 is the title of a pamphlet that was written by Murray Rothbard. And Murray Rothbard was one of the very most important Austrian economists, probably one of the most important American Austrian economists. And he penned this little history of what the U.S. government has done to our money over time, very slowly, as Mr. McCaffrey pointed out, over a period of a couple of hundred years. We went from a monetary system which was based on gold coins and silver coins and copper coins that were commodities of real tangible value to the point in time where nowadays our money is paper that represents nothing of tangible value. And it's actually a little worse than that because most of our money, particularly for the adults in the audience and on the web, most of your money isn't even paper. It's just electronic entries in the bank. And one of the things that's a little unsettling is that you put your money into the bank and you sort of maintain this impression that, well, my money is in that bank. There's some kind of very protective room with shelves and my name is right there and my stack of money sits there waiting for me to come and get it. No, it's not there. Banks nowadays are not storehouses of money. Banks hold money like Walmart holds money. Just a little bit of money in the drawers to make change for that vast amount of inventory that sits in Walmart ready for us to buy. So we've had this unbelievable transformation over 200 years and it's synthesized in that pamphlet by Rothbard. What has government done to our money? You can get an electronic copy from the web page and I think the pamphlet itself is available either here or online for a couple bucks. Okay, the topic of my lecture this morning is how money caused the housing bubble and other troubles. Okay, I'd like to begin by giving you a homework assignment. I'd like you to Google my name, which is Mark Thornton, T-H-O-R-N-T-O-N, and housing bubble and look at the list of things that come up. And what that's going to show you is that myself and the Austrian economist of the Austrian school knew that there was a housing bubble in existence early on, well before anybody else noticed. And so I have my articles where I talk about the housing bubble and I also have articles where I talk about other Austrian economists who were writing about the housing bubble before I was. And in the early days, 2003, 2004, when the housing bubble was in full swing and we would say, well it's a housing bubble, it's just not real and people would berate us. They would say, that's stupid, you never lose money in real estate. Housing prices only go up. How could there possibly be a housing bubble that might come undone? So we were kind of quiet about it in 2003 and 2004 because you can never be absolutely sure of these things as I'll explain when I tell you about the Austrian theory of the business cycle. So I wrote about it, the housing bubble in February of 2004. And in the first half of that year I had some experiences that made me think, well this housing bubble is not only real, but it's a much bigger problem. It's going to be a much bigger problem than the typical business cycle of ups and downs in the economy. In May of 2004, I got a call from my brother out in California. He had gotten a new job. He was a mortgage lender and I thought to myself, you know, that's the last thing in the world I think my brother could possibly do is to be put in charge of giving money to other people. You know, I just imagined someone appointing my brother to be the chairman of the Federal Reserve or something like that and he said, Mark, you know, this is really easy. I never imagined it was going to be this easy. People call me up who already have a mortgage and I refinance their mortgage so that their interest rate is lower, their payments are lower and I can give them 30, 40, $50,000 cash refinancing their house. He said, Mark, it's almost too good to be true and that set off a light with me that anytime somebody says it's almost too good to be true, it usually is. So that was on Saturday. I go into work, excuse me, on Sunday I went for this walk around my neighborhood and I noticed that a colleague of mine who had a rental house that someone was putting up a for sale sign in front of that house. Nice neighborhood, small house. And so Monday morning I go into the office and I said, hey, Dave, I noticed you put your rental house up for sale. He said, nope, it's already been sold. He said, two people called my real estate agents on Sunday afternoon in order to buy the place and they paid 19, the ultimate buyer paid $19,000 more than I listed it for. So that's the kind of thing that was going on and also what was going on, of course, was behind the scenes the Federal Reserve had started manipulating interest rates in the economy. It had brought interest rates down from a normal range of 5% for them to lend money to banks down to 1%. Okay, so that's a key feature in the Austrian theory of the business cycle is that the central bank or the Federal Reserve is going to manipulate interest rates in such a way as to reduce the rate it charges banks from a normal or market level based on supply and demand and so forth down to a very low, artificially low level. When the interest rates are low for banks, then the rate it charges its customers is also reduced. So the price of borrowing money is also reduced in the economy. So when the price of anything is reduced, what happens, of course, is that more of it will be transacted as a result. So if we brought the price of iPads down from $500 down to $100, this audience might currently have maybe a dozen iPads. Everybody might want to go out and buy one for $100, right? Why not? If you've got the money, the price is low, let's go out and do it. So what happened is a result of these lower interest rates in the Fed, mortgage rate interest rates also came down to historically low levels. This caused, in turn, more people to want to build homes and to want to buy homes. And as the process of buying started to take place, of course, the supply side of the market also changed. And you had more people going into the construction industry, more people going into the housing input supply businesses, going into business and expanding their operations. So housing prices are rising, housing starts are rising, the size and number of home construction companies is also beginning to rise. They're taking resources from other areas of the economy, such as manufacturing. And so what the Fed ends up doing, what seems to be nice, they seem to be giving us all a gift. Reducing the price so people can afford a mortgage, they can afford to buy their own house. The President of the United States, George Bush, was promoting all of this thinking that the dream of home ownership would not only put people in a place where they could live, but it could fulfill the American dream that they would become property owners and they would become better citizens as a result. Stock prices go up in the economy as a result as well. Unemployment comes down. So it seems as if the Fed is making everybody's dream come true. The economy starts booming and the money flows into housing so a bubble develops in our economy in favor of housing. And essentially what they're doing is they're distorting the whole structure of the economy. The structure of production and consumption has changed as a result. It's not just a little problem, it's a systemic problem in the economy. But it's a problem that cannot continue. Eventually as this boom continues on, as the bubble develops, there's inevitable changes in the economy that result. Here in Auburn, for example, in 2005, 2006, 2007, as the housing bubble is maturing or getting older, long in the tooth, so to speak, what started happening around us was that the whole structure of our little community was changing. Apartment buildings were being converted into condos. Other buildings were being torn down and turned into large condominium complexes. They were called luxury game day condominiums. In other words, the idea here was that people were going to come to Auburn and buy an expensive condominium so they would have a place to stay when they came to Auburn for the football games. And I thought to myself, well, isn't that odd that you would pay like a quarter of a million dollars in order to have a place to stay for six weekends or six days out of the year? That seems a little odd to me at the time. But apparently it didn't seem odd to the 12 developers who went into this business or to all their clients who bought these condominiums. And so several of those developments were in this local area and I would question these people. You know, as to the rationality of doing these kind of things. So, you know, wouldn't it be cheaper just to, I don't know, rent a Winnebago or get a hotel or something like that? You know, it's awful expensive and you've got this mortgage on this property and you've got to keep it up and you've got dues you have to pay. So you're paying, you know, like $169 maintenance fee on this condo. Every month of the year, that would seem to pay for a hotel room for the games at least. And you know what the answer I got back was? Well, if we get tired of it, we can always sell it for more later on. Well, it turns out they couldn't sell it for more later on. And anybody who bought one is either stuck with it and the mortgage or they lost a lot of money on it. And several of the developers went bankrupt. And thanks to all that folly, there are several hundred Auburn students who now are very thankful to be renting luxury game day condominiums. You know, with covered parking, swimming pools, workout rooms, balconies. But that's the kind of systemic restructuring that the Fed can engineer from Washington, D.C. a thousand miles away down to little old Auburn, Alabama. Now left to its own devices, the market economy restructures itself on a regular ongoing basis. An example of a natural restructuring of the economy. When I was a boy, I lived in a small town and we were surrounded by farms. And about half of those farms were dairy farms where there were dairy cattle. And the dairy farmers would let the cattle out and they would eat grass. And then they would come in and the cows would be milked into a tank. And then a little truck would come and take the milk out of the tank into the truck. The truck would drive into town to one of three dairy businesses. And the dairies would put the milk into cartons or make it into butter. Chocolate milk was my favorite. And then they would cool it down and then the next morning some guy would go through the neighborhoods before dawn and put the milk magically out by our back door. So that was a very direct process from the field you saw in the country into the business and then back to the back door. Nowadays, it's a much bigger structure of production. There are much bigger dairy farms and with much more equipment to milk the cattle with the cows. And the milk is put onto much bigger trucks and shipped far away and processed by large processors who then ship it not to your back door but to the supermarket. And then you go to the supermarket and get it. So that's a natural kind of evolutionary change which makes milk cheaper and more available to everybody, not engineered by the Fed. But the Fed can manufacture dramatic, radical, and wrong-headed changes in the economy. And one of those things was the housing bubble. Now, to the inevitability, why can't this just go on? Why can't we have our luxury game day condominiums? Well, the boom creates the changing conditions which inevitably have to show that the boom was a wrong thing. First of all, if everybody is trying to do a particular thing like build houses or if everybody is trying to make computer chips, then the cost of producing those things is going to go up. If everybody is trying to get the raw materials, the inputs, the specialized labor, the raw materials and so forth to make a particular thing like houses, then the costs are going to go up. So in the housing bubble, the cost of granite countertops went up because granite is hard to get. And if everybody's trying to install granite countertops in the kitchens of these new houses, the prices, the cost of producing those kind of houses rises. And also the cost of things in the economy are rising. As the boom proceeds, no matter what kind it is, then basic raw materials are going to become more expensive. So every time we get into a boom in the economy or a bubble, one of the things we inevitably see is oil prices rising. Oil is kind of a master input. We use it in everything. Driving, energy for the house, agriculture, manufacturing. It's just used for everything. And so whenever there's a boom in the economy, oil prices rise. Food prices rise. So everybody's budget takes a hit. We're paying more for gas. We're paying more for electricity. We're paying more for food. So all of the customers, all of us, have less money left over to buy whatever the bubble is about. And also in a bubble, as in the case with the housing, more and more people get into that industry. The number of contractors in Auburn, for example, quadrupled during the housing bubble. So there's many, many more competitors who can make that same product. So what happens in a bubble eventually is that the cost of production rise, that the number of customers out there falls, and the number of competitors rise. So this is the trifecta, the worst of all cases. If you're a company, you're an entrepreneur in the area of the bubble economy, your costs are rising, your customers are falling, and your competitors are rising. And that's essentially what happens. And what did happen in the housing bubble in almost all cycles of boom and bust in the economy. Now, the market started correcting for all that. What we saw as the housing bubble came undone was that people who granted mortgages, a lot of them went out of business. We saw financial companies restructuring, merging with other companies, trying to compensate for the lack of business, trying to compensate for the more intense competition. We saw unemployment go up. We saw all sorts of adjustments in the economy, which the market would typically make in order to correct for the problems caused by the Federal Reserve's bubbles. The source of the problem, mortgage financing, started to dry up. The oversupply conditions in construction started to decline. Housing started to fall. Unemployment in construction started to decline. Housing prices started to fall. All of the normal and natural reactions to a bubble and trying to correct for that started to take place in the market economy. And if we had left it alone, we wouldn't be talking about this. As a matter of fact, we wouldn't have the economic crisis. So as a matter of fact, you wouldn't have had to get up early this morning and drive to Auburn, Alabama, because no one would be interested in this stuff. But the fact of the matter is, is you high school students have lived your entire adult lives with a specter of an economic crisis looming over us. And it's not just here and now in the US, but it's Europe. Europe's currency and economy is in a recession and its currency is in doubt. Japan, once the mighty Japanese business empire, is teetering. Its economy is slipping. Its production levels are declining. China, which is supposed to be the great giant economic engine of the 21st century, also has massive economic problems and financial imbalances. The same is true for India, to a lesser degree. So what has happened is that instead of allowing the marketplace to unwind the problems with the housing bubble, the Federal Reserve went in and tried to maintain things as they were, to keep housing prices up, to keep wage rates up, to keep the government spending money however it wanted to, so that the government could spend $1.2 trillion deficits every year to try to reflate the economy, keep air going in so it wouldn't collapse. And so we have these problems today. Thank you very much.