00:01:57.960How hard of a job do you think the most recent chair has, Warsh, that he got the job with being pressured to lower rates versus keeping him that way?
00:02:08.880And if you were given that job, let's just say if you were given that job, this is your world, you follow it.
00:02:13.720What do you think would be the right move for him to make in this state of affairs that were in America?
00:02:18.800Well, I think the main problem in America is too much private debt.
00:02:21.620It's not the government debt that matters, and that's what all the mainstream economists
00:03:41.640Because some people push back on the president on lowering rates and they're concerned if you lower rates, you know, inflation may continue versus keeping it kind of where it is right now for things to level off.
00:03:57.460What is your position and the reasoning for lowering rates?
00:04:00.640Well, inflation is not controlled by interest rates in any effective sense.
00:04:04.440If you want to reduce the rate of inflation, whether using interest rates, you have to do something like Vokula did and cause a recession.
00:06:15.480It's funny because you and the president agree on that.
00:06:17.760That is a part where they think that's the right move.
00:06:23.820I'm not sure if I'm there with you and the president.
00:06:25.540I know you guys agree on that part of it,0.98
00:06:27.720whether lowering the race is the right thing to do or not.0.99
00:06:30.440The economy, a lot of people in America would love to see that happen.0.99
00:06:33.600By the way, going back to the personal debt side, how much of that, and I'm curious from your standpoint, how much of that personal debt challenge happened the moment we got off the gold standard?
00:06:44.180Is that where you are with it or do you have a different position?
00:06:48.220What actually caused the growth in debt was deregulation of the financial sector.
00:06:52.640You used to have – if you go back and look what happened after the Great Depression, what Roosevelt realized and Irving Fisher realized was the financial sector caused both the bubble of the 1920s
00:07:04.860And so we have to restrain the tendency of the financial sector
00:07:07.660to get involved in irresponsible behaviour in Ponzi schemes.
00:07:10.960So things like the Glass-Steagall Act,
00:07:12.980reduction in the level of margin leverage,
00:07:15.660so margin debt used to give you 10 to 1 leverage,
00:07:17.900now it only gives you 2 to 1 leverage.
00:07:19.700All those things came out because the attitude of the people
00:07:23.380who experienced the Great Depression was the financial sector
00:07:26.140will lead to speculative bubbles and we have to restrain
00:07:29.380that tendency of irresponsible behaviour by the financial sector.
00:07:32.800When we got conventional economists dominating their profession starting in the 1970s, they basically thought everything is better as a free market, let the banks do what they want to do.
00:07:42.660And their belief was that if you deregulated the financial sector, there'd be more money for investment.
00:07:48.360In fact, there was more money for speculation.
00:07:50.900You had some, obviously, banks provided money investment funds for telecommunications and internet and all that sort of thing.
00:07:59.680But they also did the subprime bubble.
00:08:01.180And the whole idea of the subprime bubble was borrow money, buy a house and sell it to somebody else for more money, which only worked if somebody else borrowed more money than you did.
00:08:09.500So you got this exponential increase in the ratio of household debt to GDP, which reached a peak and then crashed in 2006.
00:08:18.940So the banking sector has a tendency to be irresponsible and it just runs with the nature of banking.
00:08:25.900So I blame that on deregulating the financial sector.
00:08:29.260I'd bring back regulations to make sure that the financial sector predominantly provide working capital for corporations rather than providing funds for gambling and speculation in casinos, which is what they do at the moment.
00:08:41.380How do you do that? How do you do that? Because what opened up, we talked about it earlier with China, what opened up the market in China is when they started having more banks lending more money to small business owners.
00:08:51.700You and I both know when the big banks were bailed out in 2008 and they got all those billions of dollars, the money didn't go to the business owner.
00:09:00.100They kind of kept it to themselves and didn't.
00:09:07.200Like what do you create for that money to go to small business owners?
00:09:10.920Well, one thing I do is rule out making it possible to make a profit out of funding a Ponzi scheme.
00:09:15.500So my favorite one there, of course, is the housing scheme, housing bubbles.
00:09:19.360and I've done empirical work to show that what causes rising house prices is accelerating
00:09:24.480household debt and that's what's that's caused the booms and busts you've seen in America and
00:09:29.120everywhere else and what that means with that comes about because banks will claim to be giving a
00:09:35.660borrower an amount of money based on their income but they'll fudge the numbers you know the idea
00:09:40.180what do they what do they have expression for it no ninja loans no income no job no assets that's
00:09:44.360right okay okay they're willing to do that i would make it uh i would put a limit on the amount of
00:09:50.500money that can be provided to buy a property based not on the income of the buyer but the
00:09:56.140real or prospective income of the asset itself so if you buy if you you know you build a house for
00:10:02.420rent then i would say the maximum amount of you could borrow to buy a house for rental purposes
00:10:07.640would be 10 times the annual rental income of the property the same sort of thing applies for owner
00:10:12.280occupied. That would mean that it was no longer profitable to lend into bubbles. You wouldn't get
00:10:18.100runaway amounts of debt. The amount of money being lent would be related to the rental income
00:10:25.280of the property, which doesn't have the bubbles you see elsewhere. I'd also make it possible for
00:10:29.920banks to take an equity position when they made a loan. At the moment, there's a very good reason
00:10:34.920for banks not to lend to entrepreneurs, and that is that most entrepreneurs fail. And if a bank
00:10:40.600lends to, say, six entrepreneurs, then five fail. So the bank loses its money on five of them and
00:10:46.120only makes an interest earning out of the sixth. I would have banks having passive emphasis on
00:10:52.340passive. I've got enough entrepreneurs who tell me the last thing I want is a banker making
00:10:56.200decisions on their board, but a passive position where they take an equity stake. And if they have
00:11:02.280six, five companies that fail and one that succeeds, the one that succeed could be Amazon.
00:11:06.700So you make up for the losses elsewhere. So I call those that idea.
00:11:09.720kind of like a private equity model? Similar, but it's money creation rather than private equity
00:11:15.220tends to pool existing money. Banks create money when they lend. This is one thing mainstream
00:11:19.740economists do not understand. They simply don't want to know that that's the case. But when a bank
00:11:24.760makes a loan, it also creates money. So I want to limit that for money being created for productive
00:11:30.880purposes, not for speculative ones. And I want to encourage getting money to entrepreneurs.
00:11:35.740So that idea of banks make loans to entrepreneurs and get an equity stake rather than a loan position, I call those EELs for entrepreneurial equity loans.
00:11:47.840So you can make changes like that that change the behavior of the banking sector and get back from the days when the banking sector dominates the physical economy to the days when the banking sector was a servant of the physical economy.
00:11:59.500Do you think there almost needs to be a massive shakeup for them to make that kind of an adjustment?
00:12:05.540Because, you know, if somebody wanted to go that route and somebody got elected and they wanted to propose your idea, real estate valuation in America would probably take a 25 percent hit overnight if that would have happened.
00:12:22.960I have no doubt my ideas will never get tried.
00:12:26.320OK, so I'm aware that I'm putting through the hypotheticals that won't happen.
00:12:29.760But in the case of trying to reduce the level of household debt, which is like running at about 100 percent of GDP, it should be about 30 percent of GDP at most.
00:12:39.460It's scary, by the way. It is truly a concern that I don't care who the president is on the left or the right.
00:12:46.260They have to know that's a real issue with affordability, because if the average guy, say 28 year old man, cannot afford to get married, buy a house and have kids.
00:12:54.840We have a very big problem in America.
00:12:56.720Yeah, and that's the situation you're in.