 My name's Doug French. In case you've lost your programs. And I'm with the Mises Institute in Auburn, Alabama. Of course, that's not why Hans asked me to speak on this topic. I'm actually an ex-banker. I used to make real estate loans, construction loans, in one of those sand states that Steve Saylor talked about yesterday. I was a lender in Las Vegas for over 20 years. And very much a contributor to the boom. And the bust, as it turns out. So thankfully I've found a place to land, but this speech will have a lot to do with my past experiences. But I first wanted to talk about legitimate banking. Not that I have a lot of experience with legitimate banking, but legitimate banking is based on honoring property rights, which seems appropriate for this conference. And if you put money into, make a deposit into a bank, into what we would call a checking account, that person is not trading a present good for a future good. If you put money in the bank, you still believe it's your bank or your money. The bank is just warehousing it for you. The deposit's not alone. You're not giving it to the bank for a certain amount of time to be returned later to you. It's available all the time. You could put it in one day and get it the very next afternoon. That's the understanding. The bank goes to guard, protect, and return the money at a moment's notice. But unfortunately bankers, being men and women, they're subject to temptation. Temptation to commit theft, temptation to commit fraud, and the warehousing profession's been no different. Sort of just stealing depositor's stuff, or in the case of money, the warehouseman borrows the money temporarily to profit by speculation or whatever and return the money later, prior to when the depositor needs to withdraw it. And of course this is called embezzlement, which the dictionary defines as appropriating fraudulently to one's own use of money or property entrusted in one's care. And essentially that's what modern fractalized banking is. And of course nothing is more tempting than gold coin back in the days of the Goldsmiths or money now, cash money for embezzlement, because these items are fully fungible. And they found that this is very profitable to create money out of nowhere. So bankers and governments have found that it would be very important to find an adequate theoretical justification beyond the easy solution of just simply declaring legal a corrupt criminal practice that's ultimately happened. Now there's a number of court cases down through history that has made this all legal. But really what reminds me of this is a movie, a John Wayne movie called The Common Charrows, and I don't know if any of you have seen it. But there's a great character played by Edgar Buchanan, circuit court judge Thaddeus Jackson Breen. And he tells Paul Regret, played by Stuart Whitman, major here has told me what your problems are. I've been thinking it over and in light of my 40 years experience in legal jurisprudence, I have come to the positive conclusion that there's ain't no way to do this legal and honest. Being sensible Texans will do it illegal and dishonest. And I think that sums up how banks and governments have come together to make law very ambiguous, deliberately ambiguous to legally justify fractional reserve banking. Because ultimately fractional reserves cannot survive economically. They must be supported by government force. They must be supported by a central bank, which institutes the regulations and supplies the litiquidity at all times to prevent the entire apparatus from collapsing. Now banking crises are as old as history. And in fact for those of you who are going to Ephesus on Tuesday, there was actually a crisis that occurred over 2,000 years ago. I don't know what the name of the bank is, it's probably Ephesus State Bank or something like that. But this crisis motivated authorities to grant the banking industry its first express historically document and privilege, which established a 10 year deferment on the return of deposits. So as you're walking around Ephesus look for evidence of some collapsed bank. But there was an attempt in 1609 to return to 100% reserves. It's called the Bank of Amsterdam. Very famous bank and they maintained reserves for a number of years. In fact many historians, many economists believe that they scrupulously fulfilled the commitment to have 100% reserves for 150 years. Now there's some dispute about this and some historians believe that they actually, the Bank of Amsterdam actually, surreptitiously made some loans to the East Indian Company from their vast pool of deposits. In other words the Bank of Amsterdam as much as they tried to maintain 100% deposits again succumbed to the notion that they should loan out this money. And the man who learned about that was a guy that was on the lam from the law, John Law actually. He had killed a man in a duel in his native Scotland and had been tried and been found guilty and they were going to hang him for murder. So he's able to escape and he was a theoretical thinker on monetary issues. He traveled around Europe and he actually went to the Bank of Amsterdam and he discovered that the Bank of Amsterdam had made this loan to the East Indian Company. And as John T. Flynn writes, law perceived with clarity that this bank in its secret violation of its charter had actually invented a method of creating money. So John Law really was the Keynes 200 years before Keynes was even born. And John Law went throughout Europe as he gambled, he partied every night. He was a tremendous gambler, made his money that way. But he was constantly seeking a government to try his system of creating paper money. And he finally found that country in France in the early 1700s. He started a bank called the General Bank. And of course he was smart enough to own it 25% by him, 75% with the King. So he cut the King in on the deal and away they went. He created money, vast forms of money. He started other companies which became the Mississippi system. Of course ultimately within two years of the system he knew he needed to make the General Bank the Royal Bank. He needed government force to keep the system in place. But ultimately the system collapsed. And he did every thing he could by decree to keep people from moving their money from the Royal Bank into gold and silver. He confiscated gold and silver. He did all he could to keep the system in place. But eventually an outraged French public forced the regent to place law under house arrest. And he in fact died in near poverty. In fact the Mississippi bubble, the bursting of the Mississippi bubble was so immense. And the loss is so heavy that it was considered a faux pas in France to even utter the word bank. For over 100 years the term was at the time synonymous with the word fraud. Now I want to fast forward very quickly to the United States and how banking in the United States is deteriorated over the last 50 some years. And the reason I'm wearing this fancy suit that I had made in Hong Kong by my Taylor Sammy as opposed to my American Taylor Joseph A. Bank. But bankers used to wear suits. They used to be very prim and proper in the 50s. And that was about the time actually at the end of 1954 National Citibank which was a predecessor to today's Citicorp. It had $6.3 billion in assets of which $5 million was lent out on real estate loans. Only $5 million of $6.3 billion. It's half a tenth of 1%. And while all loans were only $2.3 billion, in other words their loan to deposit ratio was only 41%. So in the 50s despite practicing fractionalized banking in America bankers were pretty conservative. They wore a suit to work and they were very tight with credit. And they would certainly not make loans from deposits on long term assets such as real estate or not very often anyway. Now when I started in banking in 1957, 51% of all loans with US banks were real estate loans. It's a huge change from less than 1% of loans being made on real estate. In the 50s by 40 years later over half were made on real estate loans. Of course in 1997 at least when I started bankers were still wearing suits. But in the early 1990s and early 2000s that's when dressing casual during the week became very prevalent. And I know at the bank that I worked at we started wearing suits four days a week when I started. And of course in Las Vegas it's hot so you can create all kinds of reasons not to wear a suit. But as we made more money and we thought we were very smart because all our loans were paying off and the real estate bubble was going great. We didn't figure we needed to dress up to do this anymore. So first we had casual Fridays. Then we had casual every day in the summer. Summer being defined from May to October. Well then we redefined summer. Summer began in March and went all the way to December. Which means we dressed up for two months out of the year. Then we decided we can dress casual every day except board meetings. When the board showed up we should probably dress up. But then by that time things were going so good that we didn't care what the board thought. So we dressed up. We had casual day every day even during board days. And then casual wasn't enough. It was casual except for Fridays and then you could wear jeans. Of course the next thing that happened unfortunately is the bank was seized by the FDIC and everybody was unemployed. So presumably they could dress casually every single day. By the end of 2008 the loan deposit ratio for all banks. And remember back in 1954 National Citibank had lent out 41% of its deposits. Still very liquid something that Guido mentioned. By 2008 the loan to deposit ratio for all banks was 87%. So virtually you take all your deposits and you lend it out because it's very very profitable. And by the end of 2008 60% of all loans were secured by real estate. So what we have is very casually dressed bankers lending out all their deposits on real estate loans. And it was good while the boom was happening. In 1991 total bank assets were 4.5 trillion. By the end of 2008 those bank assets were 13.8 trillion. Essentially tripling, more than a tripling. So you might assume that gee there was a lot of savings. Americans must have been saving like crazy if bank assets were going up that far. But actually the savings rate fell from 7% to negative half a percent. The peak of the housing move in 2006. So it's rebounded somewhat since then. And now we have this annoying parade of Keynesian now complaining about the paradox of thrift right now. But we can see that this wasn't savings that were driving these bank loans and bank deposits. It was actually money being created out of nowhere through the banking system. So nobody was saving, casually dressed bankers were making all kinds of loans and being paid like used car salesmen. And as with the help of the Fed expanding bank assets out of nowhere. And this was all based on real estate values that were essentially as we found out later to be an illusion. I saw Donald Trump recently on television. And he's telling the story about old time mortgage bankers earning a small salary. And the only bonus they'd receive is a turkey at Christmas. Around holiday time. But in the last few years he said bankers have been on commission. Some of them make $50, $60 million a year. They don't even get paid when the loan pays off but when the loan is funded. Well that's exactly right. That's the way we were paid was on commission when things got hot. When I started in the banking business you would get paid a small salary and hope for a turkey at the end of the year. But lenders went on commission. And Tom talked earlier about Robert Morris, the evil Robert Morris. It's funny when I started in banking there's actually a trade association for bank lenders. It used to be called RMA, the Robert Morris Associates. And because Robert Morris had financed the revolution according to the pamphlets. And I did a little digging and of course I heard Murray Rothbard give a speech about the evil Robert Morris and the fact that the revolution actually financed Robert Morris, not the other way around. So I wrote this dandy little article about Robert Morris, the evil Robert Morris. And I don't know if they said anything to do with it but within a couple of years RMA changed their name. They were still RMA but they called themselves Risk Management Associates. But again that's kind of silly because bank lenders weren't addressing risk at all. They were just shoveling depositor money out the door as fast as they could. So instead of making a salary and being careful with loan dollars bank lenders began to be paid on commission. Banks wanted real estate assets, they wanted loans on their books, they wanted to grow. And so when I started in the business it quickly reverted to being paid 10% of your loan fees. And you didn't get paid when the loan was paid off. You were paid your bonus when you initiated the loan, the loan was funded. So you had every incentive to seek out loans and make sure they got boarded. Eventually all the banks in town paid bonuses. Everyone was on salary plus commission and eventually portfolio maintenance was added to this where at the end of the year you got a certain percentage of the loans outstanding that you had in your particular portfolio. And some banks even paid as high as 12% commissions on loan fees. Department heads would earn an override on their employees under them so they might earn 2% of the loan fees generated. So everybody was after loan fees and everybody was after loan generation. And nobody was concerned about loans being paid back because in a bubble high tides lift all boats. Whatever silly loan you made on the book there were plenty of greater fools to come in either refinance the loan or the property would get purchased. So there was no great fear that too many loans would be made. There was tremendous fear from bank management that they would actually lose loans, that loans would pay off and they couldn't replace them. There was that constant fear that actually your bank would shrink. That would be awful. And so that's why those incentives were there. Now of course that's all changed with the bust. I think that the price of bankers is going down. And I think they're going to go back to making fairly modest salaries and potentially a turkey at Christmas. But the days of big commissions I think are over. But that's what's led to where we are today. And I know that we've been enjoying the lap of luxury here in Hoppeville. So you probably haven't kept up on the number of bank failures in the United States. But there were three more over the weekend. So we're up to 36 banks have been shut down this year. One of them is of note. Two are in Illinois and they're relatively small banks. But one is called Bank United in Florida. It's a $12.8 billion bank. And it was closed actually on a Thursday, which is unusual. Banks are generally closed at five o'clock on Friday. But Bank United in Florida was closed on a Thursday. They were turned around and sold immediately to Washington insiders, Wilbur Ross, the Carlisle Group, and Blackstone along with a few others. And they're going to inject $900 million into this $12.8 billion bank. So you can rest assured that the beat goes on. The insiders will pick up more of these banks. And it is estimated the FDIC fund will lose $4.9 million on this transaction. They do have a loss sharing agreement with the new group that is buying it. But the Wall Street Journal estimates that the FDIC or the taxpayer, if you will, will absorb all the losses. Now through all this bank lending, we've seen, as Austrian theory would tell us, we've had numerous malinvestments financed. And the most famous one that's hit the internet lately is Guarantee Bank of Austin. Recently it made YouTube that they demolished 16 new and partially built homes in Victor Valley, California. I don't know if you've seen that video. But these were perfectly good. There were four completed homes and another 12 homes that hadn't been completed. And the cost of completing the development was higher than what they could ultimately receive by finishing the homes and finishing the development. So they just went ahead and knocked them down. The bank did. And these were homes that sold from $280,000 to $350,000 in 2008, probably much higher at the height of the boom. And so this Victorville is a bedroom community outside of Los Angeles, about 50 miles away, which sounds like a long ways away, but in LA that's a fairly close bedroom community. So here we have banks that shoveled out money to real estate developers to build homes and a few years later it is more cost effective for the bank to turn around and just knock the homes down. This is not going to be an isolated case. Nearly 250 residential developments in the state of California have been mothballed, if you will, totally 9,400 homes according to one research firm. So that's one example of the malinvestments. But the next shoe to drop, in my view, is commercial real estate. This would be income property, shopping malls, office buildings, potentially casino projects, in fact. And this is where many of the community banks, smaller banks, regional banks have really made their money in the last few years. There's 3,000 banks and thrifts that have commercial real estate loan portfolios that exceed 300% of their capital ratios. So a heavy reliance on real estate. You know, in Bank of America, which is considered too big to fail by the Obama administration, just a couple of the projects that they have lent on. They're the lead lender on the Fountain Blue project in Las Vegas. This is a large hotel and casino, and of course they had intended to sell condominiums. That project is essentially stopped. Bank of America actually has funded two office projects in Buckhead, which is a suburb of Atlanta. Each of those loans is $100 million. And those projects are going to be completed with no tenants in sight. Speaking of Atlanta, there are 35 new condo projects in that city that will provide a 40-year supply of condo units at the current sales rate. So there's plenty of real estate pain to go around. And we'll see how the bigger banks weather that. You know, Bill Bonner said recently, little mismanaged banks go broke. But big mismanaged banks get federal money. And with these subsidies and bailouts, the big banks get larger and live to fall up another day. And that's essentially what will happen. But Guido mentioned the equity of some of the big banks. And B of A actually has a capital ratio of 3%. So their leverage is essentially 33 to 1. Wells Fargo's equity capital is 3.7%. Regions Bank has a capital ratio of 5.4%. So even though some of the bigger banks don't have as great a real estate concentration, they certainly have very small equity capital ratios to protect them as this onslaught of defaults in the commercial real estate arena come home to roost. But I would tell you community banks, most of them have real estate concentrations, especially in the sand states and the sunbelt of 80 to 90%. We all drank from the same trough, so to speak. So it's a very important part of the financial system is the community banks. You know, 28 to 30% of total bank assets, and that's where a lot of the commercial real estate has been done. Now you may have read that some of the bigger banks had good first quarters, that they're making money, everything's okay. And in fact, B of A announced earnings in the first quarter of 4.2 billion. However, upon closer inspection, equity investment income includes 1.9 pre-tax sale of the China Construction Bank, and then they had a non-interest income of 2.2 billion in gains related to market to market adjustments on certain Maryland structured notes as a result of capital spreads widening. So actually, when you take out all of that nonsense, they actually showed a loss. So, and the other big banks are no different. Andrew Ross Sorkin wrote in the New York Times, with Goldman Sachs the disappearing month of December didn't quite disappear. J.P. Morgan reported a dazzling profit partly because the price of its bonds dropped. Theoretically, they could retire them and buy them back at a cheaper price. That's sort of like saying you're richer because the value of your home has dropped. Citigroup pulled the same trick. So we have all kinds of accounting tricks that really have created any sort of profits that have happened with the big banks in the first quarter. Of course, we can all be thankful that they were stress test. And Obama says that none of the big banks will be allowed to fail, and so everything will be okay. But a number of people questioned those stress test results. The Wall Street Journal reported that the stress testing was actually negotiated by the banks. They negotiated the results with the stress testers. And so it really calls into question just how much stress these banks could take. What's interesting is with all these failures, we've got so many banks failing that government watchdogs who by law have to review these failures. Any time there's more than a $25 million failure within a bank, they must be examined by the Inspector General. And that threshold is just too low according to the Inspector General. He testified the other day that his office had to do only five failed bank reviews from 1991 to 2007. They've already closed down 36 banks this year, and all of them will be over that $25 million threshold. And so his staff says that they just can't keep up with that. He would like to increase that threshold to $300 million or $500 million. And that also goes for closing down banks. There would be many more bank failures than the 36 if the FDIC had the staff to close down banks. In fact, I've heard that if they had the staff they would be closing down five to six banks a week. But they just don't have the staff to do it. So this is going to take many years to unfold. But the government has come to the bankers rescue, last fall's panic. The Fed wheeled out the money market investor funding facility, the asset bank commercial paper money market mutual fund liquidity facility. It raised the ceiling on insured deposits from $100,000 to $250,000, guaranteed new debt issuance of the banks, thrifts and holding companies that provided full insurance for any and all non-interest-bearing deposits. And the Treasury issued a blanket guarantee of money market liabilities. So as is always the case, when banks get in trouble, the government rides to the rescue with the idea of taking care of the poor depositor. But in fact, it props up the very banks that got in trouble. Now, Murray Rothbard pointed out that in the absence of central bank intervention, these bank panics would be very healthy. They'd be very healthy on a check on inflation in the banking system. And that would certainly be the case in this meltdown. As these assets are written down and as these banks fail, we would see the pressure of inflation would be greatly curtailed. But the Fed is valiantly fighting to reinflate. In fact, it's increased its balance sheet 140%, just to generate a 14% increase in M1 money supply. So the central bank has pulled out all the stops. Chairman Bernanke has done everything but to send out the helicopters, dropping bales of money, although he has said in previous speech years ago that he would be willing to do that. But Jim Grant from Grant's Interest Rate Observer estimates that the federal response to the current downturn is 12 times greater than that of the Great Depression. So we've seen central bank intervention like we've never seen it before. But some people believe that it's not enough. In fact, the Financial Times reports that the existence of a federal reserve, there's a staff memorandum within the federal reserve that makes the case for a negative 5% Fed funds rate. Now it's hard to cut rates below zero. It's very difficult. And I quote here, however, the staff research suggests the Fed should maintain unconventional policies to provide stimulus roughly equivalent to an interest rate of minus 5%. So imagine if they're able to unleash that kind of power. So although ostensibly it's been dodgy real estate loans that are bringing all the banks down, whether it be subprime mortgages or construction loans or land loans, whatever it may be, what it really is is the fraudulent nature of fractionalized banking. Now what Murray called the pernicious and inflationary domination of the state. That's the real culprit. Now when things go bad, the regulators always go into a bank and they say the bank is operating in an unsound and unsafe manner. But what is really unsound and unsafe is fractionalized banking, the lending out of embezzled deposits. Thank you.