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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, and 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
Director
Gold Anti-Trust
Action Committee
www.GATA.org
GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S.
Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe
at www.GATA.org. GATA is
grateful for financial contributions, which are federally tax-deductible in
the United States.
 
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