Marc Faber on the current crisis

He’s not drinking the Krugman kool-aid.  From the interview:

HRN: Is there a relationship between monetary expansion and the fact that the US economy depends so heavily on consumption?

Dr. Marc Faber: Basically, if you look at consumption as a percent of the economy and at housing activity, the excessive debt growth began essentially after LTCM and, I have to say, it was a huge mistake of the Treasury and Fed to bailout LTCM because it gave Market participants in the financial sector a signal that there is a Greenspan put, and later on a Bernanke put, with an even higher strike price and this resulted in excess leverage. So, if you have problems, the Federal Reserve will bail you out or the system will bail you out. That’s where I think the Federal Reserve acted irresponsibly—irresponsibly—that has to be said very clearly. They didn’t pay attention to credit growth. Every central banker in the world pays attention to credit growth, but not in the US.

HRN: What would you recommend that the Federal Reserve do differently?

Dr. Marc Faber: The first action Mr. Bernanke should take is to resign. If I had messed up the system so badly, as he has done, I would have to resign. He has talked constantly about the Great Depression and what caused the depression but the problem is that he really doesn’t understand what caused the depression, which was also excessive leverage at that time. I have to stress that in 1929 the debt to GDP ratio was of course minuscule in comparison what it is today. It was 186% of GDP but you didn’t have Social security, Medicare and Medicaid and unfunded liabilities for Social Security and so forth. So, debt today, as a percent of GDP, is 379% and if you add the unfunded liabilities we are at over 800%. The Federal Reserve should pay attention to that.

HRN: With debt levels and liabilities so high, what solution is there for the United States?

Dr. Marc Faber: The solution is, basically, for the government to move out and not intervene in the economy. There are economists who will dispute that the Federal Reserve is partially responsible for the crisis and there are economists that will still tell you that debt doesn’t matter, that deficits don’t matter and they want to continue to intervene in the free market constantly. To these economists I respond: What about Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB)? It was an intervention by the government into the housing market and into the mortgage market and the biggest bankruptcies—bigger than Citigroup (C) and all the banks—are Fannie Mae and Freddie Mac—government-sponsored enterprises. The same economists will tell you that the government has to intervene and to these economists I say: Well, you have made so many mistakes already with interventions do you think that in the future your interventions will improve anything? Einstein defined insanity as doing the same thing over and over and expecting different results, but these economists and the Federal Reserve think that by more interventions with fiscal measures and more money printing they will improve things. No, they won’t. They will make things worse.

HRN: It seems the US is moving towards more government intervention into the free market rather than less.

Dr. Marc Faber: Yes. That’s why I’m very negative about economic growth in the US. It just won’t happen. Can the US economy grow at 2% per annum or, in the best case scenario, at 3% per annum with current policies? Yes, but it will create a lot of distortions. The best case for an economy that goes into a boom phase, in other words over consumption, is to bring it back into the trend line as quickly as possible. So when you have an excursion into a boom, what you need is a cleansing of the system and that may take a few years to happen in the US because the excesses were built up not just in the last 7 years between 2000 and 2007 but, over the last 25 years. So, to really bring the US back into sanity—into a healthy mode where the economy can grow—might take 5 to 10 years, but it won’t happen under the Obama administration.

HRN: Given the poor prospects for US economic growth, do you foresee a flight of capital from the United States?

Dr. Marc Faber: You would be out of your mind, with health care reforms and with the government interventions and the uncertainty about future taxes in the US, to even consider expanding in the US and this is a problem. I mean people say that loan demand is down because banks are not lending, but maybe nobody wants to borrow any money in the US and nobody wants to expand in the US but they are expanding in China, India, Vietnam, Bangladesh, Africa and Brazil. The business world is an international place today, and if you run a corporation, whether you employee 50 people or 10,000, you can choose where you invest your money in terms of capital spending. Where do you want to expand factories? If I employed people in the US, I would rather think of reducing the 50 employees maybe to only 20.

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