Dr paul said it on 9-25-08
The Great Depression of 2008
Congresman Ron Paul wrote:
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, Congresman Ron Paul