Today I am posting what I received in a newsletter from www.dailyreckoning.com
I have just copied it from the original letter and pasted here. To remind you, this is from Dr. Ron Paul, one of the only remaining sane persons in US of A.
THE AUSTRIAN SCHOOL AND THE MELTDOWN
by Dr. Ron Paul
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.
[On September 25] 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
The only thing we learn from history, I am afraid, is that we do not learn
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
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.
for The Daily Reckoning
Editor’s Note: Congressman Ron Paul of Texas enjoys a national reputation
as the premier advocate for liberty in politics today. Dr. Paul is the
leading spokesman in Washington for limited constitutional government, low
taxes, free markets, and a return to sound monetary policies based on
Dr. Paul is known among both his colleagues in Congress and his
constituents for his consistent voting record in the House of
Representatives. He never votes for legislation unless the proposed
measure is expressly authorized by the Constitution. In the words of
former Treasury Secretary William Simon, Dr. Paul is the “one exception to
the Gang of 535” on Capitol Hill.
To learn more about Dr. Paul, see here:
Congressman Ron Paul