Ed Steer: Larry Lindsey lays it on the line - on banks and CRAZINESS
By Ed Steer
for Casey Research
Friday, October 26, 2007
One of the speakers I was particularly interested in hearing at the New Orleans Investment Conference this year was Larry (Lawrence) Lindsey, the former economic adviser to President George Bush in the early years of his first term in office.
The reason that I dragged myself out of bed at 7:15 in the morning to hear him (a tough thing to do when you're whooping it up almost every night) had to do with an event that occurred in the second year of GATA's existence. The brighter lights at GATA had figured out that there was a serious problem in the gold market and that the bullion banks were not only short massive amounts of the physical metal but also had a stack of derivatives written against gold as well.
Bill Murphy, GATA's chairman, approached a lifelong friend of Dubya's and was able to send an executive summary of these concerns directly to the president via his private fax at the White House. Bush had been president for only a few months and there was concern that this problem, which had started under Clinton, would blow up on the Bush watch.
Murphy received a reply the same day, but it came from Larry Lindsey rather than Bush. Lindsey acknowledged receipt of the fax but wrote that he wasn't prepared to comment because GATA consultant Reg Howe had filed suit against the Bank for International Settlements, the Federal Reserve, and the US Treasury Department, plus a host of bullion banks, for rigging the gold market; and the case was still in the courts.
Can't comment because it's before the courts? Lindsey was a public servant, and there's nothing in law that precludes government officials from commenting on matters in litigation.
Anyway, we soon discovered that President Bush and his cronies weren't going to do a thing about it. The fact of the matter was that the Bush administration was just as involved as the Clinton administration.
Anyway, that's where it sat until I got to New Orleans.
When he started his speech, Lindsey asked whether the cameras mounted in the speaker's hall were TV cameras. Once he was assured that they weren't, away he went. I made notes but I'm going to do some paraphrasing here and touch only the high points.
The first thing Lindsey said was that he was a card-carrying member of "the Brotherhood of International Central Bankers," and once a member, always a member ... all for one, and one for all.
He commented that the Fed had turned the humble American home from a place to live into a financial asset that had become a cash cow for homeowners who were using it like an ATM machine. Now we've all heard that before, but coming from him, it was candor I wasn't expecting. He went on to say that once the Fed people noticed how bad the quality of loans was becoming, they were reluctant "to tinker with a boom," so they sat on their hands.
Lindsey's charts went into the collateralized debt obligation problem, the asset-backed commercial paper, mortgage-backed securities .. the lot. He said that it will "force banks et al. to mark these products to market (over time) instead of their current practice of marking to model ... or to myth." He wasn't the least bit worried about how the hedge funds would manage because, as he said, they were very good at looking after themselves.
He appeared delighted that Wall Street had been able to unload hundreds of billions of dollars' worth of (now toxic) CDOs on the rest of the world, saying that "we Americans were very clever" in doing this.
He showed graphs of the real estate market including the number of months of supply and said that now that the real estate credit cycle had ended, few would be able to refinance mortgages that had had teaser rates, and that housing prices were going to go into a steep decline.
In answer to a question from the audience about the obviously bogus Consumer Price Index numbers, Lindsey said that it was a government statistic and that, speaking as a businessman himself, anyone in business should definitely not rely on it.
His comments on interest rates were to the effect that by mid-2008, the Fed Funds rate would be 3.5 percent.
There was much more to the speech than this, but it was all along the same lines of "yep, we created this economic, financial, and monetary monster, here's the road map of how we did it, and the results. Now it's up to the citizens of the United States and the rest of the world's financial community to live with the consequences."
His comments were eerily similar to those made back in the early 1970s by then-Treasury Secretary John Connolly when he said (to European central bankers, I believe), "It may be our currency but it's your problem." Going further back in time, Marie Antoinette said, shortly before being relieved of her head, "Let them eat cake."
And you were wondering why the Treasury International Capital numbers were so bad in August? Wonder no longer.
As soon as the speech was over I hurried out into the hall to catch Lindsey before he took off. I managed to get a couple of minutes alone with him, picking up a few more items of interest.
First I asked him how he felt about being removed from his advisory position with Bush after having the audacity to predict that the war in Iraq would cost the United States at least $200 billion. This week, of course, we heard that the new estimates have it that the war will cost $2.4 trillion.
Lindsey shoved right past the question and said that it was a war that the United States must win because the security of the country and the world depended on it. He pointed out that Franklin Roosevelt had spent 150 percent of U.S. GDP on World War II. I jumped in rather bravely and asked,
"Does that mean that the U.S. is prepared to spend $15 trillion on this war?"Lindsey thought about it for two seconds and said that
150 percent of GDP was more like $22 trillion, and if that was what was required, so be it.
At that moment I felt like Alice in Wonderland shortly after she had taken the red pill. I was incredulous.
Going further down the rabbit hole, I forayed into the gold world. I worded my next question in such a way that Lindsey couldn't answer it with a simple yes or no. I mentioned his comments in the speech about CPI and told him that it was obvious that the inflation genie was out of the bottle, as commodity prices were on the rise and gold was up to $750. I asked him how long he thought the Fed and the Treasury Department were going to hold the gold price down. He answered along the line of
"Neither the U.S. Treasury or the Fed is doing anything to influence the gold price. It's all coming from the European central banks."He volunteered that he was, in fact, a "gold bull" because of all that was happening in the world. He repeated that he was a "gold bull."
By then a crowd had gathered around us, and others were asking questions. The first question was about a dollar devaluation, either planned (Plaza Accord-style) or unplanned, and how that would affect the United States. Lindsey's answer was that it was foreign holders of dollar assets who would be hurt the most, not the United States. When pressed on this particular point, Lindsey said that,
"no, a 20-30 percent drop in the value of the dollar would have minimal impact within the U.S."
By this time, Lindsey was starting to look like the Mad Hatter, so I knew it was time to go. I took the blue pill and crawled out of the rabbit hole.
I wish you had been there. Lindsey's speech and answers to my questions and those of others were off the charts. But he was a great speaker and a really charming guy ... the 21st-century's equivalent of a salesman selling snake oil from the back of a covered wagon.
In celebration, I bought some more physical gold. Then I put a deposit on the (slightly used) WWII surplus twin 50-calibre machine gun that the Mogambo Guru had put up for sale.
See you in the trenches, and bring your crash helmet with you.
---Ed Steer is a regular contributor to Casey Research and a member of the Board of Directors of the Gold Anti-Trust Action Committee Inc.