A statement from Ron Paul

American · 09-25-08, 04:22 PM

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

donsutherland1 · 09-25-08, 06:18 PM

Congressman Paul states:

To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about...

I myself am doing everything I can to promote the correct point of view on the crisis...

While Congressman Paul is correct that a credit boom, Fannie Mae's/Freddie Mac's decisionmaking, etc., were among the factors responsible for the rise of the real estate bubble whose contraction precipitated the current financial crisis, he offers no alternative solutions to the rescue package.

If no rescue package is adopted, what specifically would Congressman Paul propose to do so as to avoid a financial system meltdown? It should be noted that the financial system came very close to melting down just before Secretary Paulson announced that the Treasury would pursue a rescue package.

One runs no risks in criticizing a package one cannot thwart. However, one assumes risks in devising and introducing specific alternative solutions.

MC.no.spin · 09-25-08, 06:44 PM

Quote:

Originally Posted by donsutherland1

Congressman Paul states:

To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about...

I myself am doing everything I can to promote the correct point of view on the crisis...

While Congressman Paul is correct that a credit boom, Fannie Mae's/Freddie Mac's decisionmaking, etc., were among the factors responsible for the rise of the real estate bubble whose contraction precipitated the current financial crisis, he offers no alternative solutions to the rescue package.

If no rescue package is adopted, what specifically would Congressman Paul propose to do so as to avoid a financial system meltdown? It should be noted that the financial system came very close to melting down just before Secretary Paulson announced that the Treasury would pursue a rescue package.

One runs no risks in criticizing a package one cannot thwart. However, one assumes risks in devising and introducing specific alternative solutions.

I haven't seen any proposed solution by him, but judging by his earlier platforms, I would say he probably thinks the free market should just be allowed to go through the business cycle, the Fed should be abolished, the gold standard should be returned to, Fannie and Freddie should be privatized, etc.

My translation would be that Dr. Paul is fully willing to have new "Hoovervilles" with hoardes of citizens having to live in tents, where breadlines were everywhere, where thousands of people applied for the same job, where little Federal help was given, and eventually rise up into some new age where government was run from a barebones administration, where the U.S.A. only policed its own borders and left alone the rest of the world, and where radical self-reliance was the dominating mantra of his supporters.

128shot · 09-25-08, 07:06 PM

Quote:

Originally Posted by MC.no.spin

I haven't seen any proposed solution by him, but judging by his earlier platforms, I would say he probably thinks the free market should just be allowed to go through the business cycle, the Fed should be abolished, the gold standard should be returned to, Fannie and Freddie should be privatized, etc.

My translation would be that Dr. Paul is fully willing to have new "Hoovervilles" with hoardes of citizens having to live in tents, where breadlines were everywhere, where thousands of people applied for the same job, where little Federal help was given, and eventually rise up into some new age where government was run from a barebones administration, where the U.S.A. only policed its own borders and left alone the rest of the world, and where radical self-reliance was the dominating mantra of his supporters.

it seems like there are a lot of misconceptions to be seen with all this.

I mean, first of all the state amplified the great depressions impact ten fold-not only that-the outcome was predictable.

Quote:

So far all was explicable and might easily have been predicted.
This particular stock market corrective was bound to be severe
because of the unprecedented amount of speculation which Wall
Street rules then permitted. In 1929 1,548,707 customers had
accounts with America’s 29 stock exchanges. In a population of 120
million, nearly 30 million families had an active association with
the market, and a million investors could be called speculators.
Moreover, of these nearly two-thirds, or 600,000, were trading on
margin; that is, on funds they either did not possess or could not
easily produce.
The danger of this growth in margin trading was compounded
by the mushrooming of investment trusts which marked the last
phase of the bull market. Traditionally, stocks were valued at about
ten times earnings. With high margin trading, earnings on shares,
only one or two percent, were far less than the eight to ten percent
interest on loans used to buy them. This meant that any profits
were in capital gains alone. Thus, Radio Corporation of America,
which had never paid a dividend at all, went from 85 to 410 points
in 1928. By 1929, some stocks were selling at 50 times earnings. A
market boom based entirely on capital gains is merely a form of
pyramid selling. By the end of 1928 the new investment trusts were
coming onto the market at the rate of one a day, and virtually all
were archetype inverted pyramids. They had “high leverage”—a
new term in 1929—through their own supposedly shrewd investments,
and secured phenomenal stock exchange growth on the
basis of a very small plinth of real growth. United Founders
Corporation, for instance, had been created by a bankruptcy with an investment of $500, and by 1929 its nominal resources, which
determined its share price, were listed as $686,165,000. Another
investment trust had a market value of over a billion dollars, but its
chief asset was an electric company which in 1921 had been worth
only $6 million. These crazy trusts, whose assets were almost
entirely dubious paper, gave the boom an additional superstructure
of pure speculation, and once the market broke, the “high leverage”
worked in reverse.
Hence, awakening from the pipe dream was bound to be painful,
and it is not surprising that by the end of the day on October 24,
eleven men well-known on Wall Street had committed suicide.
The immediate panic subsided on November 13, at which point
the index had fallen from 452 to 224. That was indeed a severe correction
but it has to be remembered that in December 1928 the
index had been 245, only 21 points higher. Business and stock
exchange downturns serve essential economic purposes. They have
to be sharp, but they need not be long because they are self-adjusting.
All they require on the part of the government, the business
community, and the public is patience. The 1920 recession had
adjusted itself within a year. There was no reason why the 1929
recession should have taken longer, for the American economy was
fundamentally sound. If the recession had been allowed to adjust
itself, as it would have done by the end of 1930 on any earlier analogy,
confidence would have returned and the world slump need
never have occurred.
Instead, the stock market became an engine of doom, carrying
to destruction the entire nation and, in its wake, the world. By
July 8, 1932, New York Times industrials had fallen from 224 at the
end of the initial panic to 58. U.S. Steel, the world’s biggest and
most efficient steel-maker, which had been 262 points before the
market broke in 1929, was now only 22. General Motors, already
one of the best-run and most successful manufacturing groups in
the world, had fallen from 73 to 8. These calamitous falls were
gradually reflected in the real economy. Industrial production,
which had been 114 in August 1929, was 54 by March 1933, a fall
of more than half, while manufactured durables fell by 77 percent,
nearly four-fifths. Business construction fell from $8.7 billion in
1929 to only $1.4 billion in 1933. It is a dismal story, and I do not feel that any historian has satisfactorily
explained it. Why so deep? Why so long? We do not
really know, to this day. But the writer who, in my judgment, has
come closest to providing a satisfactory analysis is Murray N.
Rothbard in America’s Great Depression. For half a century, the conventional,
orthodox explanation, provided by John Maynard
Keynes and his followers, was that capitalism was incapable of saving
itself, and that government did too little to rescue an intellectually
bankrupt market system from the consequences of its own
folly. This analysis seemed less and less convincing as the years
went by, especially as Keynesianism itself became discredited.
In the meantime, Rothbard had produced, in 1963, his own
explanation, which turned the conventional one on its head. The
severity of the Wall Street crash, he argued, was not due to the unrestrained
license of a freebooting capitalist system, but to government nsistence on keeping a boom going artificially by pumping in
inflationary credit. The slide in stocks continued, and the real
economy went into freefall, not because government interfered too
little, but because it interfered too much. Rothbard was the first to
make the point, in this context, that the spirit of the times in the
1920s, and still more so in the 1930s, was for government to plan,
to meddle, to order, and to exhort. It was a hangover from the First
World War, and President Hoover, who had risen to worldwide
prominence in the war by managing relief schemes, and had then
held high economic office throughout the twenties before moving
into the White House itself in 1929, was a born planner, meddler,
orderer, and exhorter.
Hoover’s was the only department of the U.S. federal government
which had expanded steadily in numbers and power during
the 1920s, and he had constantly urged Presidents Harding and
Coolidge to take a more active role in managing the economy.
Coolidge, a genuine minimalist in government, had complained:
“For six years that man has given me unsolicited advice—all of it
bad.” When Hoover finally took over the White House, he followed
his own advice, and made it an engine of interference, first
pumping more credit into an already overheated economy and,
then, when the bubble burst, doing everything in his power to
organize government rescue operations.
We now see, thanks to Rothbard’s insights, that the Hoover–
Roosevelt period was really a continuum, that most of the “innovations”
of the New Deal were in fact expansions or intensifications
of Hoover solutions, or pseudo-solutions, and that Franklin
Delano Roosevelt’s administration differed from Herbert Hoover’s
in only two important respects—it was infinitely more successful
in managing its public relations, and it spent rather more taxpayers’
money. And, in Rothbard’s argument, the net effect of the
Hoover–Roosevelt continuum of policy was to make the slump
more severe and to prolong it virtually to the end of the 1930s.
The Great Depression was a failure not of capitalism but of the
hyperactive state.

Here's the analysis

Intervention kills all.

donsutherland1 · 09-25-08, 08:38 PM

Quote:

Originally Posted by 128shot

Intervention kills all.

The question still stands: In the absence of a rescue package of some kind (with all its attendant trade-offs), what specific approach should be taken to prevent systemic failure of the nation's financial system?

Congressman Paul provided no alternative.

Onion Eater · 09-25-08, 08:44 PM

Quote:

Originally Posted by American

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

Did you hear about the Austrian economist who claims to have predicted nine of the last five recessions?

Seriously, Hayek's Triangle describes wealth being shuffled back and forth between the higher and lower stages of production - it doesn't say anything about a housing crises.

I intend to write a thorough rebuttal to Dr. Paul's statement but, for now, let me quote from my Axiomatic Economics by Victor Aguilar: Critique of Austrian Economics

"Skousen writes:

"'The very essence of the market economy is the specificity of capital goods. Suppose, for the sake of argument, that all capital goods were completely non-specific and totally versatile. This would mean that they could be transferred from one project to another at no cost. If this were the case, there would be no structure to the economy and therefore no lags, no structural unemployment of resources or labor – in short, no business cycle. Capital goods are specific in nature, although some are more specific in use than others. But the degree to which producer’s goods and machinery are nonspecific – that is, usable in more than one stage – is the degree to which the economy will be flexible in adjusting to monetary disequilibrium' (1990, p. 155).

"Those are strong words. It sounds as if we can refute all of Hayekian business cycle theory with one counter-example, the boom and bust of a non-specific capital good – for instance, the dot.com bubble. Websites are capital because they are not valued directly but only as a means for obtaining the products they advertise. The dot.coms are highly non-specific, facilitating the sale of products at every stage of production. Non-specificity is, in fact, the great virtue of the internet. Television and radio are only useful for consumers’ goods; yellow pages are only useful for local businesses; and trade magazines, the traditional forum for advertisers of producers’ goods, lack the convenience of surfing the net. When one can obtain anything on the internet that one desires, from machine tools to pornography, I defy Garrison to tell us in which of his five stages (mining, refining, manufacturing, distributing and retailing) the dot.coms belong.

"Rothbard is as emphatic as Skousen: 'What are the consequences [of a credit expansion]? The new money is loaned to businesses. (To the extent that the new money is loaned to consumers rather than businesses, the cycle effects do not occur.) These businesses, now able to acquire money at a lower rate of interest, enter the capital goods’ and originary factors’ market to bid resources away from the other firms' (1970, p. 855). An easy counter-example is cycle effects occurring when new money is loaned to consumers. In the 1990s, banks would make consumer loans up to 125% of the equity in people's houses. Today, foreclosures are skyrocketing and the streets are lined with 'We Buy Ugly Houses' billboards."

As I said in 2004, "An easy counter-example is cycle effects occurring when new money is loaned to consumers. In the 1990s, banks would make consumer loans up to 125% of the equity in people's houses." So no, Dr. Paul, the Austrians did NOT predict this one. My 2004 counter-example to your theory goes unanswered.

Quote:

Originally Posted by American

As always, artificially low interest rates distort the market.

I've said this many times, so I'll just paste in my reply to Dr. Paul:

Quote:

Originally Posted by Onion Eater

In my Critique of Austrian Economics, Axiomatic Economics by Victor Aguilar: Critique of Austrian Economics, I write:

“Credit limits are more important than interest rates and there are many people who cannot get credit at all. Interest rates only affect how much money is being transferred. They do not affect who gets it…

“Recently, Stiglitz and Greenwald have raised the same issue. ‘That some loans are not repaid is central… Thus, a central function of banks is to determine who is likely to default, and in doing so, banks determine the supply of loans.’ (2003, p. 3). This idea, that bank loans redistribute wealth from one class of people to another, is a fundamental departure from the classical view that banks merely divide the world into those who are willing to borrow at x% but not at x.1%, without regard to who those people are, their class or their importance to the government.”

Recent events have confirmed my belief that credit limits are more important than interest rates:

Alan Zibel writes, “Lenders [who must satisfy Fannie and Freddie] are demanding bank statements, big cash reserves and second appraisals before they approve a loan to refinance a home. Mortgage rates are hovering around 6.6%, about the same level as a year ago.”

Clearly, if mortgage rates are the same as a year ago but the housing market is so much different (and worse) than a year ago, then mortgage rates are not the best measure of the market. Credit limits are.

Martin Feldstein concurs, “The dysfunctional state of the credit market means that many individuals and businesses are unable to get credit. Lowering interest rates will not stimulate demand for those who cannot get credit.”

At the macro level, most economists agree that the Federal Reserve loaning money to investment banks and holding loan auctions to avoid shaming the recipients is far more important than the fact that they lowered the discount rate. Also, the repeal of the Glass-Steagall act in 1999 is widely seen as a precursor to the current credit crisis, yet it had no direct impact on interest rates.

You [MC.no.spin] write that the Fed was forced to help Fannie Mae and Freddie Mac. Maybe, maybe not; but let’s consider why you think the issue is important in the first place. It has no direct impact on interest rates. It just makes a source of loans, the Fed itself, available to Fannie and Freddie that they were previously denied access to. In other words, it changed the credit limits that Fannie and Freddie face, but not the rates that they must pay.

REFERENCES

Rothbard, Murray N. [1962] 1970. Man, Economy and State. Los Angeles, CA: Nash Publishing

Skousen, Mark. 1990. Structure of Production. New York. NY: New York University Press

Stiglitz and Greenwald. 2003. Towards a New Paradigm in Monetary Economics. Cambridge, England: Cambridge University Press

Ethereal · 09-25-08, 09:38 PM

Quote:

The question still stands: In the absence of a rescue package of some kind (with all its attendant trade-offs), what specific approach should be taken to prevent systemic failure of the nation's financial system?

First of all, I'm not sure how anyone can definitively claim a systemic meltdown will occur one way or the other. The same "experts" (Paulson, Bernanke) espousing this are the same "experts" who just six weeks ago after the Congressional Budget Office told taxpayers we may have to spend $25 billion dollars bailing out Fannie Mae and Freddie Mac assured us that beyond that all was well. Now we're looking at a bailout package in the hundreds of billions.

More importantly, these are the same people who not only failed to accurately predict or foresee this catastrophe but implemented the policies that are largely responsible for it, yet now all of a sudden we're suppose to afford them some kind of enlightened perspective on how to solve a problem they created? It's madness!

Quote:

Congressman Paul provided no alternative.

Congressman Paul's solution is simple. Allow the market to correct itself. Admittedly, there will be an acute economic downturn should we chose to pursue this but it will be short-lived and will ultimately result in long-term economic security. The other option is to dull yet prolong our suffering while putting our long-term economic security in jeopardy.

I think the best analogy one can give is this. Our economy is like a man with gangrene in his leg. We have two options: take the pain, severe the limb, and rid our system of the putrefying necrosis, or we can numb our senses with opiates and die a slow ignominious death. There is no panacea.

MC.no.spin · 09-25-08, 09:50 PM

Quote:

Originally Posted by Ethereal

Congressman Paul's solution is simple. Allow the market to correct itself. Admittedly, there will be an acute economic downturn should we chose to pursue this but it will be short-lived and will ultimately result in long-term economic security. The other option is to dull yet prolong our suffering while putting our long-term economic security in jeopardy.

I think the best analogy one can give is this. Our economy is like a man with gangrene in his leg. We have two options: take the pain, severe the limb, and rid our system of the putrefying necrosis, or we can numb our senses with opiates and die a slow ignominious death. There is no panacea.

Please provide evidence this will be short-lived.

Gladiator · 09-25-08, 10:05 PM

Quote:

Originally Posted by donsutherland1

The question still stands: In the absence of a rescue package of some kind (with all its attendant trade-offs), what specific approach should be taken to prevent systemic failure of the nation's financial system?

Congressman Paul provided no alternative.

Ron Paul clearly states the direction of the corrections needed to match economic realities.

First recognize that Fanie Mae and Freddie Mack are insolvent. The mortgage gurantees were under-priced for the risks that were being underwritten. The correction is a combination of reducing the risks assumed, and raising the prices to match the real level of defaults, or reducing the level of coverage available.

Second, the Interest rates have been artifically stimulated to below real market levels. People like good retirement income, and low interest house payments. The two are mutually exclusive. If you have artifically low interest house payments, then your retirement income is going to be low also, because interest earned on savings will have below market earnings. The market correction is to raise interest rates.

Third, House Values are over-inflated. Housing prices need to fall further, to reach actual market value. The artifically low interest rates, rigged by the Fed, Hud, etc., have caused an artifical increase in house/condo prices. The market correction is to let house prices drop further, to their real values.

Ron Paul points out that printing more paper money, is going to devalue the Dollar against world currencies.

The aim of Responsive US Congressional Action could be to gradualize the market corrections toward higher interest rates, lower house prices, and higher Loan Gurantee service fees.

In addition, the AIG failure indicates that insurance reserves are inadequate for closely timed natural disasters, like Catrina, Hannah and Ike, etc. So Insurance companies should reveal in additon to how low their prices are, how RELIABLE their reserves are overstretched and overleveraged.

The consumer should be given information to effectively shop for RELIABLE insurance, rather than relying on US Government bailouts.

False Government Figures on Unemployment and GDP

..

Ethereal · 09-25-08, 10:15 PM

Quote:

Please provide evidence this will be short-lived.

Please provide evidence the following will happen in the absence of a bailout...

Quote:

new "Hoovervilles" with hoardes of citizens having to live in tents, where breadlines were everywhere, where thousands of people applied for the same job

The point being all of this is speculation. Either you subscribe to Keynesian theory (orthodox) or Austrian theory (heterodox). I'm an Austrian. One thing that leads me to believe a laissez-faire approach will be more beneficial is the effect it had on the 1921 depression, which lasted only a year, whereas the Great Depression, which saw massive government intervention, lasted nearly a decade. I'll say it again, I'm certainly no expert, but I am a staunch proponent of Austrian economics so that's what I'm going to advocate.