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SCHIFF & MALONEY: THIS is How the ECONOMY WILL CRASH [transcript]

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Mike: I saw you had your picture taken with him [Bernanke] right?

Peter: Yes, we were at a cocktail party following the event and I thought people would get the irony of the juxtaposition between the two of us kind of having a glass to drink.

Mike: I think that he and Greenspan have absolutely destroyed America. People don’t realize what is coming from the stored up energy from the manipulations that they did.


 And there’s a big plunge that’s happening right now. That suggests to me if people aren’t ordering new goods it feels like this [crash] could be this summer maybe..

Peter: And speaking of him, this was really the first chance I had to have a conversation with Ben Bernanke. Speaking of him, I really got the sense that he has no idea of the Fed’s culpability in the housing bubble or the ensuing financial crisis, he really doesn’t know. And he denies that the Fed had anything to do with that, that maybe it was pure happenstance or coincidence that we had a housing bubble and these very low interest rates. 

And because Ben Bernanke still doesn’t get the connection between the Fed’s mistakes of the past and the last crisis,
 he certainly doesn’t understand the coming crisis, 
which is going to be far worse,
 because the mistakes the Federal Reserve made 
in the aftermath of that crisis are far worse
and far bigger than the ones that caused it.

Mike: Right. Ben Bernanke’s overreaction was far bigger than Greeenspan’s reaction to the NASDAQ crash.

Peter: And as a result the crisis in our future unfortunately is going to be far larger than the one that we just experienced.

Mike: You predicted that we were in a real estate bubble. I predicted that we were in a real estate bubble.

Peter: Ben Bernanke denied that there was a real estate bubble. Even after it burst, he still couldn’t figure it out.

Mike: And what amazes me is people like Bernanke are taken seriously still and the people that did predict it are dismissed as lunatics half the time. It really burns me up.But this is manufacturing new orders for consumer goods and this is from the Fed’s website and you can see this big plunge that it took in 2008.

The Fed is going to have to do another round of quantitative easing, that they’re not going to raise rates and that’s going to be a shocker

It’s going to send shock waves throughout the currency markets and the bond markets because everybody expects the Fed to raise rates.

I think the dollar collapses.

 A dollar crash is going to be much more damaging to the US economy and to the standard of living of the typical American than what a stock market crash or a real estate crash or banking crisis.

Peter: But more importantly, the reason that he’s been able to look like he’s succeeded is because of the illusion that it’s all temporary. Everybody believes that the Fed can normalize rates, shrink their balance sheet but when they realize that they can’t do that, that they’ve been lied to then this is going to be a major event for the currency markets or the financial markets when people come to terms with the predictament that we’re in. That it’s QE infinity, that rates have to stay at zero in perpetuity. Because the debt is now so enormous that even the slightest increase in interest rates would collapse the system because there is just so much debt.

Mike: I agree. I don’t think that they can raise interest rates. The next thing here is rejection of credit applications. And I wasn’t following this chart before. I just saw it in somebody’s newsletter. I think this is zero hedge maybe, but this is the crisis of ’08 and look at what happened in March for credit application rejections. So there’s something happening in the economy.

Peter: One of it is the big transformation from full time employment to part time jobs.Everybody points to all the jobs that are being created and the low unemployment rate but the problem is that the unemployment rate dropped not because people found jobs but because a) they stopped looking or b) they settled for a part time job. So when people who used to have full time jobs now have part time jobs they don’t have the income to get the credit that they need.

Peter: As if the government didn’t learn their lesson from the housing bubble, they decided to create an auto bubble because when the governments.. when GM and Chrysler went bankrupt the government also acquired their financing divisions and they still own them. So the government after they bailed out these companies they certainly didn’t want them to fail again. 

They wanted to make it look like the ballot was a good idea. So they wanted to revive their profits by making it possible for just about anyone to buy a car. And so many people have been able to buy cars with zero down and they’ve been stretching out their payments so that now people are getting six and seven year auto loans.

Mike: Right, the seven year auto loan. The car only lasts maybe that long. So you have no equity ever.

Peter: Well the warranty only lasts for four years. Four or five years tops. And when these cars come out of warranty, try to have it repaired. We don’t have a lot of repair places anymore. It costs a fortune, and of course the value of the cars are plunging. 

Mike: Home mortgages, they’re going longer now than 30 years. There’s longer home mortgages being offered too, trying to keep that bubble inflated.

Peter: Well, of course they’re offering 3.5% down payments now too with government guarantees which was part of the problem because 3.5% is not enough down to actually have skin in the game. It costs you more than that just to sell a house. So if you buy a house with 3.5% down, the minute your mortgage closes you’re already under water. 

But now the problem is you’re giving the homeowner a free gamble on the real estate market. Because if real estate prices go up, he can keep the profits, refinance. If prices go down, he could just walk away but better than that he can just stop making his payments altogether and live rent free for three years before they can kick you out.

That’s really what they set up. I think a lot of the recent home buyers that did put 3.5% down are going to do just that. They’re just going to stop making their payments when they realize that they’re underwater especially when a lot of their repair bills come in. 

Because a lot of people were lulled into buying homes they couldn’t afford, once they see that it’s just not the mortgage but you also have maintenance and property taxes and some of these people might lose their jobs in this next recession so they no longer even have the income to service. 

And a lot of these people have adjustable mortgages. Imagine the people that are not even taking out 30 year fixed.

Mike: With rates this low they are still buying an adjustable rate of mortgage.

Peter: Because they couldn’t afford the fixed rate. That’s how stretched they are. You know the real solution to the housing market problem is to let real estate prices come down so that homes are affordable, but the government doesn’t want to do that because it will bankrupt all the banks that loaned on them so what their answer is to keep prices inflated and just make credit available by keeping interest rates low and keep throwing the lending standards out the window so that people can buy houses that they cant afford.

The real solution to the housing market problem is to let real estate prices come down so that homes are affordable, 
but the government doesn’t want to do that because it will bankrupt all the banks that loaned on them 

Peter: Remember, the air is coming out of the bubble because the Fed halted or paused it’s quantitative easing program. Most people think they ended it but I think it’s just a pause because now everybody expects the Fed to raise interest rates because they think the recovery finally has enough traction that it no longer needs the emergency life support of 0%.

Yet your chart is showing and a lot of other economic indicators are showing that the economy is already rolled over and is rapidly headed back to recession even though the Fed hasn’t raised them yet. All they’ve done is talk about raising them in the future and we’re already rolling back into recession.

So I believe that the Fed is going to have to do another round of quantitative easing, that they’re not going to raise rates and that’s going to be a shocker. It’s going to send shock waves throughout the currency markets and the bond markets because everybody expects the Fed to raise rates…

… and when they don’t do it because the economy is too fragile because it’s just a bubble, not a legitimate recovery,  then people are now going to have to second guess their idea that what the Fed worked instead of calling Ben Bernanke a hero a lot more people are going to say, wait a minute he wasn’t a hero what he did wasn’t heroic. 

He took the coward’s way out because all he did was exacerbate the problems to postpone the day of reckoning.

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Mike: Yes the derivatives are bigger instead of smaller. Everything that was put in place to create that bubble that then popped. The two big [inaudible 00:05:36] banks are all bigger. Nothing has been addressed right?
 

Those banks are now bigger than ever and if it was going to be a problem to let them fail in 2008 it’s going to be much bigger problem to let them fail in 2016.

Peter: No.  So the government has to do whatever it can unfortunately to keep the bubble from popping and I think the air is already coming out even without a rate hike but…

Now they’re saying “we can’t raise rates until unemployment improves.” Well it’s supposedly been improving. 

The unemployment rate is 5.5%. They initially said they would raise rates if it got to 6.5%. But the bottom line is that it doesn’t matter where the unemployment rate goes, 
doesn’t matter how high the inflation rate goes -
 they can never raise rates without precipitating a 
worse financial crisis than 
the one we had in ’08.

Mike: So you and I just absolutely agree that this entire recovery has been engineered through the creation of currency. Now if Keynesian economics was remotely plausible, if it worked would they have made it a QE2 or a QE3?

Peter: Well no, it would have worked the first time.

Mike: Right.

Peter: The reason they’ve done it three times is because it fails every time which is why they’re going to do a fourth. Quantitative easing is like trying to put out a fire with gasoline. You can’t put the fire out, you just make the fire bigger. The problem is when all you have is gasoline that’s all you can do. 

The Keynesians don’t understand that their own remedy is the reason the patient is so sick and they just want to keep on administering it. But I don’t think we’ve had recovery. We haven’t recovered from anything. We’re sicker than ever. The average American knows that. The man on the street can feel his standard of living declining despite what the Federal Reserve. The cost of living is going up, the quality of jobs is going down, all the Fed is doing with its monetary policy is redirecting our resources from productive uses on main street to speculation on Wall Street. 

They’re propping up the stock market, they’re propping up housing, they’re diverting loans to things like education, they’re propping up health care but the real economy is disintegrating and Americans can feel that.

If we actually had a real recovery we wouldn’t be talking about all the jobless recovery. The reason it’s jobless is because it’s not a recovery. If it was a recovery there would be good jobs and the jobs that are being created..you know I think the most interesting thing is …

 
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Source: Excerpts from ZeroHedge
 

 
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