Dave in Houston

--- On Thu, 9/25/08, Congresman Ron Paul
wrote:

From: Congresman Ron Paul
Subject: My Answer to the President
Date: Thursday, September 25, 2008, 2:52 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