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US political experts discuss financial crisis -

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Nariman Behravesh who is the chief economist at Global Insight in Boston joins financial analyst
and author Peter Schiff to discuss the current financial crisis in the US.

TONY JONES, PRESENTER: Joining us now in Stamford, Connecticut is Peter Schiff, former advisor to
Republican presidential candidate Ron Paul, and also the author of Crash Proof, which predicted the
current financial crisis.

And in Boston is Nariman Behravesh, chief economist and executive vice president of the economic
and financial forecasting company Global Insight.

Thank you for joining us. I'll begin if I can with Peter Schiff. You've been a very passionate
opponent of this federal bailout. Are you thinking again after seeing the chaos it's been causing
in the markets?

PETER SCHIFF, FINANCIAL ANALYST AND AUTHOR: Not at all. In fact the market would have dropped if
the plan was passed. You know, the market opened up down 200, even though everybody thought they
would pass it. First of all this isn't a bailout. Our Government is broke. It can't afford to bail
out anybody. The way we have to raise the $US700 billion ($882 billion) to buy up these bad
mortgages, we have to go to the Chinese and the Japanese and borrow even more money, and drive our
over-indebted economy deeper into debt.

Or Ben Bernanke has to print up money and destroy the value of the dollar. $US700 billion, that
would have just been the tip of the iceberg; it would have cost are $2 or $3 trillion.

TONY JONES: Well Peter, the people entrusted with running the economy, that is Ben Bernanke as you
said, the Fed chairman, and Treasurery Secretary Hank Paulson, both believe there is no alternative
at the moment. What alternative do you think there is?

PETER SCHIFF: Well they've run the economy into the ground. We don't want bureaucrats and
politicians running our economy. That's how come we're in this mess. You had Alan Greenspan who
brought the interest rates down to 1 per cent and blew up this bubble. And you had two government
entities, Fannie and Freddie, that were guaranteeing all the mortgages, creating a moral hazard,
making it possible for people to buy homes they couldn't afford.

We need the free market to run the economy; we need to get risk back into this economy. The
Government is trying to make believe that nobody has to suffer losses; that it can come in with a
printing press make everything better. It can't. We need to restore balance. What's happening in
America is the deflation of our bubble economy. And we've got to stop borrowing money from the rest
of the world that we can't buy back to buy products we didn't make and we can't afford.

We need a serious recession, and that's what's going to purge the economy of these imbalances, and
we can restore a viable economy.

But it's not going to happen without a lot of pain; and all the politicians want to pretend they
can make the pain go away, and all they can do is make it worse.

TONY JONES: We had a prime minister and treasurer in this country who said of a recession back in
the early '90s, "This is a recession we had to have". Is this what you think of what America is now

PETER SCHIFF: Yes. Sure, it's the artificial boom; that was the disease. The recession is the cure.
The market is trying to cure the economy from the disease infected by the Government, by Alan
Greenspan and Ben Bernanke, and Hank Paulson; and the Government is trying to interfere with this

The risk that we run is in trying to avoid this crisis, we get a much bigger crisis because they
destroy the value of the dollar, there's a global run on the dollar and that's going to send US
interest rates into the stratosphere and consumer prices into the roof and we'll turn into
Argentina or maybe Zimbabwe.

TONY JONES: Nariman Behravesh, I think you probably have a more benign view of things, but let me
get you to respond to what sounds like an absolute disastrous scenario for the US economy.

NARIMAN BEHRAVESH, CHIEF ECONOMIST, GLOBAL INSIGHT: Let me put things in perspective. Every single
banking crisis we had in the last 30 years, whether it's here in the US in the '80s, or in Sweden,
Norway, Japan, what's needed to end that banking crisis is a system of buying up the bad assets,
holding on to them, and then actually selling them when the markets stabilised. That is a necessary
condition for ending a banking crisis. Now what has happened is by refusing to do this, I think
we're going to worsen this banking crisis.

Point number two: everyone focuses on the $US700 billion; that's a bogus number, it's a gross
number; it's not a net number. The Government will sell assets eventually, so the net cost is only
going to be about a $100 to $200 billion. So, its... everyone got caught up $US700 billion. That's
a nonsense number, it doesn't make sense, it's not meaningful.

And then finally, I would say in terms of the dollar and monetary stimulus and inflation, we've had
a huge amount of monetary stimulus in the US. Nothing has happened to core inflation, nothing's
happened to wage inflation, nothing's happened to the dollar. So this notion...

PETER SCHIFF: What are you talking about?

NARIMAN BEHRAVESH: That the dollar's going to collapse because the Fed is lowering interest... let
me finish... because we're going to lower interest rates, doesn't make any sense to me.

TONY JONES: Peter Schiff, you wanted to come in there, and then we'll go back to Nariman Behravesh.

PETER SCHIFF: Well I mean first of all, inflation is running at 10 per cent plus per annum. The
Government lies about inflation with the phoney numbers it puts out. And to say nothing happened to
the dollar; the dollars hit historic low, it's bounced a little recently, but that's just a dead
cat bounce. And you know, this nonsense that the Government will make money buying these mortgages
is sheer nonsense. It's going to go into the market and overpay dramatically for these assets, and
if it tried to buy them cheap enough to make money it would actually bankrupt all the institutions
it's trying to bail out.

And then if you read the language of the bailout, once the Government bought up these assets, it
was going to be required to renegotiate the mortgages to avoid foreclosure. They were going to
reduce the value of the assets, they were going to reduce the principal, extend the maturity, lower
the interest rates. This was going to be a fortune; they're going to lose more than $US700 billion,
because if this Bill was passed almost everybody with a mortgage was going to stop paying.

And it would have created a much bigger problem; you would have seen delinquencies go through the

TONY JONES: OK, let's here from Nariman Behravesh on that because a lot of us struggling to work
out how the bailout will work. George Bush, the President, seems to saying that in the long run the
American Government can make money buying up the indebted assets, or so-called assets. Are we
mostly then talking about houses?

NARIMAN BEHRAVESH: No. Well, we are in the end talking about houses, but it's the assets were
created around the subprime mortgages that financed the houses. Let me be clear on one thing, I am
not suggesting the US will make money; I know, that's an extreme statement.

I do think If you look at the history of the savings and loans crisis in the '80s, if you look at
the Swedish banking crisis, every single bailout like this Government buys the assets, it has the
luxury to hold on, unlike private investors.

It eventually sells them and recoups as much as 70 per cent of the original cost. Go look at
history; that's the case every single time. This is not just making statements out of the blue,
this is historical sort of precedent. And I think that's going to happen this time around...

PETER SCHIFF: Where are we going to get the money... first of all where are we going to get the
money to buy up the assets in the first place?

TONY JONES: Nariman Behravesh, I think that was for you.

NARIMAN BEHRAVESH: The US Government is not broke. Come on.

PETER SCHIFF: Sure it is. Of course it's broke.

NARIMAN BEHRAVESH: We've got a lot of debt, but we're not broke; we're not insolvent. I'm sorry;
we're not.



PETER SCHIFF: Well, we are just as solvent as a subprime market was a year or two ago. People were
foolish enough to buy these bonds because they trusted them. Pretty soon no-one's going to want to
buy US dollar-denominated debt. I mean it's a subprime currency; we're a subprime economy. And
you're going to see it collapse.


PETER SCHIFF: Just because Standard & Poor's rate US sovereign debt AAA doesn't mean anything; they
rated all these subprime mortgages AAA.

TONY JONES: OK Nariman Behravvesh, can I intervene there, I'm going to let you respond to that.

But the 'Wall Street Journal' says that foreign capital finances $US700 billion... the $US700
billion US trade deficit, the $US400 billion Federal Budget deficit and 70 per cent of all new
debt. Now if that were to dry up, let's take what Peter Schiff is saying, if that dry up what would
actually happen?

NARIMAN BEHRAVESH: Alright, 'if' it were to dry up, big if, then I agree interest rates will go up.
But look at what has been happening, foreign investors are pouring into the US; you've got Japanese
banks buying US, parts of US banks. You've got a lot of sovereign wealth funds are putting money in
the US. This is not bad news; this is a vote of confidence in the long run stability and prosperity
of the US economy.

PETER SCHIFF: It's not confidence, it's desperation.


PETER SCHIFF: And remember, we're not making productive use of any of the borrowed money. We're
spending it all on consumption, so we're not going to be able to pay it back. So, the world isn't
actually lending us money, they're giving it to us. And at some point they're going to tire of
that; they're going to come to their senses, and they're going to stop. To say that's its going on
in perpetuity is ridiculous.

TONY JONES: Well, Peter Schiff they may tire of it if they listen to you. But if they listen to
Nariman Behravesh, they may not. So tell us where do you see signs of health Nariman Behravesh,
where you see signs of good health in the American economy right now. Because a lot of us are
struggling to see that.

NARIMAN BEHRAVESH: Well, number one, a weak dollar is actually a good thing for the US economy. The
exporting industries in the US are doing incredibly well. Anybody who's focused on exports is
actually doing well. I go out and talk to a lot of industrial clients; they're not that worried
about what is going on.

They see the problems in Wall Street, but in terms of their day to day business, they actually
doing reasonably well. So from that perspective anybody focused on exports in the US is actually
doing OK. I am not saying they're doing great; they're doing OK.

PETER SCHIFF: A weak currency is never a good thing. Unfortunately it's going to be the result of
the fact that we squandered our wealth. We let our manufacturing base disintegrate to borrow from
the world to consume. So unfortunately we're going to have to deal with a lower dollar. The problem
is if we get these kinds of bailouts the dollars going to lose all of its value. It doesn't help an
economy when its currency is the debased; its citizens are poor, it devalues the purchasing power
of everybody's wages, of everybody's savings.

And when all the politicians are talking about protecting the taxpayers; it's not... we're not
going to lose as taxpayers. None of the politicians are talking about funding the bailouts through
higher taxes; they all want to fund it through inflation, and that's going to hit every American in
his pay cheque and his bank account...

TONY JONES: Alright Nariman Behravesh, let me go to you because if those arguments put by Peter
Schiff are seriously considered by the group of Republicans in Congress who voted against this
bailout, they may continue to vote against it. And particularly when you consider there's an
election coming up and their necks are on the line, politically. So what do you think is going to
happen; where do you think a deal is going to come from, and how quickly will it emerge?

NARIMAN BEHRAVESH: I think they'll do a deal. Because I don't think they don't want to face the
electorate and be told that, 'Look, you destroyed my pension plan, you destroyed my job prospects,
you destroyed the US economy.' They don't want to face that. They've made their point, they've got
the political cover if you will, they'll come back and do a deal. I have very little doubt about


PETER SCHIFF: Unfortunately I agree they'll do a deal. But it's not going to stop the stock market
from falling. It's certainly not going to stop home prices falling; they're all going to come down.
The economy is going to be in worse shape because of the deal. Sure, if we don't have a deal it's
going to be trouble. We're going to have a serious recession; banks are going to fail, companies
will go out of business, people are going to lose their jobs; that has to happen.

The Government can't stop that; the Government doesn't have any wealth. All they can do is change
the character of the losses and shuffle it around, and make sure that people didn't really any part
of the process suffer any losses. But there is no way out of this that involves more government and
more inflation.

TONY JONES: Peter Schiff, can I just interrupt you there, the US economy creates 25 per cent of
global production; it consumes 30 to 50 per cent of global consumption. So what happens to the rest
of the world, the rest of the global economy effectively, if America goes into a serious recession
as you are predicting?

PETER SCHIFF: Yeah, this is my thesis; I think certainly there'll be some people outside the United
States with a vested interest in the status quo that will be hurt. But overall the global economy
will actually boom. Once they no longer have to support the United States. See the problem is the
world has to produce a lot extra to supply us and they have to lend us a lot of money.

If America wasn't borrowing and consuming, that would free up resources and capital for everybody
else. And so you see, the rest of the world, particularly Asia where governments are suppressing
the value of their currencies, people go without things so that America's standard of living can be
artificially propped up. So I think the US is actually the caboose of the global economy, not the
engine. And if we decouple the caboose, the rest of the cars will move around the track faster.

TONY JONES: Nariman Behravesh, what do you think? What would it mean, for example, if America
enters serious recession. What do you think it would mean for the emerging economies, the big new
economies of China and India, that countries like Australia, commodity producers that we rely on so

NARIMAN BEHRAVESH: I think it's bad news in the sense that the US is too big; it's not a question
of how much we borrow, it's just that we're too big in the global economy. Nobody can avoid a
serious sort of recession, which we're headed for without this package, not with the package. So in
that sense Europe already is being hurt, and will be hurt.

TONY JONES: Gentlemen, can I hold you both there for a minute. Because while we've been talking,
President Bush has... President George W Bush has been addressing the American people on the
current crisis. Let's listen quickly to a little of what he's saying and get you to respond to it.

GEORGE W BUSH, US PRESIDENT: Unfortunately the measure was defeated by a narrow margin; I'm
disappointed by the outcome.

But I assure our citizens and citizens around the world that this is not the end of the legislative
process. We are facing a choice between action and the real prospect of economic hardship for
millions of Americans. And for the financial security of every American Congress must act.

My Administration will continue to work closely with leaders of both parties on Capitol Hill. I
appreciate their determined efforts. Congress is out today for the Jewish holiday. My
Administration will talk to congressional leaders about how we can move legislation forward when
members begin returning to the capital tomorrow. Our economy is depending on decisive action from
the Government. The sooner we address the problem, the sooner we can get back on the path of growth
and job creation.

That's what elected leaders owe the American people, and I'm confident we'll deliver.

TONY JONES: OK Nariman Behravesh, I don't know if you could hear that, I hope you could; the
President is saying the legislative process is not over. Not that a lot of people are listening to
the lame duck President right now, but that message at least must be getting through to the general
public by now?

NARIMAN BEHRAVESH: Well, I think there's going to be a lot of arm twisting in the next 24 to 48
hours; not just by President Bush, but by Hank Paulson, by the leadership in Congress, on both
sides of the aisle, because both Democrats and Republicans voted against this thing.

So I think there's going to be a lot of pressure put on these guys. As I said, they did the
symbolic no vote, they got the political cover, if they can tweak the bill a little just to say,
'Look, our no vote made a difference', then I think we'll get something in the next few days.

TONY JONES: Peter Schiff. You obviously think the same, because of what you said earlier. But you
think that's going to effectively destroy the American economy?

PETER SCHIFF: Yeah, it's just going to make it worse, we'll get more and more Government. What
happens is the Government affects the free markets, it creates a problem, and then they use it as
an excuse to get more even Government, and you get into a self-perpetuating spiral where the
government keeps worsening the problems it's trying to correct, meanwhile growing its power at the
expense of individual liberty.

Bush doesn't understand the economy; just a month ago he was ensuring everybody a month ago
fundamentals were sound; they're not sound. If they were sound we wouldn't be in this predicament.
Getting back to your other point. It doesn't matter if Americans stop consuming, the US dollar
collapses; other currencies are going to rise. Our purchasing power is going to be transferred
abroad. The world will not miss a beat. Just because America stopped consuming, all factories
around the world are producing goods, all the resources are being produced, all the savings are
going on; we don't have to consume.

Everybody else can do all that buying for us, it's no problem. We are hurting the world, we are
suppressing everybody else's standard of living so they can subsidise America. You remove the
subsidy and the rest of the world will be better off.

TONY JONES: Nariman Behravesh, whether you think the men economy should or shouldn't fail, foreign
capital is propping up your country now?

NARIMAN BEHRAVESH: Well, I think there's no debate about that. I am not going to debate the fact
that there's a lot of foreign capital coming into the US to finance the current account deficit.
But it's not a one-way street. The other way is goods going out of these countries to the US, or US
buying these goods. The Chinese are happy.

PETER SCHIFF: But we're not paying for those goods.

NARIMAN BEHRAVESH: The Europeans are happy... let me finish.

PETER SCHIFF: No, they are not.

NARIMAN BEHRAVESH: Why would they.

PETER SCHIFF: They're not; they are screaming.

NARIMAN BEHRAVESH: Why would they object?

PETER SCHIFF: Look at all the inflation we are supporting. They are giving us real stuff; we are
giving them pieces of paper.

TONY JONES: Let Nariman Behravesh finish his point.

PETER SCHIFF: Sure, we are we are the reason there's so much inflation.

NARIMAN BEHRAVESH: No, we are not.

PETER SCHIFF: Yes, we are. We are printing money to pay for the goods we import.

TONY JONES: Peter, just hang on, we need to let Nariman Behravesh make his point.

NARIMAN BEHRAVESH: How are we exporting inflation, our core inflation, wage inflation is 3 per
cent. How are we exporting inflation when do that to Saudi Arabia that has 12 per cent inflation.

PETER SCHIFF: Yes, here's why; let me explain it.

NARIMAN BEHRAVESH: No, let me finish.

PETER SCHIFF: What happens is..

NARIMAN BEHRAVESH: Let me finish. You are not letting me finish.

PETER SCHIFF: Let me answer you question. You're not letting me finish.

TONY JONES: Go ahead Nariman Behravesh.

NARIMAN BEHRAVESH: The reason Saudi Arabia and China have high inflation because they are pumping
credit into their economy.


NARIMAN BEHRAVESH: Their money supply growth rates are 20 to 30 per cent that has nothing to do
with us.

PETER SCHIFF: Yes, to prop up the dollar.

TONY JONES: Gentlemen, I'm sorry, I've got to interrupt up you both, because we are just about out
of satellite time, sorry.

NARIMAN BEHRAVESH: Let me answer the question it's important.

TONY JONES: Sorry to end on a disagreement, it reflects your congress. Thank you Peter Schiff...

PETER SCHIFF: Let me address this point. Can you let me address the one point.

TONY JONES: You can try, you have about 10 seconds to do it.

PETER SCHIFF: Alright, look, we export money to pay for the goods we buy. Foreign centre banks have
to print it to keep the dollar collapsing. We're the reason their money supplies are going through
the roof; they're printing money to prop up the dollar. That's how we export inflation all around
the world, we're the root cause of it.

TONY JONES: OK gentlemen we have to leave you there. I'm sorry, the satellite will go. Thank you
very much to both of you.