 Welcome to what I think is probably the worst titled lecture this week. Errors, business cycles, and government stimulus. I've never gotten good at titling lectures. But here we go. So what I want to do today is look at this idea of government in particular fiscal stimulus, and merge this idea with what we know from Austrian business cycle theory to develop what I hope are some, I guess, somewhat unique insights into things that we can say about stimulus programs that you can't say using other theories. Now before we get too far, we do need to talk about error. Here I'm drawing a lot from Professor Holtzmann wrote this paper. I believe it was 1999 or 98, something like that called Torted General Theory of Error Cycles. I'm not sure that he followed it any further as we're just moving that direction. I don't know that we have arrived. But there he suggests that every business cycle theory ultimately is a theory of error. We need to explain why is it that entrepreneurs are making errors. Now just to make that point, I have up here from our most recent business cycle that we completed. This would be the home price index using as the case Schiller index is a fairly standard way of measuring housing prices and getting a rough idea of how they're moving. We can see a very clear housing boom. In this case, the data only goes back to 2000, but certainly in 2000-2001 it's already happening. It peaks right here where I have the cursor laid right around April of 2006. We see that peak and then things collapse as we know. The point that I want to make here, and this is a point that I think we as Austrians need to make, is at first it's very important that we look at the data. That's not my point. Rather that we need to remember that there's actual people involved, that this data does not just exist on its own. We are not physicists, we have mindless motion happening, we're just watching that motion. There are actual people involved that are leading to this data that we see. We need to try to explain then when we look at housing prices, we have actual people buying and selling houses, leading to price patterns that look like this. So why is it that somebody here at the peak is willing to buy and sell at that price when we now know that housing prices are going to collapse over the following year to something like three years by the time we finally hit the bottom of what's happening here? Why would somebody do that? They such an outrageously high price for a house knowing what we know now that prices are going to fall. Well, the obvious answer is that they didn't know what we know now that they made an error. They foresaw a future that wasn't actually going to occur. So if we really want to explain how business cycles work, we need to understand those peaks. There's investment going on that is not going to pay off eventually and that we kind of know that, but why don't they know it? So ultimately all business cycles are driven by this cluster of errors, entrepreneurs making investments that will not pay off, but they just don't realize it at the time. Now one thing I'll point out here is that this idea of the business cycle being the result of error, it's nothing specific to Austrian business cycle theory. One of the big points of the new classicals and the rational expectations of you was that even if we look at kind of a standard aggregate supply, aggregate demand kind of story, if everybody foresees what's going to happen, all we get are price level effects. We don't get any boom and bust that we would see in the real economy. It just get price levels going up and down, but that really doesn't matter if we're interested in actual cycles of people losing their jobs or having booms in the economy and the like. So even going to the mainstream, we need to have error being an important part of the story if we're going to explain business cycles. Also I would note that this idea of error being very important has actually been leveled as an attack on the Austrian business cycle theory. We have people like Brian Kaplan was one that authored this critique against us, where he says, well, you Austrians, you love the entrepreneur, you think the entrepreneur is so good at forecasting the future and earning profits by doing so. Yet, we have a business cycle theory built upon the idea that the entrepreneur gets duped in the midst of the boom and makes all of these errors and everything falls apart. How can this possibly be the case that we have both entrepreneurs that run the economy very efficiently but then also get duped on a regular basis by monetary policy. So how's that possible? Well, here, I guess the first point I'll make is that Kaplan's critique is not actually original Kaplan. It goes all the way back. There was a fairly famous economist wrote this book. I'm called The Theory of Money and Credit. I believe his name was something like Ludwig von Meissies or something like that, I don't know. Anyway, but he suggested in that, right, as he was just beginning to develop what his business cycle theory ends up being, which we teach here this week, he says the day may possibly come that people learn to foresee what all these effects are going to be as we have this stimulus. And when they do, we wouldn't actually expect the stimulus to happen. So Meissies himself was aware that if people foresaw what was going to happen as a result of this credit expansion monetary stimulus, we wouldn't see the business cycle he described. So I guess Brian Kaplan just kind of went back, read Meissies and wrote it down again. Anyway, so how then do we explain these errors? As it appears that we do still have these business cycles now, 2007, 2008, we see people are engaged in this kind of erroneous activity. There are a few explanations. One, we could just say in general foresight is hard. We live in an uncertain world with an uncertain future. Knowing exactly what's going to happen is just not easy. But I suggest this isn't a great explanation for business cycles. So to get that idea, suppose that instead I actually don't have any coins with me, I pulled out a coin, so here's my invisible coin. So it's a penny because that's about the level of coin I can afford. So here I have a penny and I say, okay, I'm going to flip this coin. We're either going to end up with a head or a tail, obviously, because it's a fair coin. And I ask you, I ask you to predict. So everybody in the room has to predict is it going to be a head or a tail. So it would say it would probably be a head. Nobody thinks it's probably a tail. Okay, who doesn't vote because we're Americans? We just don't vote. Or I guess here we're good libertarians, we don't vote. So I'd expect if you were forced to choose one or the other, we'd split about half and half because there's about a 50-50 shot, which means that half of us are going to be right, half are going to be wrong. Now this isn't quite the same thing as happens during a business cycle where we all are falling into the same kinds of errors. It's a cluster of error. We're all making the same kinds of mistakes. So at this point, it looks like the common thing is for people to be overvaluing housing if they're not being offset by a bunch of people undervaluing housing, which would have driven the price down. We wouldn't have seen that kind of peak that we did. So we're making the same kinds of errors and there's no reason that just saying, well, foresight is hard, leads us to make the same kinds of errors. So we need some other better explanation. Walter Block, off verse one, he suggests that the low interest rates that the Fed creates are in effect bribes to make a very specific type of error, making these capital investments specifically early in the capital structure that aren't going to turn out well. So in that case, we can understand why people would fall into a specific error if they're in effect being bribed to do it. Or another view out there is Curly and Dempster. They suggest that there is this conflict between the private incentives or I'm trying to make as much profit for myself as possible. And that would suggest I should participate in the boom despite the fact that if we all do this, it results in a boom that is going to result in a bust. I do have a critique of that. If you want to hear it, listen to my game theory lecture from earlier, I find the video on YouTube, right here. There we go. My favorite view, though, comes from Baxendale and Evans. I also wrote a little bit about this. And that's the idea that the monetary expansion itself changes the quality of people that are entrepreneurs. So what I kind of have in mind, we can imagine, is not just like people are either good or bad entrepreneurs, right? There's a whole spectrum, right? Some people are really, really great entrepreneurs have a great ability to foresee the future, anticipate the future, make plans for that future. Some people are terrible entrepreneurs. I would probably put myself in that camp. Yeah, I mentioned earlier today, I have my Ameritrade account with literally $1 in 19 cents left in it. Yeah, it seemed like when I was in college, the best way to predict a company would go bankrupt was that I'd buy it a few months ahead of time. So one after another, I bought this company when bankrupt stock was worthless, bought another company when bankrupt stock was worthless and so on. Very, very bad foresight, definitely not toward the good end of being a positive entrepreneur. There's this whole range of people. Some very good, some very bad, but lots of people in between. So then what happens in the course of a monetary or credit expansion? Well, now banks are flush with cash, if you're going to make any money off of it, you have to lend it to somebody. So who do you lend to? Well, naturally, we just kind of go down the list. You lend to the most qualified entrepreneurs first, those that you think really have the business plans and the record that are going to succeed, but then we still have more money left over, so we keep going down the list to less and less and less and less qualified entrepreneurs, which means if credit is fairly tight, only the best entrepreneurs are the ones that get funding. Meanwhile, if credit is fairly loose, as you know it is during the boom, we have to bring in entrepreneurs that are not quite as qualified. So I like to say it's not so much that our great entrepreneurs suddenly get fooled. It's rather that people that were always fooled suddenly become empowered to become entrepreneurs, which is not normal if we have tighter credit conditions. So we can explain this error just on the basis of the fact that I would normally have made that error, but I normally don't have the money to make that actually relevant in the economy. More money, now it becomes relevant. Okay, some of the evidence that I gathered for that, I was actually based on the data you see up here. I went a little bit back, back a little bit further, there's another form of the Case Schiller index that can go back into the 80s. I mean what I looked at was how the housing prices reacted to different interest rates. So I thought sensibly, a house is a fairly long-term investment, so most people should pay attention therefore to long-term interest rates, so I think here in the US fairly common people use a 30-year mortgage. So 30-year mortgage interest rates should have the biggest statistical impact on housing prices, so I thought okay, that seems reasonable and I looked and I checked against another possibility and that was, well what about say one-year adjustable rate mortgages, which are fairly uncommon in the US, we don't use those uncommon day-to-day basis, they're fairly rare, their interest rates move around a lot more, so I thought this shouldn't actually matter that much to housing prices, it's not actually the loan people are using. But statistically, it turns out that one-year interest rate mattered more than the 30-year interest rate, that this was kind of weird, so I could go a little bit deeper and actually break down and say okay, at what kind of levels does this interest rate matter more, and I found out the lower interest rates went, the more important that shorter-term interest rate became. To me, this sounds very much like the story of as interest rates drop, we start looking and looking more at the wrong interest rate, we start falling into a particular type of error, which in turn is reflected in housing prices. Yeah I think, I actually went through a couple days ago, I got thinking about this, I developed kind of a fairly simple model here, I'll show it to you, because we all love mathematical models, so fairly simple, I think nothing here is particularly groundbreaking by any means. The idea is that the value that you would place on your home is related to the use that you get from it this particular period, and then also the discounted expected future value of the home itself in the future. So the discount there would be where interest rates would come in and be irrelevant. So and then I decided for expectations, let's just say that people expect that housing prices are going to rise over the next month the same way they did the previous month. So let's make it fairly simple, and then could figure out what should housing prices move like on the basis of various interest rates. And what I found, going back to the original data, when you look at the housing boom, if you put in as interest rates to determine what that discounting looks like, if you use the 30 year mortgage, you get a very very small increase in housing prices, nothing like what we saw. We saw this enormous, basically a doubling of housing prices between 2000 and 2006. See nothing like that if 30 year interest rates are what's driving the discounting. But when you look at 30 year interest rates, they didn't fall very much, so this isn't shocking. On the other hand, when you look at these one year, these very short term interest rates, they fell a lot and they could explain the grand majority of this boom that we saw. So it looks like people are looking at the wrong interest rates during this boom, which I would suggest putting all this together. It looks like we're having people that previously may not have been empowered to buy a house, say, who aren't very sure about how housing markets work, that are getting fooled into making this particular very long-term investment. So I would suggest if we want to explain errors, this is one way we can do it. There are people out there that would naturally make errors, normally they're denied resources by the market economy, expand credit, we have to give it to somebody. We end up pulling in people that are less qualified. So that's the first point about kind of how errors are made. The second point, it's about the role of capital in Austrian theory. And I'm very tempted to invite Professor Garrison up here to talk about it again, but I don't think we paid him to do part of my lecture, we did pay me to do part of this lecture, so I'll do it. All right, so we've already heard from Dr. Garrison kind of how Austrian theory, specifically capital theory, relates to business cycle theory. Specifically, we have these distortions, the dueling triangles, as Dr. Garrison described, or on the one hand, low interest rates lead us to want to make these early stage capital investments. On the other hand, when the interest rates are funded by this new money, people don't wanna save so much, they want to consume more, which would push us more toward the late stages as well. So this dueling triangle, we just don't have enough resources, it's not sustainable, we're pushing beyond the sustainable production possibilities. There's no way we can keep this going. So that's what our artificially low interest rates or unsustainably low interest rates should be the term I would prefer, lead entrepreneurs to make these sorts of errors, specifically going toward these very long production processes being the most problematic thing. Now the problem, of course, is that when the collapse comes, it's not quite so easy just to take these resources and move them around to a better part of the economy. That is, our capital is not just some amorphous K that can be reshaped into whatever form we like, it takes very specific forms. We have very specific factories that do very specific things. I like to say that it doesn't matter how large a McDonald's you have, it's never going to produce a car. You don't have the right kind of capital. An enormous deep fryer will not get you a drivable vehicle. At the same time, I suppose it is possible we could take the Kia plant there right on the border between Georgia and Alabama. I guess we could fill it with deep fryers and get French fries out of it or something like that, but it's not really well suited for that. So that being the case, when we hit the collapse, now we have to start thinking about what can we do with these pieces of capital? Some of it may be totally useless at this point when we restructure what the economy is going to look like. Are there good stories told after the housing bust occurred of just half-finished houses just sitting in the suburbs of Houston, totally abandoned? Are there people that were planning to buy them? No longer could afford to finish them. So we just have resources locked away here in a half-finished house, but you really can't get the resources back out without loss. So they end up just sitting there for years. So we end up with this problem that capital goods have specific uses. Once we start investing in a particular way, it's not so easy to move those capital goods to other uses. This is one of those things where, like when I teach this in my undergraduate, I actually do it in microeconomics. I talk about capital for a day. And it's the kind of thing where I feel kind of stupid telling this to undergraduates, like, did you know that even really big McDonald's can't produce a car, right? You kind of feel like you're wasting everybody's time by saying that, right? But then you start, you give this in a seminar to professional economists and they start arguing with you, right? So, like, oh, why don't we just put this all together in K like we would in any model? Is it really important, right? Capital has different forms. You have to start making these arguments in any way. All right, and so just to make an analogy here to really drive what I hope is an obvious point, even further home, right? Let's think about something like a lead baseball factory. Now, that is a factory that makes lead baseballs, not a factory made out of lead that makes baseballs. Right, so a factory designed to make lead baseballs. Now, as far as I understand, lead baseballs would not be particularly useful, right? You know, not useful for playing baseball in all likelihood and probably not useful for much else, right? And so how might this factory get started in the first place? Well, okay, to make that argument, let's just say that the government's providing subsidies for people that produce lead baseballs, right? It's a stimulus program or something. I mean, we need more jobs, right? So we're going to buy up a bunch of lead baseballs and sure enough, if the government guarantees they're going to pay us to produce lead baseballs, it might become profitable to do it, right? So we make the investments, we build the factory designed to make lead baseballs, and then the government decides it's going to cut this stimulus program, right? What is going to happen to the lead baseball factory? I suggest it's probably going to sit empty, right? Like, we might be able to retool it for something else, but probably not everything can be easily moved to another type of production. I often find, where I live in Ohio, it's often known as the Rust Belt. Because we had this history of manufacturing, which kind of left the area over time for various reasons. All right, so there's some parts where you drive through these cities in Ohio and you see just these abandoned factories. And I like to imagine what were things like back when this was actually a productive thing to do, right, operating in these factories. But this just provides evidence that sometimes we can't move that capital out to another use. Sometimes the best thing to do is just let it decay over time, which means those resources may very well potentially have been wasted. Okay, so, point being, right? We have this crisis, right? So we've built up a lot of capital, say housing or whatever it may be, especially in the early stages of production as the boom is going on, right? Then the crisis occurs and we find out that we're not going to be able to complete a lot of these projects profitably. We abandon them, right? This then leaves this empty shell of all of these projects that are not quite completed, but where resources have been spent anyway, okay. Well, we're getting to government stimulus next, okay. So after the crisis, right? The government says, well, we want to create jobs, right? I suggest that this in itself is kind of, suggests we're not focusing on the right thing. I like to say personally, I'd be perfectly happy without a job. As long as I had an income, I'm okay, right? Right, okay. If the university decided to keep paying me and said, oh, you don't have to teach any more classes, do any more research or anything like that, I would not consider myself to have been taken advantage of at that point. Okay, that's fine. I can come up with something else to do. Maybe I can grow a second strawberry or something like that, right? I can find other things to do with my time, right? So it's not so much that people need jobs, it's that people need income, okay, but this is tied to jobs, which is not necessarily a bad thing, right? So the government decides we want to create jobs and so we're going to use some kind of stimulus to do it. Now, in order to really do this effectively, you hear these phrases and some of you may be too young to remember, but I'm old, right, so I remember this, right? We want shovel-ready projects, right? Oh, shovel-ready projects. So this sounds very good, right? We want projects that can get off the ground like that or we're ready to go, that means we can hire people, we already have things set up so that all we need to do is pick up the shovels and we can go. Although there are some that suggest we should pick up spoons instead, right? The story is told of, I think, I believe it was Milton Friedman who was traveling around, I think it was India, if I recall correctly, right? And he saw people digging a ditch by the side of the road, and they were using shovels to do it. And he said, well, you know, there's fairly modern machinery we have available to us, you could finish this in a fraction of the time, right, with much less labor power. And the government official that was showing him around said, oh, well, the point here is to create jobs, it's not just to dig the ditch, to which Milton Friedman said, of course, well, why aren't they using spoons, right? If the purpose is to create a job, let's make this as labor-intensive and therefore capital-unintensive as possible, right? I guess bare hands may have been even better, but okay, we need to beat that. Anyway, right, so why aren't they using spoons? So we need to create jobs. So we need these spoon-ready projects. So what kinds of projects are in fact shovel-ready, right? Where we have basically most of the resources in place to go, right, we just kind of have to pick up and start working them. Well, remember all those empty-led baseball factories, right? And we have all of these things that we have started, or these projects that have been started, they just need to be completed, right? We already have a lot of people that have been trained in doing construction, right? We already have lots of equipment that can do heavy construction, right? Maybe we should do some construction projects, right? We have the resources available to do it. Okay, so it looks like, right, the shovel-ready projects, those that look most attractive, right, to governments that care about these things, right, are going to be exactly those projects that have just failed, right, where the market has shown that these were actually erroneous investments to begin with. Like, as somebody who cares about the way capital gets allocated, this should be disturbing to us, right? We should want to move resources out of unproductive areas toward other areas, right? But instead, right, what the stimulus is going to do is say, hey, we have all these resources sitting in these areas, it's unproductive right now. Let's make those productive, let's start producing more led baseballs, that kind of thing, okay. Right, so it seems like, when you look at the purpose of kind of these make-work programs, it's not actually just to create jobs, right? Creating jobs isn't actually that difficult. But instead, it's to maintain also this illusion of productivity at the same time as we're creating jobs. Here I think about, say, the American Recovery and Reinvestment Act, which was passed in 2009, was more or less the first major thing that President Obama signed, right? And when you look at the cost of the project, it was right around $800 billion. And the projection was that it would either create or save 4 million jobs, right? So I do the math, okay. 800 billion divided by 4 million, lots of zeros get canceled. But then you find out it was basically $200,000 per job. That feels like a bit much, right? And it kind of makes me want one of those jobs. But I suspect they weren't paying $200,000 per job, right? Of course, then when you look afterward, may as well update this a little bit. In terms of actually afterward, how did this particular piece of legislation do? Lots of debate. Estimates range from, there's one, I was very glad when I found this on Wikipedia, it was an economist by the name of Bill DuPour, and most of you probably don't know, but he was one of my professors at Ohio State, right? And here, just to give you an idea of where he's coming from. So he taught macroeconomics, and a lot of the, he was working out these mainstream models, and they'd often reached the conclusion the government really shouldn't do anything. And he said, well, I don't want you to get the wrong impression and think I don't like the government. Don't worry, I'm a Democrat, right? I like the governments. But his estimate, right, with a co-author, was that when you look at, when you break things down by category, the American Recovery and Reinvestment Act saved roughly 450,000, 500,000 government jobs, while at the same time it destroyed or prevented the creation of about a million private jobs. Which means that we had an $800 billion program to destroy on net about 500,000 jobs. I feel like there's a cheaper way to do that. Okay, well, now his estimate is one of the certainly more negative. But when you look at other estimates, they often range around, yeah, about two million jobs created or saved, maybe three million jobs created or saved was the CBO's estimate. But all this still comes down to over $200,000 being paid in order to create each of these jobs. Now, what we were actually interested in was just creating jobs. I think we probably could have created more, right? All right, so give me $200,000. I can hire, say, four people at $50,000 a year. $50,000 a year isn't bad. Not at all, right? It's actually fairly close to an average level of income. It's not poverty wages by any means, right? So $50,000, right? It ends up, if you look at the total cost of that $800 billion, $50,000 a piece, you could employ basically 16 million people over the course of a year. 16 million, interestingly, being the number of unemployed people at that point in time in the American economy. We could have directly hired every single one of them just to sit at home and watch TV and write reports or reviews of these shows or something like that, right? Created four times as many jobs, right? At exactly the same cost, right? But after all, we would all recognize that this is not a productive use of resources. We know that people will write reviews of TV shows for free, right? So we need to have this appearance of productivity, right? So whenever you look at these estimates, they say, oh yes, it's $200,000 per job, but that doesn't include the fact that we built up infrastructure, that kind of thing, right? A lot of that money, apparently, must have been going to build up infrastructure rather than actually creating jobs, right? You kind of feel like sometimes politicians may not be 100% honest when they're selling you these things, you know, our purpose is to create jobs and that's why 75% of the money is going to go toward building up infrastructure rather than creating jobs, okay? All right, so instead, it looks like a lot of this money, it's not used for creating jobs, used for building roads, building bridges, that kind of thing, right? So then if I kind of wanna draw some of this together, right? If we're going to have effective stimulus that a stimulus that actually produces something, whether it's a value or not, right? We will end up increasing employment as much as possible, right? In those areas where we already have capital just sitting there waiting, right? Being exactly those areas that are not particularly productive based on the bust that just happened, right? The lead baseball factories, right? So then, the cheapest way for us to create these jobs will be just to bring these malinvestments back online, use the capital that we've built up, right? In order to produce products that in the end we know that people actually don't want, right? So my central claim then, and then we'll kind of wrap up here, right? Is not, I wouldn't say that government stimulus is a problem because we can't create jobs, right? I think, I don't think that's quite true, right? Rather, the problem is that creating these jobs freezes resources into those unproductive uses. They were revealed as unproductive. And this in turn slows the true recovery that is getting the economy back onto a footing that reflects consumer preferences, right? To do that, we need to liquidate these investments, right? Abandon the ones that can't be used for other things. Those things that can be used for other things should be moved out of the lead baseball factory, moved into producing whatever else it may be, I don't know, ball bearings or what have you, right? So moving these resources out naturally means we can't use then government stimulus to stimulate those industries that have fallen, right? We need to stand away from that, okay? Well, that is all I have for you. I do have some time for questions, so I think we have maybe 15 minutes if anybody has questions you wanna talk about or we could just take a break, let's find two. Yes, sir? In terms of the criticism to the AUCD, you mentioned pooling the entrepreneurs to like tweak the question that I had. It was like, why do we think that we keep pooling and then it's over, it's over, it's over, it's like why not stay there and not draw up? Mm-hmm, right, yeah, that's a good question. And that is more or less the kind of challenge that Brian Clapplin would present, right? There are a few answers to that, right? One being, a lot of the time you're dealing with different entrepreneurs, right? Entrepreneurs don't live forever, right? So, you know, there are no entrepreneurs today that also live through the Great Depression, for example, or basically none. So you do have the fact that our human minds are bound by our own memories to some degree and remembering details. I would also suggest that this spectrum of entrepreneurs also would matter here and that as people become more experienced, they very well may see their own abilities increase or improve, not everybody, but at least some would and would therefore become more qualified to be entrepreneurs in the future. But still, when we make that expansion, we're pulling in people that are less qualified than those that would naturally be without that expansion. So, yeah. What would another answer to Clapplin be? You're not talking about all entrepreneurs, you're talking about entrepreneurs in different sectors that are being directed and related, and then even within the housing sector, you've got entrepreneurs who actually are being smart and recognizing where they're at, like if you've seen the big shortening get out in time, then everyone else gets out a little bit later. So, it's not like they're being fooled for all time, or eventually they realize it. Right. Yeah, I think that hits at the heart of kind of the problem with Clapplin's argument is that he kind of treats entrepreneurs as being just kind of this one type of person and they're all identical to each other. Right, yeah, he's ridden, you know, why I'm not an Austrian, right? But he shouldn't at least be aware of these things because he was kind of brought up by Austrians, right? But yeah, he seems to have totally missed the idea that there are different entrepreneurs of different quality, at least when he's making this particular argument. Yeah, so, I can't explain it. Yeah. Oh, certainly, yeah, it's certainly true. The point here being made is that if we have these bailouts, that kind of thing, it now creates a new incentive, right, for people to hop in on these. And you certainly worry about this, say, in areas like financial institutions where the bailout is something you can expect ahead of time, right? And okay, I've never been to Las Vegas, right? But if somebody told me they would cover all my losses while I was there, and that I could keep all the profits, I'd be much more likely to go, right? Right? Yeah, that's exactly the scenario we set up, when there's a reasonable expectation of bailouts if things go wrong. Yeah, that's a very good point. Yes, sir? If anybody wants to say that, reasons no. Yeah, yeah, that's true that one of the things that this monetary policy does is it creates kind of an additional source of uncertainty, right, okay? Are things going well for me because I have a good product that people value or they're going well because everything's going well? Here I think about, before I had that dollar and 19 cents in that account, my first got started investing, it was the kind of mid-90s or so, right? Just as the tech bubble was getting started. Part of the reason that I was willing to make very risky investments was that early on, my first investment, I remember it, air touch communications, which you probably do not remember, but air touch communications was a fairly early cell phone company, cell service, right? And I bought that stock, I believe I was in seventh or eighth grade at the time, within a year it had doubled, right? Yeah, okay, I think that spectrum of entrepreneurship, I was pretty sure where eighth grade me was, right, in that spectrum, which is another kind of error, I suppose, right? So what was actually going on at that time wasn't that I invested in something that was great, right? It was that basically everything in that sector was doing well, right? So it was very difficult to sort out, which was which, and that's certainly a problem that happens in this general boom, it can be difficult to tease out, right? Do people like my product, or do people just like every product at the moment, you know? Mm-hmm. It's a whole sector of silver, more or less, a few dollars, whole sectors. Right, I think typically, you watch whatever the previous boom was and things closely related to that, right? So when we look at, say, the tech boom and bust, certainly most of the suffering was in kind of the high tech sector, was where we saw the hugest effects. That's also who benefited the most from the boom, right? So in a sense, what we can see is that, you know, as the boom is going on, it's encouraging particular types of investments, what those are can vary from business cycle to business cycle. It could be something like, I think I mentioned this earlier today, when you look at the dot-coms, at the time that people were starting to invest in them, they weren't earning nothing. They were taking losses, typically, right? So this had in mind that it was going to be a very long-term investment, right? Eventually, these companies are going to grow to the point where they're profitable, right? So it has kind of this long-term character to it in terms of when it's gonna pay off, right? So that was something, it was an eligible candidate during a boom for people to invest in this. When things fell apart, there was exactly those investments that fell apart. More recently, housing was where a lot of the money went to. So when things fell apart, we saw the most concentrated effects then in construction, especially of, say, residential housing, being where the big effects were at most, but then also things related to that. So we saw, say, furniture stores had very serious trouble, right? The housing market goes down, people aren't buying new houses, they're also not having to furnish them, right? So things related to that. So we do see effects broader than that as well, but I think you do tend to see the biggest effects wherever the boom was. Right, yeah, commodities would be one case, possibly, as well. Right, yeah. So just to kind of share this conversation, one of the big points, just kind of in general terms, Austrian theory would suggest, right, that it's those early stages, which we could see, if you're going to look at GDP data, we could see in just investment, right? That I, the private side of I, would be one way we could see that versus consumption, which generally isn't affected quite so much. And it's certainly true over the course of the business cycle, investment is much more volatile than consumption is. Like even, as you mentioned, cases like the Great Depression, where we see a big drop in consumption, investment was even worse, so, yeah. That is a very good point. So regarding where the boom is focused, do you see that for, like, happenstance, is legislation targeted, or, like, what particularly made housing the area of the boom? Right. It can be a combination of things, right? Right, some of it may just be that, you know, this is something that happened to look promising, people got excited about it. I think the tech boom's mostly that way, right? Yeah, it looked exciting, it was a new thing. With housing, though, there is a pretty good set of legislation that would push us toward specifically mortgages, which then would fund housing. Around this time, you know, there are lots of things that people blame, and some of them can take more credit than others if we're gonna be fair. So one of the points people would make is, there's, I'll turn over the name of it, is the CRA, or the Community Reinvestment Act, right? It was one thing people would point to, right? It's not a new act. It's been around for a very long time. But right around the late 90s, there was an increase in a couple points of it. Some reforms were done to that act, right? One was that it increased the percentage of mortgages that had to qualify by CRA standards, right? So that'd be one thing, right? So the CRA just got bigger in its effect. The second thing was that previously, there really weren't very strong enforcement measures, right, it was almost just a guideline that weren't enormous fines attached to violating it. But those enforcement measures got stronger in the reforms, right? So banks both had a reason to do more CRA lending and also had more of a reason, right, to do that CRA lending, which would tend to amplify its effects. Now, at the same time, right? Those that would say, no, shouldn't say that story. That's probably not true. It would say that when you look at these CRA qualifying loans, they actually didn't do that badly. Like these weren't the ones that went belly up. Generally, they paid off better than an average mortgage at the time. But at the same time, we're talking about giving loans to people we would normally not think about giving loans to. This increases the demand for housing, right? So, okay, maybe they're not the ones that are causing the problem, but maybe if you go back a few steps, they're causing the problem, even if they didn't end up being the problem, right? Exactly, right? So if they're the ones fueling, say the early stages of the boom, and that gets people excited about housing, right? Okay, it's not necessarily their fault, right? The people came on later, they got excited. They're the ones making the error, right? But at the same time, without those provisions, is that where things would have been focused? Maybe not, right? Yeah, yeah. People also like to point to, say the way that, say the regulatory side of things handled say, CDOs and CDO squared and that kind of stuff. So what these are, mortgage-backed securities, right? So banks would take a bunch of mortgages, package them together, not unlike a mutual fund in a sense, right? And then break this up into securities that banks would hold, right? What this ended up doing was basically masking a lot of the risks that people were taking on, right? Because, you know, we all know if you diversify your investments, they're safer, right? Which I suppose means if you take a lot of subprime mortgages, right? You package them together, right? Peace this out. Oh, they're safer now, right? Which, if the primary concern was that one of these people lose their job and not pay their mortgage, then you're fine, right? But if the actual concern is that, say housing prices are going to collapse, right? That's gonna affect everybody, right? So it didn't take into account those risks, right? And one of the big reasons you would do this is that these mortgage-backed securities often got much more favorable ratings in terms of their safety, which meant banks didn't have to hold as much capital against them, right? So banks could give a lot more mortgages if they invested in this very roundabout way through securities, right? Yeah. And the government through the GSEs, like Danny and Freddie, they were guaranteeing a bunch of these and people were taking out insurance once. So it made it look even safer, but it's like they thought they were getting chocolate chip cookies, but they thought they didn't tell them to raise. Right, you know. Which as we know is the worst possible outcome. So, yeah. And then also, what happened by number of securities happened about a column over first. Then they really happened to have a lot of the housing prices. So people viewed it as, oh, okay, so we have this bus, but nothing happened to the housing so it's a safe investment, right? And it also caused a lot of money to stay in the housing. Yeah, yeah, it's true. If you look at housing prices, I think the previous dip, right? Before the most recent one, which a dip is not the right word for what we see up there. Yeah, the previous dip was, I believe in the early 90s, right? So right around this 2000, 2001 time, the stock market is crashing and dragged down specifically by the .coms mostly, right? Stocks don't look good, right? Bonds look terrible. These interest rates are as low as they've ever been until more recently, right? So what's a good investment? Just like you said, housing looks fairly safe, right? You know. And I don't even have to live in it. I can rent it out to somebody else, right? To get that income, okay? Anything else we'd like, yeah. So it's a real way to either have a cycle of who much of being in it again and have a lot of the entrepreneurs do get full, for one reason or another. Yes. Do you foresee, suppose we could create a system where a lot more entrepreneurs who are related to watching that account as long as we're aware of this. Do you see a system where we could get away from this? Or is this an alternative system? Is this something where, due to competition, you'll never get 150% of the entrepreneurs waiting at the other end of the set. So are we kind of stuck in this or could we get past it? That's a good question. That's a very good question. And it's one that I don't have a really good clear answer to, honestly. Cause it just kind of raises the question of how many entrepreneurs or what proportion of them have to be familiar with a theory for it to stop working, right? That I don't know. Cause it's certainly true there are some that are already aware, right? So we have people like Peter Schiff like to tell the story about how right around as we're getting close to the top of the housing bubble, he was looking for someplace to live and somebody tried to sell him a condo or something like that. And he knew it was totally crazy, right? He was aware of Austrian business cycle theory. He knew it was going to collapse at some point. Especially given that his mortgage payment would be astronomically higher than what renting was at that point in time. There's such a huge gap in the cost of those two things. There's no way it was sustainable in his mind. So how many Peter Schiff's do we need, right? To tame these things is kind of the question, right? Like, does it have to be 100% right? I don't know. I think that might be going a little bit too far. But as long as we're doing credit expansion, the money's going to go to somebody, right? It doesn't have to be a huge percentage making a mistake if they just have huge amounts of money to make it with. You're right, but if every single, I suppose every single entrepreneur was a Peter Schiff at that point and now they have to compete with each other. So would it be the case that the Austrian business cycle would start at the beginning or would it just be the case that you have to know Austrian architect amounts better than the next guy? Ah, that's a good question. I'm not going to answer that because I have the slightest idea, honestly, yeah. I'm not sure if knowledge of the theory would help now because while we think it lets us know what happens to us against time frame, so as one of the examples for why the bumpers get to do this kind of get in, try and beat the bubble. So while even all our bumpers know that there's a cycle going on, they'll know when they finally reach the people in the class who's going to start. So I don't think even if they all knew what was going on, there's still a bit of trying to beat the project just because it doesn't give the time frame. We can't predict exactly what is going to crash. Yeah, you'd almost think you were a student of Walter Block. Is Walter Block also, in addition to this bribery argument, makes exactly that type of argument, which for those that may not have heard it, basically says, even if I know Austrian business cycle theory and I know this thing is going to end, I might say, well, it's probably not going to end tomorrow. So okay, if I think I can write it for a year, I buy the house now, I sell a year later. And if we have variance in terms of what we think the length of time is going to be, then we could see are these errors arising even if we know Austrian business cycle theory. We don't know the precise timing. Even those that would like to predict the business cycle, so using skyscraper indices, that kind of thing, which I've written about this, somewhat sympathetic to it, even that we know it's not totally precise. Sometimes the skyscraper opens 12 months before the crash comes, sometimes it's exactly as the crash is happening, sometimes it's 12 months after the crash has started. But the timing isn't quite precise, and that is a point. Yeah. And going back to how many people would need to use all your property to use the cycle, if you imagine that everyone in the room is familiar with that, is that the one person? Well, the base are a plus or a half, it is a length over half, that's about one person. But even if there was a batch majority of people knowing it, still they just let in the person. Right, yeah, and this is something where I think a good point that I think back someday on the heavens may have made if I recall correctly, is that in financial markets we can count on people shorting to kind of keep things under control, but you can't do that with physical capital markets. I can't short physical capital, there's no good way to do this. So then this one person with all the money can bid up the price themselves. Well, it looks like our time is up. At this point I think we're going to panel, starting at three. I think upstairs is theory and method, down here is policy and history. Thanks.