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Congressman Ron Paul’s answer to President Bush’s $700 Billion bailout
(Sep 26, 2008)
The financial meltdown the economists of the Austrian School predicted has
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.
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
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
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:
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
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.
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