Does this mean the United States is effectively bankrupt?
There’s no doubt about it. Greenspan and Ben Bernanke have ensured the demise of the Federal Reserve. America has had three central banks. The first two disappeared and these two clowns have ensured the current one will also disappear. Bernanke tripled the balance sheet of the Federal Reserve in something like four months and filled it with garbage. The Federal Reserve used to have almost 100% government bonds; now it’s got who knows what percent of garbage. I wrote this in a book five years ago, expecting the Fed to disappear some time after 2010. I think it could happen much sooner now.
A year ago, the US government had debt of about US$5 trillion, which had been built up over the 200 years of the republic. Then, over a single weekend in September, Hank Paulson doubled that. He did this by assuming the debt for Fanny Mae and Freddie Mac, which had US$6 trillion of debt. Some of that debt perhaps has good assets behind it, but Fanny Mae and Freddie Mac also had untold trillions of off-balance-sheet derivatives. The government assumed those as well. In taking over AIG, the government assumed untold trillions of AIG’s off-balance-sheet derivatives obligations. The government tripled or quadrupled its debt in a few months.
What are the key challenges facing President Barack Obama?
Obama ran on a platform of taxing capital and protectionism, and won, at a time when the world knows that those two platforms are crazy. But he did it. Throughout history we know that the taxation of capital has been a disaster. It leaves a country with less capital and, if that’s done during a crisis, it makes capital flee. As for protectionism, that has never worked. Nobody has ever won a trade war in history. In 1930 America passed the Smoot–Hawley tariff, which promptly led to the Great Depression. Politicians have done dumb things throughout history. So far, Obama has shown a distinct lack of understanding of what is happening and certainly has continued his anti-capital approach.
Given Obama’s economic policies, are you worried about the future of America?
The hope is that he didn’t mean it, that it was just in the heat of campaigning. Or, even if he meant it, that somebody will pull him aside and say, “Look, Mr Obama, this would be a disaster.” And that he would listen. But who knows? Of course I’m worried. This is one of the reasons that markets kept falling in the build-up to November’s presidential election. Everybody knew Obama was going to win and everybody knew what his policies were.
What does the future hold for the City of London?
The game is up for the City of London. A lot of business, including a lot of derivatives business, some initial public offerings, and some underwriting, migrated there because of Sarbanes–Oxley and other things. But most of that business is now in chaos and has been devastated. The City of London has been particularly error-prone in the derivatives market. I cannot see the City of London making a quick revival.
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