[ExI] Fwd: My Answer to the President (from Ron Paul)

Lee Corbin lcorbin at rawbw.com
Fri Sep 26 15:02:33 UTC 2008

Samantha writes

> [Ron Paul wrote back to the President of the U.S.]

Just a We Told You So from the Austrian Economists.
But as always, the directness of the language, the
completely logical picture adduced, are wonderful
to read.

    Dear Friends:

    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.

Don't people at least here understand the basic mechanism
that Ron Paul is describing. Do you know what those words
mean? Suppose that I were able to create credit. Suddenly
Lee's IOUs were good all over town. Can't you see the 
inflationary effect? Can't you understand not only that harm
itself, but how it could encourage very unwise decisions from

Someone who yesterday could not afford a new swimming pool
---well, he could afford it literally, but would he'd have to go into
more expensive debt---now quickly grabs a lot of Lee's IOUs
at *low* interest rates. (Lee has decided that the economy
needed a stimulant.) Being one of the first to get the new IOUs,
before the inflationary effects get very far, the moment he walks
out of my house with his new wad of cash---which everyone must
accept by law---the value of everyone else's money goes down.

Naturally the extremely imprudent benefit. Those with massive
credit card debt, those with mortgages way over their heads.
All these people are *rewarded*---and then the country moans
and screams because they got into too much debt. Well, the
system *encourages* that, and discourages prudence.

(But then who uses that old-fashioned word anymore anyway?)

    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.

You do see the mechanism in place, right? It's not rocket science.

    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?

Um, Mr. Paul, uh, "no"?

    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.

And who keeps screaming for more stimulants?

    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,

I can learn from this. He's a more articulate economist than I am. I hope
others re-read that paragraph the way I'm going to.

    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.

Interest rates do describe the cost of money. When they're artificially
suppressed, much more malinvestment occurs. New expansions or
new businesses suddenly appear to make economic sense, (and they
indeed may with the cheap new money suddenly available).

    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!).

Yes. Let's just criticize human greed, and draft more laws to punish people
who try to create profit. More restrictions on business decisions not dictated,
(as they should be) by market conditions.

    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?

Humans respond to incentives. Why not take certain risks when it's fairly
likely that the government will bail you out? Oh, yes, the day of reckoning
will sometimes come, but not before tomorrow when I'll be able to find
"the greater fool" to unload my bad loans and unwise investing on.

    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.

Of course, the much maligned Warren G. Harding was president. Any reason
why he and his successor are *so* maligned? (And the disdain for his presidency
goes far beyond the scandal. He was a "do nothing" president, unlike Hoover
and FDR, and he let the economy heal by itself. Gee, if we'd only had the
Hoover/Roosevelt team in 1921, we could have had the Depression last
two decades instead of one!

    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

    Ron Paul

Nowadays, civilization is in a race between technological innovation and
other forms of wealth creation, and the socialization of the economy and
the draining of profits by government actions. Until a few days ago,
civilization had the upper hand, and was still gaining albeit much, much
more slowly than should have been the case.


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