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Housing Crisis Dead Ahead

Robert P. Murphy
Barron's Magazine
November 3, 2012

Author Peter Schiff has helped reassure me that I haven't been taking crazy pills. President and chief global strategist of broker-dealer Euro Pacific Capital, Schiff is also the man who argued face-to-face with the Occupy Wall Street protestors in Manhattan's Zuccotti Park, telling them -- in part, at least -- that they had a right to be angry.

Such perspectives help inform this wide-ranging and highly readable tome. For those who dismiss Schiff as an eccentric investor who "got lucky" with his now-famous prediction of the housing collapse, The Real Crash showcases a writer and analyst with a clear hold on sanity, who nonetheless has an unsettling message to convey.

"Whenever people credit me with calling the crash," he declares at the outset, "it pains me to tell them that what they saw in 2008 and 2009 wasn't the crash -- that was a tremor before the earthquake. The real crash is still coming."

Like many economists in the Austrian School -- associated with thinkers like Ludwig von Mises and Nobel laureate F.A. Hayek -- he author blames the housing bubble largely on the Federal Reserve. He acknowledges that government-sponsored agencies Fannie Mae and Freddie Mac and related interventions were contributing factors. But he thinks these alone can't explain the size of the bubble.

In response to the collapse of the dot-com stocks, then-Fed Chairman Alan Greenspan slashed interest rates and created the very liquidity that found its way into the housing sector. Things looked good for a while, but in retrospect we can see that the artificial boom simply postponed the inevitable and, in fact, made the crash that much worse. Ben Bernanke, who was Fed governor under Greenspan when this mischief occurred, has adopted the same strategy, and with even more gusto. Accordingly, Schiff believes we're in store for a crash that will make 2008 look rosy.

What is today's bubble, analogous to the dot-com and housing bubbles? In the author's view, America's economy is currently being propped up by twin bubbles in the U.S. dollar and Treasury securities.

Just as it is obvious to us now, with the benefit of hindsight, that housing prices were far too high in 2005 and 2006, Schiff argues that the dollar is overvalued, compared with many other currencies, and that nominal yields on Treasuries are far too low, given the price inflation that he views as inevitable. So long as foreigners treat the U.S. dollar as a valuable commodity in its own right, Americans can get away with endless trade and budget deficits. Yet that situation could unravel very quickly. In the author's words: "The day will come when the rest of the world stops trusting America's currency and our credit. Then we'll get the real crash."

Schiff's coverage of related topics is refreshingly nuanced. He doesn't simply (and rightly) bash New York Times columnist Paul Krugman; he also criticizes conservatives. For example, as he points out, conservative Republicans had wrongly championed many of the distortions in the housing sector as allegedly "pro-growth" and conducive to an "ownership society."

The author also clarifies his warnings on the U.S. trade deficit, tackling the conservative objection that he's somehow ignorant of the standard case for free trade. He shows that he understands what a "good" trade deficit would look like, but claims this isn't relevant to today's America. On another issue, he chastises alleged fiscal conservatives who seem to think that a huge military budget is consistent with small government.

Since Schiff's day job is in finance, he devotes an entire chapter to the gold standard. He uses a medical analogy: If a patient has symptoms in various body parts, the doctor wouldn't treat each part separately, but would instead look for a common cause. By the same token, he argues, when every sector of our economy is suffering, we should suspect that our faulty fiat money is to blame.

Besides recommendations for reducing government, the author also gives advice on personal investing in this dismal environment. "The key to building a diversified stock portfolio," he writes, "centers around four components: countries, currencies, sectors, and individual stocks (in that order)." Given his pessimistic views, he naturally rules out the United States as one of those countries. He likes places such as Australia, Singapore, Hong Kong, and New Zealand, and explains why.

Fans of Peter Schiff will love this book. Even his harshest critics should be aware of its perspective. Former denizens of Zuccotti Park should read it out loud at their next reunion.