The Latest from Ron Paul on the Bailout

I received this via e-mail a few minutes ago:

Dear Friends:

The financial meltdown the economists of the Austrian School predicted has arrived.

We are in this crisis because of an excess of artificially created credit at the hands of the Federal Reserve System. The solution being proposed? More artificial credit by the Federal Reserve. No liquidation of bad debt and malinvestment is to be allowed. By doing more of the same, we will only continue and intensify the distortions in our economy – all the capital misallocation, all the malinvestment – and prevent the market’s attempt to re-establish rational pricing of houses and other assets.

Last night the president addressed the nation about the financial crisis. There is no point in going through his remarks line by line, since I’d only be repeating what I’ve been saying over and over – not just for the past several days, but for years and even decades.

Still, at least a few observations are necessary.

The president assures us that his administration “is working with Congress to address the root cause behind much of the instability in our markets.” Care to take a guess at whether the Federal Reserve and its money creation spree were even mentioned?

We are told that “low interest rates” led to excessive borrowing, but we are not told how these low interest rates came about. They were a deliberate policy of the Federal Reserve. As always, artificially low interest rates distort the market. Entrepreneurs engage in malinvestments – investments that do not make sense in light of current resource availability, that occur in more temporally remote stages of the capital structure than the pattern of consumer demand can support, and that would not have been made at all if the interest rate had been permitted to tell the truth instead of being toyed with by the Fed.

Not a word about any of that, of course, because Americans might then discover how the great wise men in Washington caused this great debacle. Better to keep scapegoating the mortgage industry or “wildcat capitalism” (as if we actually have a pure free market!).

Speaking about Fannie Mae and Freddie Mac, the president said: “Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk.”

Doesn’t that prove the foolishness of chartering Fannie and Freddie in the first place? Doesn’t that suggest that maybe, just maybe, government may have contributed to this mess? And of course, by bailing out Fannie and Freddie, hasn’t the federal government shown that the “many” who “believed they were guaranteed by the federal government” were in fact correct?

Then come the scare tactics. If we don’t give dictatorial powers to the Treasury Secretary “the stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet.” Left unsaid, naturally, is that with the bailout and all the money and credit that must be produced out of thin air to fund it, the value of your retirement account will drop anyway, because the value of the dollar will suffer a precipitous decline. As for home prices, they are obviously much too high, and supply and demand cannot equilibrate if government insists on propping them up.

It’s the same destructive strategy that government tried during the Great Depression: prop up prices at all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year.

The president also tells us that Senators McCain and Obama will join him at the White House today in order to figure out how to get the bipartisan bailout passed. The two senators would do their country much more good if they stayed on the campaign trail debating who the bigger celebrity is, or whatever it is that occupies their attention these days.

F.A. Hayek won the Nobel Prize for showing how central banks’ manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day – and which are being proposed, just as destructively, in our own:

Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.

To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection – a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end… It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.

The only thing we learn from history, I am afraid, is that we do not learn from history.

The very people who have spent the past several years assuring us that the economy is fundamentally sound, and who themselves foolishly cheered the extension of all these novel kinds of mortgages, are the ones who now claim to be the experts who will restore prosperity! Just how spectacularly wrong, how utterly without a clue, does someone have to be before his expert status is called into question?

Oh, and did you notice that the bailout is now being called a “rescue plan”? I guess “bailout” wasn’t sitting too well with the American people.

The very people who with somber faces tell us of their deep concern for the spread of democracy around the world are the ones most insistent on forcing a bill through Congress that the American people overwhelmingly oppose. The very fact that some of you seem to think you’re supposed to have a voice in all this actually seems to annoy them.

I continue to urge you to contact your representatives and give them a piece of your mind. I myself am doing everything I can to promote the correct point of view on the crisis. Be sure also to educate yourselves on these subjects – the Campaign for Liberty blog is an excellent place to start. Read the posts, ask questions in the comment section, and learn.

H.G. Wells once said that civilization was in a race between education and catastrophe. Let us learn the truth and spread it as far and wide as our circumstances allow. For the truth is the greatest weapon we have.

In liberty,

Ron Paul

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11 Responses to “The Latest from Ron Paul on the Bailout”

  1. Timothy Peach Says:

    He did not send you that, you wrote it yourself.

    I mean, look at the signature. That’s the handwriting of a 6-year-old!

    Enough of this bombast! The time for wagers has arrived!

    I’ll bet you the gov’t uses less than $500bn buying this stuff up, and that in the final reckoning, they make at least $50bn in profit (above borrowing costs).

    The bet must be in the form of some physical object or service provided, not in stupid fiat money.

  2. Mark Grannis Says:

    The real “final reckoning” will be the much deeper depression we’re heading for. But I like your suggestion of a non-fiat-money bet enough to say you’re on for a single one-tenth-ounce American Eagle gold coin, reckoning as of September 30, 2009.

  3. Timothy Peach Says:

    I’ll take the bet, but it might be academic.

    Something amazing may be happening here. By the end of the weekend, you may be voting for McCain, and I may be voting for Obama.

    The way I see it, the Republicans are sabotaging a necessary and viable bailout plan for political gain. If McCain and Co. decide to play chicken with a market crash/depression because they know the American people don’t understand this issue and therefore don’t support it right now, I’m leaving the party. I’ve never seen something so diabolical.

  4. Brian Freeman Says:

    Paul’s comments seem to make sense, at least to this finance-knowledge-challenged lawyer. (Full disclosure: everything I know about economics I learned in Austrian school-style kindergarten, so the mere reference to the Austrian school by a sitting member of Congress gets big points from me.)

    Note: Some points were subsequently deducted for the reference in the penultimate paragraph to “the correct point of view on the crisis” Not to get on an epistomology tangent, but this sounds a bit overstated, at least as to things economic.

    I can’t contribute much more other than to suggest two resources that seem to make basic sense of this mess:

    * a May 2007 article that took a human-scale, ground-level look at then-mushrooming subprime collapse, http://online.wsj.com/article/SB118047548069017647.html

    * A website that I came across by the name of “The Mortgage Lender Implode-o-Meter,” http://ml-implode.com/, which is stuffed full of links to articles, blogs, etc. on the subject (but suggested mainly because the gallows-humor website name seemed apt for these times).

  5. David Fitzgerald Says:

    The trouble with Paul (and maybe, Grannis) is that you can’t unring the bell. It is undoubtedly true that they current crisis resulted from the free money circa 2001-2005 made available by the Fed. Its very simple really, if money were free (which it essentially was) it is human nature (and probably pretty smart since the lender is taking all the risk) to get a house with 1500 more square feet, a BMW instead of a Honda, a flat screen instead of a flat panel, Aruba instead of the Jersey Shore. One of the problems with Adam Smith’s disciples is that they forget that Enlightenment thinkers stopped reading their Augustine. They falsely assume that humans act rationally when anyone who has ever honestly engaged in the examen knows that this is not so, even for one minute.

    Now, unfortunately, we are dealing with the reverse problem. Money cannot be had at almost any price. Just as assets were wildly overpriced when money was free, they are now wildly underpriced. Fear has overtaken reason and everyone is running to cash.

    While it is no doubt true, as the House Republicans are arguing, that the market will, eventually, start to see reason and will start cleaning up the assets at market prices the damage that will be done in the interim will be severe. It will do no good to cure the disease if the patient dies from the side effects. While I agree that some sanity needs to return to the pricing of credit, and that this will require significant regulation in the next Congress, it is an essential role of government to try and get people to start making rational decisions as opposed to fearful ones. That was Franklin Roosevelt’s genius, whatever one thinks of the New Deal’s fits and starts.

    The Treasury may very well misprice the assets it buys. The taxpayer may very well have to do more to clean this up. We may have to trim our sails in terms of lifestyle for a decade and pay higher taxes and receive fewer services. However, the opposite may also happen and this could turn out, as Tim says, to be a pretty good deal for the Treasury.

    What is certain is that unless banks start lending to each other again the deflationary pressures on the economy will be so severe that paying too much tax in 2011 will be the least of our concerns. The Paulson plan, with slight modification, presents a plausible argument to make that happen. Its worth a shot.

  6. Timothy Peach Says:

    David totally hit the nail on the head. These are not times for being right on academic points. Paul’s contentions about blame are largely correct, and for the moment, pointless.

    We have a dying heroin addict on our hands. Some methadone is needed to prevent a fatal seizure. We’ll work on good behaviors later. Dead people are really hard to rehabilitate.

    (It’s not the best analogy because there are good arguments that heroin addiction is almost entirely psychological and that addicts fake all kinds of crap to get the methadone. Opiates, apparently, are the least physically addictive drugs. But you get the point.)

  7. Mark Grannis Says:

    But with the heroin addict, we know, even as we administer the methadone, that the patient needs to be done with the heroin. That’s what’s missing here: a discussion of why this happened and what policy changes we will make to keep it from happening again.

    If we need to spend $700 billion here, where will we find that money? Do we think the pain avoidance we’re buying here is more or less worthwhile than our war in Iraq? More or less worthwhile than making the Bush tax cuts permanent? More or less worthwhile than a federal Department of Education? More or less worthwhile than keeping troops in Germany? More or less worthwhile than the $50 billion we borrowed for AIDS relief in Africa? More or less worthwhile than a million different tax credits stuffed away in the Internal Revenue Code to reward campaign contributors? To govern is to choose, and purely by default we’re choosing to keep borrowing and spending money we don’t have as if there were no long-term cost. Well, guess what: There is a long-term cost, and it’s time to pay up. We can pay with a short-term deflation, or we can just take on more debt and make the problem worse for our kids. Is there any point at which we will stop leaving this sort of thing for our children? What kind of people are we? Have we, at long last, no sense of decency?

    This is where real leadership is needed from the two major presidential candidates, because they’re going to have to do most of the cleanup either way. So far I give Obama a D and McCain an F.

  8. Timothy Peach Says:

    Dude, listen to yourself.

    You’ve just teed up a 3 month conversation.

    We have until the Asian markets open in the middle of Monday night to get this done.

    Everyone agrees with you that there are huge issues to get to. What does it take to get the base point here through your thick skull?

    This is emergency surgery! You want to have a conference at Jackson Hole and invite professors, meanwhile, we’re a few credit line draws away from my company pushing ME through the Fed window as overnight collateral.

    That would get them about fifty bucks, but you take what you can get!

  9. Timothy Peach Says:

    I meant Sunday night.

  10. Michael F. Starshak Says:

    I am truely amazed that any taxpayer (excepting those executives on Wall Street perhaps) could and would support this bailout. Basic fundamental rules of investing teach that with every risk comes potential for reward, or failure. The higher the risk, the higher the potential reward or failure. Failure is a requisite for knowledge. What have we learned as a nation? Those engaged in this financial fiasco should be left to pay the price. Yes, we on Main Street will also pay a price, but with a bailout, we will pay it twice, and likely a significantly greater price later on. How can our nation possibly consider paying out $700 billion (it will end up in excess of a trillion ~ oh, by the ay did I mention the government has already spent $700 billion in bailouts, etc. already this year?). Basic economics teaches, and history proves, that the creation of fiat money and the extension of (infinite) credit are a receipe for financial disaster. It is amazing to think that our “representative government” will not listen to the will of the people, expressed quite clearly over the last week by contact with Washington DC. We the People, are opposed to this bailout.

  11. Timothy Peach Says:

    OK, we hear you.

    Let’s just sit here and see what happens.

    A few days from now, when the Dow is at 6500, the markets are shut down, credit is nonexistent, all the major banks are insolvent, your credit cards don’t work, the grocery stores shelves are emptying, anybody who didn’t bother to hit the ATM hard on Monday can’t buy anything, and your house is unsellable for the foreseeable future, how will you be feeling/

    Will you feel good about the “money” we saved? “Hey, we showed those Wall Street guys! Now we all get to enjoy life in the Middle Ages!”

    No one is disagreeing that we are suffering the consequences of Alan Greenspan’s stupidity. That guy was and is an idiot. No one is disagreeing that the gov’t, broadlyl defined, completely dropped the ball.

    That’s tomorrow grievance. Today’s issues is: do we want to cut off our nose to spite our face? Do you? Is destroying YOUR way of life worth it?

    This is the choice your Congress is making as I type this.


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