doing 567 thousand square feet homes with three people. And it’s fine to have extravagance and live at large if your personal economy supports that. But I think a really decent rule of thumb is that anywhere you are even out in the Midwest, if you have a 7000 square foot home for three people probably should be a millionaire or higher. And it’s just doesn’t make a lot of sense because all of the utilities are higher, the cost of furnishings higher and all of that. It’s not really where we’re going with this episode with Thomas Sewell. He talks about what causes prices to go up what causes things to get out of whack, and incentives and regulations from local and federal governments cause that a lot. He talks about one other example he kind of compares California and taxes and talks about how things from environmental organizations with local regulations prevent people from developing land and that causes often it’s very self centered, meaning I don’t I don’t want to subdivision my backyard. So let’s turn it into a green belt and get it updated. Often it’s in Vegas, there’s a classic case where when you go to Vegas, they’ve went vertical and there’s not much development outside of the main city. It’s all protected lands for I think it’s a turtle, some a turtle that is endangered. And, you know, so it’s on developable and that happens a lot, you know, on the coasts when people would like to have would like to be able to see the ocean, you know, from their front door and not have the land developed, get some protected lands in place around it. So Thomas Sewell talks about that, but big picture backing away. I think you’ll really enjoy this one. But most importantly, It’s really good for your real estate financial future, to always pay attention to where we are in cycles and the cycles, not the same place across the country. There are many markets. Jason talks about that all the time. I think that you know, I’m purchasing or have purchased recently in Florida. I think that is way behind the cycle for California, maybe a year or two or three in the current cycle just by the way in which foreclosures occurred. Is there a cycle at all in the Midwest? There’s a little bit right, it’s a linear market, but it does go up and down and certainly prices have pushed up in Memphis where I purchased some properties. Bottom line is important to know where you are in the cycle and pay attention to indicators like what Professor Soules is talking about in this interview. So please listen in and buckle up. This is a pretty good one, Thomas Sewell talks about a lot. He doesn’t pull punches on either political party, I think you’ll get a great benefit from it. And let’s listen listen in here to Jason Hartman, interviewing Professor Sewell from Stanford University.

Jason Hartman 6:00
Thomas Sowell, as I said before, is the consummate academic. He has taught economics at Cornell, UCLA, Amherst, and other highly acclaimed academic institutions, and his basic economics book has been translated into six languages. He is currently a scholar in residence at the Hoover Institution at Stanford University, he has published in both academic journals in such popular media as the Wall Street Journal, Forbes magazine, and fortune and writes a syndicated column that appears in newspapers across the country. He is the author of the housing boom, and bust, just listed on the New York Times expanded bestseller lists. Thomas, thank you for joining us today. Thank you for having me. Tell us a little bit about your perspective, it looks like from the book, you are saying that both parties are to blame. So this is a pretty bipartisan effort. It sounds like,

Thomas Sowell 6:47
Oh, yes. In fact, I’ve often said long before this, this crash, that things that are bipartisan are usually twice as bad as things that are partisan. The Democrats did take the lead in this, but the republicans contributed too much to it for them to try to blame democrats alone. The fundamental problem with all of this is it’s a very complicated story when you get into all the derivatives in Wall Street, and listen that, but the fundamental problem is that the money that financed all the fancy Wall Street derivatives and so on, all came from people, millions of people paying their monthly mortgage bills. And when that monthly mortgage money started not coming in, when people started being delinquent and defaulting on their loans, then it really didn’t matter what the clever people in Wall Street were doing if the money wasn’t coming in, it just wasn’t coming in. So the real question is, why was this suddenly all of this delinquency and default in the mortgage market? And the answer to that is that banks and others were pressured into lending to people who did not meet the standard that had been in use for decades. You know, things like the 20% down payment and verified income and so on. And under pressure from the government and more than pressure, there were actual quotas set set up for Fannie Mae, Freddie Mac.

Jason Hartman 8:08
Now, when you talk about that pressure, you referring to the CRA, the Community Reinvestment Act,

Thomas Sowell 8:12
Yes, but not by itself, because that act was passed in 1977. And it really didn’t do an awful lot until the 1990s. And what happened then was that people began to use that act as the criterion for deciding whether the regulator’s would allow banks to make business decisions of a sort that unregulated businesses make all the time. For example, the bank wants to acquire another bank, or a bank wants to go into some other sell sell securities, for example, as the later law is allowed that only those banks whose lending practices and other practices under the Community Reinvestment Act met, the government approval would then be approved to make acquisitions, mergers and other kinds of transactions. These banks were under an enormous amount of pressure, would you say to to make bad loans for political correctness reasons, but yeah, well, yes, I’m, for example, there are a number of banks who were accused of discrimination, they were accused, they were not proven anything. And on that basis alone, the regulators could simply hold up any decision that they had until the legal case was disposed of. Well, as you can imagine running a business where you’re not allowed to make the decisions that your competitors are making until such time as a legal cases settle, which can be years and which in some cases can be more than a decade, obviously, is a crippling power. And so UK,

Jason Hartman 9:39
It’s just amazing to me how people throw around words like racism, you know, I was talking about this on my show, just saying that, you know, look, these banks made such imprudent loans. And someone sent me a question saying, you know, well, you know, I don’t want to think you’re being racist by saying that certain people didn’t deserve it. to own a home, and I’m thinking like, this is the most ridiculous statement. Why would you even ask me such a question? The determination should be whether or not you can afford the property and whether or not you have good character in making payments in your past?

Thomas Sowell 10:16
I mean, what was that? It seems so obvious that you wonder why people don’t don’t see it. But but many don’t in the media doing very little to clarify the situation once the accusation is made, it’s tantamount to conviction, right, and many of the many of the studies have been done, I’ve looked at the studies in some detail. And if you are serious, so you wouldn’t convict somebody of jaywalking on the basis of this kind of evidence, right. One of the one of the problems that’s not been mentioned at all, I think, is that there are interest rate ceilings. Now, the lower the interest rate ceiling, the higher the credit rating of the people that you’re going to lend to. I mean, if you bring this interest rate ceiling down low enough, you will lend only to millionaires. And if you bring it below that, you’ll then only be billionaires. So the very fact that there’s a ceiling means that there’ll be a disparate impact on people of different income levels. And if you’re talking about low income minorities, that virtually guarantees that they will be differences in loan approval rates under those under those conditions. I’m not saying that was the only reason it was by no means the only reason when you look at the at the borrowers do discover that credit scores vary by by group, that is blacks, and Hispanics don’t have as high a credit score of scores, on average, just whites and whites don’t have as high an average credit score as Asian American. And in fact, what was fascinating to me, was how the press and pushing their case, that this was a question of white racism, causing blacks not to be approved as often, even though blacks like whites were most of them were approved. Anyway, if you look at the very same data, and the very same studies, you’ll find white for it approved as often as Asian Americans. So now it says most of the loan people are white, you’re going to tell me that they are discriminating, yes, whites in favor of Asian Americans. They’re in the business of making money. And many of the very people who are forever talking about corporate greed don’t seem to understand the implications of that. That is, if you’re in business to make money, you’re certainly not going to turn away people who are going to pay you back with interest.

Jason Hartman 12:16
You know, one of the radio show hosts that used to be here in the LA market, he was very popular, and he endorsed us on on our radio advertising our commercials, he was, you know, reading our commercials a lot. And one of the things he said when I saw him speak ones is he said, Can you imagine the conversation that would happen when when people accuse companies of discrimination, some executive is sitting at the breakfast table, who runs a huge company talking to their spouse, and their spouse is saying, you know, let’s get a bigger, better, nicer home. And the executive would be thinking, well, gee, I don’t want to sell to people of a certain race. Can you imagine they would turn down money?

Thomas Sowell 12:54
I mean, they never have, yeah, I moral whether this is not a question of President, the bank, or the lending agency is probably going to see this applicant one time, right?

Jason Hartman 13:05
Or maybe they never see them at all. I mean,

Thomas Sowell 13:08
that’s right that that to me, in many cases, you don’t even see them, because you do it over the phone, and their contact with them in the future will just be checks arriving in the mail. And the idea that this guy’s gonna be sitting as the Oh, I know, this guy is blocking. I hate to see his check coming in this month. Yeah. I mean, yeah,

Jason Hartman 13:24
Well, just on the face of it, it just doesn’t make any sense. Because everybody goes for the green. You know, everybody likes the money. Well, besides the Community Reinvestment Act and other similar pressures, what else went on with the housing boom and bust? I mean, in your book, you break it up into the economics, the politics, and then some mistakes and, and, and housing mistakes. Tell us about that.

Thomas Sowell 13:46
And in addition to the pressures on on the bank to lend, there was also the pressure on Fannie Mae, to purchase mortgages, from people of low to moderate income, as they put it, and in other ways, consistent with a current Community Reinvestment Act. And so the bank can then lend really to people, whatever race they might be of low credit rating that they would never lend to, if they were themselves going to collect this money. What the banks do in this case, can they can make the law mortgage, sell the mortgage to Fannie Mae collect the money, their money now on a 30 year loan, and let Fannie Mae worry about what’s going to happen while these people will pay this thing off at 30 years, and so you, it was government subsidized moral hazard, and Fannie Mae, of course, had the taxpayers to back them up. So risky mortgages carry higher interest rates. Fannie Mae has every incentive to buy these risky mortgages. Because if they make a profit, then Fannie Mae profits, if they make a loss, again, they have the taxpayers to fall back on.

Jason Hartman 14:49
Yeah. And they also have the printing press to fall back on to the Federal Reserve, right?

Thomas Sowell 14:54
Yes. Now the policy, the politics Oh, it was just unbelievable. Because so All sorts of people, not only in the United States, but even overseas, the Economist magazine started wanting some years ago that there are all these risky mortgages out there on American houses, people overseas were buying securities based on those mortgages. And the whole thing looked very shaky. So they did not lack for wanting the head of the Federal Deposit Insurance Corporation was the Secretary of the Treasury, snow one, Alan Greenspan, one of them about Fannie Mae, I even did a piece in The Wall Street Journal, it was me joining the mob. I mean, you could just name of barons of fortune, all sorts of people want them? And the answer was always the same, that to the extent that you emphasize safety, and they poopoo the danger, to the extent that emphasize safety, you’re going to reduce the ability of the banking system to make housing affordable. There was just no no no telling them anything until until the whole thing burst.

Jason Hartman 15:59
Yeah, it was a big house of cards and moral hazard. And, you know, this is the problem, Thomas, when government gets involved, it becomes a special interest nightmare if the government just stays out of the way, all of these special interests in all of these people that have their own agendas that are contrary to really the public good in most cases, at least on the long term public good sometimes in the temporary, you know, they slap a bandaid on problems, but they never really seem to cure them. They create dependency, they create animosity, they create class hatred. You know, it seems to me like when you’re talking about this issue, we started off on of CRA and race and underserved populations and things. It seems to me that if the government really wanted to be neutral, they’d stop counting and stop asking. I’ve sort of always wondered why they even asked what race I am on the census form and and on a loan application. I know on the loan application, you don’t have to answer it. But why do they even count this stuff?

Thomas Sowell 16:55
Because there’s political mileage? Yeah, one of the other aspects of government here this case would be state and local government, there was a very false premise quite aside from the racial aspect, there was a fundamentally false premise behind this whole drive for creating more affordable housing. And that was that there was a national problem of unaffordable housing. It’s just clear beyond words I I do, I cite all the sources of work, and then the book The housing boom and bust, but there was never there was not a national problem of housing becoming unaffordable what that was, were particular areas of the country calot, coastal California being the classic example, where housing was indeed, enormously expensive. average house in California sold for some multiple of the national average, I happen to live in one of the areas where, at one time, the San Mateo County, the average cost of a house during the boom reached over a million dollars. And the average size of the house was less than 2000 square feet. We’re not talking mansions. Yeah,

Jason Hartman 18:02
no, these are these are $500 a square foot. I mean, it got worse than that. high rises in Miami and Las Vegas at the peak, were were $1,000 a square foot. I mean, at least ask you know, some people bought them. It was just crazy. It was so out of sync and and one of the things I always say to people is that in in a country as large and diverse as the United States of America, there is no such thing as a national housing market. Yeah, are about 400 distinct markets. And they really are quite different, aren’t they?

Thomas Sowell 18:29
They are and the places where housing was very expensive. For example, in California, many places where the average person taking out a new mortgage would pay one half of family income, just to put a roof over their head now, but those were very few places, Annie and you can see that when the when this is where the housing prices shot through the roof. This is where the housing profit is fell down through the basement after the bust, or I saw a statistic recently, something like I think it’s five states were over 60%, or about 60% of all the defaults occurred in five states. And I think if you looked at it more closely, you’d see that they occurred in particular areas within those five states. Even in California, there are some places further inland where housing prices are not astronomical, the government was determined that there was a national problem, and therefore they created this national program, which then created a very real problem that we’re still living with.

Jason Hartman 19:22
So when you say they created the national program, to what are you referring Fannie?

Thomas Sowell 19:26
I’m not referring to the affordable housing schemes. The fact that banks were under pressure. So they had they had to pay they had to submit those statistics that you mentioned about race, income and all that kind of stuff, and are in order to get permission to do the ordinary things that businesses do because they are a regulated industry.

Jason Hartman 19:48
Yeah. You know, Thomas, it just seems to me like the whole concept of Fannie Mae or Freddie Mac is acting contrary to its supposed goal, because If you think about it, it’s the whole concept. I mean, it’s right and Fannie Mae’s mission statement, their goal is to promote housing and homeownership. Well, it by obvious result is that whenever you promote anything, it becomes more popular. And by the basic rule of economics supply and demand, it becomes more expensive, doesn’t it?

Thomas Sowell 20:20
It does exactly the case of housing, I think the Federal Reserve’s got a little bit more blame, it should have in the sense that they did create the the expanded credit that allowed this to happen. Prior to this happening. The fact is, when it’s been in places where there’s been an increased demand for housing, even when you double or triple the number of houses, within say, a decade or so, the housing prices do not rise, if the suppliers are allowed to supply the housing. The key to the California situation is you have all these open space laws, historical preservation laws, farmland preservation laws, and then not allowed to expand the housing. And so therefore, the most modest increase in demand for housing was shoot the prices up through the roof.

Jason Hartman 21:01
Right. And that’s the old concept of of that riddle. You know, what do you call a developer, someone who wants to build a house in the woods or at the beach? What do you call a environmentalist? Someone who already has a house in the woods or at the beach, right?

Thomas Sowell 21:15
Oh, it really does sit my blood pressure through the roof because the prices are just out of all proportion. There’s no reason why any family have to have to pay half of the income just to have a house? Do you look at the places in the country where the politicians have not intervene in the market, places like Dallas and Houston, those are the places where the housing is most affordable, and backed up an international study saying this showing the same thing that you look at the most expensive housing markets around the world. In almost every case, it was because there are severe limitations on building. And when you cut back on this on the supply of a fall in demand, then you’re going to have a Pisces shooting up. So

Jason Hartman 21:56
a couple great examples of that. First of all, I’m here in Orange County, California, which is completely overpriced, and it’s a very unhealthy market. You know, we have something here called the Coastal Commission. Oh, yeah, the Coastal Commission is like the Gestapo, you cannot build anything on this coastline, it is if you can see it from the ocean, in the ocean, and you want to build it, it is very, very difficult. And it really bugs the heck out of me, because here, I pay for this enormous cost to live in this supposedly beautiful place, which you know, it’s beautiful in many ways. But there’s no good restaurants on the ocean, we’ve got this gorgeous ocean out here. And you go down to Mexico, and there’s all kinds of beautiful dining on the ocean. But here in Orange County, there’s about three places where you can dine on the ocean, you know, yeah, I want to sit there and have a beer and have dinner and overlook the sea and the sunset. And I just can’t do it. It’s ridiculous. I twice have gone to actual meetings of Planning Commission. And I just wish that I’d been able to tape it because it is like Alice in Wonderland. I mean, you find people as members of the Commission saying thank you. So the developer like, Well, you know, this landscaping could be nicer. Of course, it could be nicer. And after you’ve made it nicer, it could be nicer than that still. It’s just that he’s trying to build what people are willing to pay for. And you know, it’s easy to sit on the Planning Commission and at what all kinds of things, I must say, I got so upset, I almost walked out to the back of the auditorium now said, No, no, I’m doing this for my research. I need to sit down and just suffer through it. And I did. But I certainly wish that this had been an avid tape, you are so right about that. The hypocrisy is amazing. You’ve got all these armchair bureaucrats that dictate things under the guise of let’s preserve the beauty of the of the land and so forth. And certainly there’s something to be said for planning and prudent things here. Obviously, there’s a there’s a place for that I’m sure you would agree to but you look at a place like Aspen, Colorado, right, under the guise of preserving the environment, housing has become so expensive. All of the service people that work in the restaurants that clean the homes of these zillionaires who already have their home there, they have to live down the valley and commute in I mean, and they talk about the environment. How good is all that that road traffic for the environment.

Thomas Sowell 24:23
We have exactly the same problem here in Palo Alto, we’d like right near Stanford University’s you know, only 7% of the Palo Alto policemen live in Palo Alto. And they are probably chasing, you know, officials who bought their home was 30 or 40 years ago. But you’re right. And the other thing is especially ironic, and you’ve all the emphasis on race and low income and so forth. These are precisely the people who are forced out of these areas. Because of these restrictions on building. The black population of San Francisco today is less than half of what it was in 1970. Even though the pipeline The city as a whole was going up, right. And that’s true of a number of counties and, and California, another group that gets pushed out all low income people never Cisco and a period about two years, they lost about something like, Oh, I think 16,000 families earning less than 150,000 a year moved out of San Francisco, and 17,000 earning more than 150,000 move in. And so you’re you’re making it impossible for the very people that these places say they are interested in. Now, another group that gets very hot here are people with children, small children, school aged children, so they constantly closing schools, because the FDA, if you’re old enough, if you’re young enough rather to have school aged children, chances are you have not yet reached your peak earning years. And only people who reached at peak earning years, can’t afford to buy the kind of housing that you have, after all these restrictions. You think,

Jason Hartman 25:51
Thomas that the people, the powers that be here? Do they know that this is happening? Do they know that their designs are either corrupt or have unintended consequences as they do? Or are they just oblivious to it,

Thomas Sowell 26:07
I suspect they’re oblivious at best, because they have no incentive to find out that one after the other hypocrisy. And then all of this is that there’ll be environmentalists who push this stuff up constantly talking as if they’re trying to save the last few patches of greenery from being paved over. In point of fact, over 90% of the land area of the United States of America is undeveloped. So all the histrionics they go through is an utter farce. San Mateo County, for example, over half the land in the entire county has nothing built on it. And yet they’re constantly say, Oh, we need more open space. And what they really mean is they want a cordon sanitaire around these affluent communities. So the only other affluent people can move into them is that call it’s called, you know, preserving the character of the community. And it’s a farce in the housing market. Because housing turns over areas that used to be for the rich are now working class neighborhoods Harlem forget, for example, we use was once a middle class Jewish neighborhood. It became a working class black neighborhood, many places the opposite occurs, places that will once run down have not been gentrified. It happens with commercial properties, the original Waldorf Astoria Hotel was torn down so that the Empire State Building could be built on that site. I mean, housing turns over what what happens is that affluent people who liked the way things are now use the law to freeze that and deprive other people of the rights that they themselves exercise earlier.

Jason Hartman 27:38
You know, what you could not possibly be making more sense when you say that that is so true. It reminds me of the the bumper stickers you used to see in California, welcome to California now go home. Yeah, when the state was getting inundated with so much immigration, and I live in an area, right here in Orange County, where there’s a State Beach, Crystal Cove State Beach, and it is completely undeveloped. And there are all these people who want to save Crystal Cove State Beach and make sure nobody can ever build there. And the fact is, nobody ever goes there. It’s just weeds. And if you do go down there, you know, it’s beautiful. There’s sand and you know, waves crashing and rock formations and stuff. And it’s very nice. But it would seem to me that all of these so called inclusive, tolerant, fair minded, environmental, liberal type people would want to let that land be at least somewhat, and I’m saying prudently. I’m not saying let it run amok, let it be prudently and smartly developed. So more people could have access to it rather than the way it is now because there is less supply. You have multi zillion dollar homes on either end of Crystal Cove. And because there’s there’s they don’t let any more supply be created. They just wall off the community, just like you said. So it is theirs and they keep other people out under the guise of what is best for the environment.

Thomas Sowell 29:09
They don’t want to face that some years ago, my wife did a local column wrote about how you can’t be keeping everything off limits to building without at the same time think that you’re helping the poor or for that matter in Palo Alto, even the middle class can’t live there. Are the prices have gone up so high?

Jason Hartman 29:27
Yeah. It really is just another example of restraint of trade. And it’s a it’s a it’s sort of a trust in a way, isn’t it? It’s an antitrust violation.

Thomas Sowell 29:35
Oh, absolutely. But there are certain kinds of anti trust violations that the government is not interested in and dealing with.

Jason Hartman 29:42
Yeah, that’s true. Well, what what is your prediction of what is the future look like and what is a strategy for our listeners?

Thomas Sowell 29:50
Oh, heavens, I I avoid giving personal financial advice and I am making predictions But the general trend seems to me to be a sort of a replay of the New Deal. That is, this enormous sums of money that are being spent really don’t show much promise of getting us out of the recession quickly. And I don’t believe that’s their purpose. I think as with a new deal, or what, what, and Rahm Emanuel, of the president’s chief of staff put it very clearly, you don’t want to let a crisis go to waste, meaning that while people have panicked and a crisis, the federal government can do things they couldn’t get away with politically otherwise?

Jason Hartman 30:32
Yeah, that’s the old concept of the false flag. I mean, even even if the crisis is legitimate, which is on various levels, but sometimes the crisis is created. So they can then go in and implement all their new policies. And I mean, that statement of Rama manual right at the beginning of the Obama administration was very scary to me.

Thomas Sowell 30:51
It was but the media typically didn’t didn’t say much about it. Well, I think the tip off was this huge spending bill that was rushed through in two days, thousand pages, and there’s no one could have read it talking about the Paulson one or the Obama one? No, we’ll do that one knew during the Obama administration, two days, and then it’s set on the President’s desk for three days while he was off on the holiday. So the question becomes, why is it necessary to rush such a bill through, particularly since everyone agrees that the actual money will not even be spent by the end of next year? And the answer is, you have to rush it through and not in order to get out of the recession. But to get the government more power, before people have a lot of time to think about and have hearings, and any opposition to develop for right and so that they are they accomplish that accomplish that purpose. Similarly, with the General Motors thing, someone asked if your animal is going to go bankrupt? why did why does the federal government need for 10s of billions of dollars into General Motors? And then they still go bankrupt? Why Why not let them go bankrupt without the 10s of billions of dollars? And the question is, well, the 10s of billions of dollars do not buy for General Motors or how or or for the economy, what that buys is the power of the federal government to tell General Motors what to do, as exemplified by the Presidents getting out of their head to head of General Motors fired. Sure. And now, at the end of this the government alone 60% of the company. Moreover, the government will also subsidize your own motors and other less visible ways, such as buying these kinds of cars, if they’re gonna tell General Motors to bill if nobody else buys them, which which is a very likely thing that they will not be public, publicly popular.

Jason Hartman 32:30
We are really on a socialist tract, aren’t we? in the good old USA,

Thomas Sowell 32:34
we’re on a fascist track. And so they’re the socialist want government ownership of the means of production, the fascists, what would allow the owners to stay owners, but the politicians would dictate to them and that’s much, much better politically for them. And a sense that when something goes wrong in General Motors, now, Obama can say, well, although the General Motors didn’t have bad good management practices, and so you, you can keep it from the sidelines forced them to do things, but we think when they don’t work out, then you can dump the blame on the owners.

Jason Hartman 33:06
And that’s a good idea rather than a, it’s still a centrally planned economy. But it’s there’s like one step removed with fascism, because then you have the corporatocracy indirectly or well, directly, but they’re just a puppet of the government. Right? Right. Yeah. Very interesting. Well, so what is coming up, you don’t give predictions, but give me some broad thoughts that you have, you know, we won’t hold you to it. But do you think inflation is coming?

Thomas Sowell 33:29
Oh, I, I would bet the money on it. I don’t know when that when governments that run these levels will I’ll go but has never run these levels of deficits, except in one time. And you can’t just keep doing that. Without inflation. I mean, you’re you’re conjuring up money out of thin air one way or another. And somewhere down the road, somebody’s gonna pay for it, and who’s gonna pay for what will be posterity? And as far as a politician is concerned, that’s fine, because posterity doesn’t vote,

Jason Hartman 33:56
right? It seems like we’re going to have a big attack on our assets. And inflation is such an efficient means of wealth redistribution, because it takes an anybody who is holding assets, their assets become devalued in, you know, in real dollar value, you know, so if they have equity in real estate, if they have stocks, bonds, mutual funds, and on the other side of it, all of those who owe money, the debtors, they benefit because their debt becomes cheaper to repay, doesn’t it?

Thomas Sowell 34:25
It does, but i think that i think there’s a real redistribution is from the private sector to the government. President Obama has said that, you know, there’s not going to be any tax increase except for those rich power that’s define what inflation is the broadest base tax of all the poorest prison in America will find the value of his paycheck or as welfare checks reduced as a result of inflation.

Jason Hartman 34:47
Yeah, no question about it. And if the government maligns the numbers by which they report inflation, you know, they can say that the CPI only increased at 4% when maybe it really was 12 or 15%. I’m talking about the Now, they’re essentially making the spread on that, aren’t they?

Thomas Sowell 35:04
Well, the it’s gonna be really hard to convince people there’s been no inflation when they’re paying more for everything they buy, right, because a lot of a lot of the taxation will come through putting prices or rate raising costs really, for private businesses, and those costs will be passed on to the to the people who buy their product. Sure.

Jason Hartman 35:22
Any thoughts on China? Visa v. The us in terms of China buying our debt or objecting to buying our debt, and their fears about us destroying the value of our currency?

Thomas Sowell 35:34
Oh, well, China has already expressed those fears. And they hold a very large amount of debt, they owe the old Keynesian notion that we owe it to ourselves as long sounds going by the board, because more than 40% of the privately held national debt is held overseas. So that means that our children and grandchildren will end up having to produce billions of dollars worth of products that will be sent overseas free of charge as repayment. So this debt that this generation is running up, it’s one of the most irresponsible things imaginable. You run up huge deficits during something like World War Two, they cause you don’t want to be pleased to posterity a Nazi government. But the posterity is gaining nothing out of this stuff who’s gaining is the existing administration, which gains tremendous amounts of power and tremendous amounts of good publicity by handing out goodies to all sorts of groups, many of whom have nothing to do with the general health of the economy. And then this will be left to be paid for by other people who have no vote right now.

Jason Hartman 36:35
Yeah, that’s so unfair, isn’t it? It is you look at the state of California. And I mean, I am so grateful that the smart people finally voted a couple of weeks ago, and they didn’t go for any of these stupid tax increases. But this state is so broke, I mean, decades and decades of irresponsible dependency creating spending, yes. Are we looking at a federal bailout pretty soon is Obama going to be running California to

Thomas Sowell 37:02
more than likely I can remember, it wasn’t that many years ago, the California had a multi billion dollar surplus. But as you say, they they they they had to hand out goodies to people, and particularly in the form of low electricity rates. And so they they then ran the electricity industry into the ground, we had blackouts and so forth. And they ended up having to dump billions of dollars to the rescue that situation. Many people seem to think that if they don’t pay for it, in case right now, they’re not paying for it. But of course you’re paying for it and higher taxes. So yeah, what do you pay in one form or another really doesn’t matter? Except politically right?

Jason Hartman 37:39
Or you might be paying not just in higher taxes, but in devaluation of your currency.

Thomas Sowell 37:44
Yeah, when in case the state the state can’t again, issue its own currency. I shudder to think about what happened in California because they were allowed to issue its own

Jason Hartman 37:51
currency. Imagine if each state had a federal reserve of its own and saw like,

Thomas Sowell 37:56
oh, it would make the inflation in the Weimar Republic look like child’s play.

Jason Hartman 38:00
I saw an article It was interesting. I think it was just last week, it ran in Bloomberg, that inflation in the US may approach Zimbabwe levels. I mean, I Oh, my God, I don’t even think it’s going to get that bad. I got a lot on the horizon. But, you know, any thoughts on what the rate of inflation might be? what it might start to hit? I think we’re about two years out.

Thomas Sowell 38:22
Oh, I, I’d be surprised if for sometime in the next decade or so that it doesn’t get into double digits.

Jason Hartman 38:29
Yeah, at least past what we saw in the 70s. Probably, I think, and I think that’s going to increase pressure on it on mortgage rates. We’re gonna see much higher mortgage rates in the future, aren’t we

Thomas Sowell 38:38
there is that but also with inflation? I I don’t think the Federal Reserve with what little independence is still has gonna let inflation go on forever. And you end up having to do what Volcker did when he was head of the Federal Reserve in the 80s have this very sharp cutting back on the money supply, which in turn forced all kinds of people into bankruptcy, right? It just occurred to me, you know, probably the average American has no memory of what happened in the 80s. Right, what and fighting inflation, because half of them are probably weren’t born.

Jason Hartman 39:12
Volker now historically looks kind of good, in my opinion. I mean, he’s the guy who broke the back of inflation. He, he made the country take the tough medicine. But, you know, I’m sure if you were one of those that had to file bankruptcy because of his policies. You weren’t very happy.

Thomas Sowell 39:26
Well, he was one of the most hated men in America. And even though Ronald Reagan had been elected, was a very popular president. At first, when he supported what Volker was doing Reagan’s popularity dropped like a rock, but I greatly respect Volker, I think Federal Reserve Chairman should not try to be popular. I think it was McChesney. Martin said, you know, my job is to go to the party. And just people are starting to enjoy the punch. Take the pipe. Joy. The spike drink is take the Punchbowl away.

Jason Hartman 39:53
That’s exactly what a Federal Reserve is supposed to do here, right? Yeah. So it’s odd to me that Volcker is advising Obama

Thomas Sowell 40:00
Because that’s odd to me, too, they would seem completely

Jason Hartman 40:03
contrary, in my opinion, you know, Obama needs loose money to pay for all of his social programs, and bailouts. And Volker is sort of a tight money guy.

Thomas Sowell 40:12
Well, someone has pointed out that the policies followed by this government are the opposite of the policies advocated by summer is when he was outside of government. So I’m not sure to what extent these people are really people whose advice the president is seeking, whether they’re simply window dressing to make make the administration more palatable. Yeah. So it’s sort of like john was shocked in the early days of the Hitler regime, that that people say, well, they’re drawn my shark is a very sound man, and therefore we can rest assured that they’re not gonna do any crazy thing. Well, they did crazy thing.

Jason Hartman 40:45
Yeah. Well, I say to listeners, watch what they do, not what they say and and watch what they do not with whom they affiliate.

Thomas Sowell 40:53
Yes. Especially with this administration, because Obama is really a very smooth talker. And he knows what people want to hear. And he says it and even if it is totally contrary, you know, he went he introduced this Sonia Sotomayor, by talking about what he’s for the rule of law.

Jason Hartman 41:11
She’s an activist judge, she rose from the bench?

Thomas Sowell 41:14
Oh, absolutely. It really does take a certain amount of talent, a certain kind of person to say things like that. I mean, you know, you have to be able to look up at the sky and say it’s orange instead of blue, and say it with conviction.

Jason Hartman 41:24
I guess that’s the definition of a con artist, isn’t it? Yeah. Well, thank you so much for joining us today. The book is called the housing boom and bust by Thomas soul. anything you’d like to say in conclusion for our listeners?

Thomas Sowell 41:37
No. I think that it’s hard to hard to summarize a book that’s very compact as it is. But I think you’ll find out that there’s, as I said, at the beginning, there was plenty of blame to go around. So there’s no point all the finger pointing especially the finger pointing outside of Washington, is just a charade.

Jason Hartman 41:58
Yeah, sure is a special interest have taken over. That’s for sure. Thank you so much for joining us today. We really appreciate your words of wisdom and your insights. Thank you.

Thomas Sowell 42:05
Bye, bye.

Jason Hartman 42:08
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