Ron Paul: "Blame The Fed For The Financial Crisis"

Tyler Durden's picture

An OpEd from the only sane person in Washington, written for the Wall Street Journal

Blame the Fed for the Financial Crisis

The Fed fails to grasp that an interest rate is a price, the price of time. Attempting to manipulate that price is as destructive as any other government price control

To know what is wrong with the Federal Reserve, one must first understand the nature of money. Money is like any other good in our economy that emerges from the market to satisfy the needs and wants of consumers. Its particular usefulness is that it helps facilitate indirect exchange, making it easier for us to buy and sell goods because there is a common way of measuring their value. Money is not a government phenomenon, and it need not and should not be managed by government. When central banks like the Fed manage money they are engaging in price fixing, which leads not to prosperity but to disaster.

The Federal Reserve has caused every single boom and bust that has occurred in this country since the bank's creation in 1913. It pumps new money into the financial system to lower interest rates and spur the economy. Adding new money increases the supply of money, making the price of money over time—the interest rate—lower than the market would make it. These lower interest rates affect the allocation of resources, causing capital to be malinvested throughout the economy. So certain projects and ventures that appear profitable when funded at artificially low interest rates are not in fact the best use of those resources.

Eventually, the economic boom created by the Fed's actions is found to be unsustainable, and the bust ensues as this malinvested capital manifests itself in a surplus of capital goods, inventory overhangs, etc. Until these misdirected resources are put to a more productive use—the uses the free market actually desires—the economy stagnates.

The great contribution of the Austrian school of economics to economic theory was in its description of this business cycle: the process of booms and busts, and their origins in monetary intervention by the government in cooperation with the banking system. Yet policy makers at the Federal Reserve still fail to understand the causes of our most recent financial crisis. So they find themselves unable to come up with an adequate solution.

In many respects the governors of the Federal Reserve System and the members of the Federal Open Market Committee are like all other high-ranking powerful officials. Because they make decisions that profoundly affect the workings of the economy and because they have hundreds of bright economists working for them doing research and collecting data, they buy into the pretense of knowledge—the illusion that because they have all these resources at their fingertips they therefore have the ability to guide the economy as they see fit.

Nothing could be further from the truth. No attitude could be more destructive. What the Austrian economists Ludwig von Mises and Friedrich von Hayek victoriously asserted in the socialist calculation debate of the 1920s and 1930s—the notion that the marketplace, where people freely decide what they need and want to pay for, is the only effective way to allocate resources—may be obvious to many ordinary Americans. But it has not influenced government leaders today, who do not seem to see the importance of prices to the functioning of a market economy.

The manner of thinking of the Federal Reserve now is no different than that of the former Soviet Union, which employed hundreds of thousands of people to perform research and provide calculations in an attempt to mimic the price system of the West's (relatively) free markets. Despite the obvious lesson to be drawn from the Soviet collapse, the U.S. still has not fully absorbed it.

The Fed fails to grasp that an interest rate is a price—the price of time—and that attempting to manipulate that price is as destructive as any other government price control. It fails to see that the price of housing was artificially inflated through the Fed's monetary pumping during the early 2000s, and that the only way to restore soundness to the housing sector is to allow prices to return to sustainable market levels. Instead, the Fed's actions have had one aim—to keep prices elevated at bubble levels—thus ensuring that bad debt remains on the books and failing firms remain in business, albatrosses around the market's neck.

The Fed's quantitative easing programs increased the national debt by trillions of dollars. The debt is now so large that if the central bank begins to move away from its zero interest-rate policy, the rise in interest rates will result in the U.S. government having to pay hundreds of billions of dollars in additional interest on the national debt each year. Thus there is significant political pressure being placed on the Fed to keep interest rates low. The Fed has painted itself so far into a corner now that even if it wanted to raise interest rates, as a practical matter it might not be able to do so. But it will do something, we know, because the pressure to "just do something" often outweighs all other considerations.

What exactly the Fed will do is anyone's guess, and it is no surprise that markets continue to founder as anticipation mounts. If the Fed would stop intervening and distorting the market, and would allow the functioning of a truly free market that deals with profit and loss, our economy could recover. The continued existence of an organization that can create trillions of dollars out of thin air to purchase financial assets and prop up a fundamentally insolvent banking system is a black mark on an economy that professes to be free.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
LawsofPhysics's picture

You don't say - ARMY AMEDD Corp. 1987-1994.

buyingsterling's picture

This is truyly hopeless thinking - you might get a chance to vote for RP for president, and you agree with him on the issues, but he'd have to be compromised if he got that far, so forget voting? He's been a doctor and a representative - what do they have to hold over his head? The executive is still the one place they can't go with impunity, as is proven by this election cycle. If Paul gets the GOP nod, how do they stop him without killing him? They don't unless they stop the country and make the election irrelevant. It doesn't help to paint the situation as hopeless until it really is.

Conax's picture

“No matter how cynical you become, it’s never enough to keep up.” ~ Lily Tomlin

dizzyfingers's picture

LofP -- last line, absolutely right.

Fight organized crime; vote for no one.

I Got Worms's picture

Troll, you get two snaps and a twist! Well said.

Troll Magnet's picture

Men on Film!!! Man, that was awesome! I wonder what the Wayan Bros are up to these days.

SilverIsKing's picture

It is critical that those who support Ron Paul attempt to enlighten others as to what's really been going on and why Ron Paul is the only choice.  In the past twp days, I have educated a few people and I think when the time comes, they will vote for Ron Paul in the GOP primary.  It's not really a hard sell.  Just the facts.

dizzyfingers's picture

Silver is King:

...you think he'll actually be on the ballot?

Or do you think your friends will write him in?

Just curious. I don't think he'll be on the ballot.

 

SilverIsKing's picture

You might be right about that but to some extent, it is up to those who are already in the RP camp to do whatever we can to ensure he is on the ballot and in order to do that, we must convert as many people as we can in the little time we have.  There's enough critical mass now to actually make a difference.  When he has only 1%, not so easy.  10% makes it a possibility.  Fuck the media.

Abiotic Oil's picture

There would be supporters in the streets but they really need to worry about Ron's supporters who would choose to vote from the rooftops.

Ira Thurby-Wright's picture

 

"as they did with JFK"

 

Blasphemy! everyone knows JFK was killed by aliens, the Mafia, er Cubans, er, a lone gun man with rapid fire capabilities employing mind bending ricochets off the "Grassy Knoll", only coincidentally aided by last minute route changes and re-assignments of limousines and drivers. It had nothing to do with Executive Order 11110 which was quickly repealed by Johnson who did not receive any death threats from the Federal Reserve (he was too busy plotting the Tonkin Gulf Incident). Where do you get this Federal Reserve Conspiracy crap from!? Next thing you'll be claiming that the Rothchilds funded Lincoln and McKinley's assassinations because they created obstacles for the banks, or that it was a mere coincidence that the attempt on Reagan came weeks after his "frank" discussion and impromptu visit with Volcker over at the Fed Building.

 

A Nanny Moose's picture

Everybody dies. Ideas are bulletproof, and good ideas, are spoken of long after the thinker dies. The ideas we hear from he, whose name shall not be mentioned (by MSM), aren't even originally his. He is just reminding us how things are suppose to work.

redpill's picture

 

Money bomb extended until today, Friday.  Help him push over the $3 million mark!

http://www.ronpaul2012.com

 

 

Aside from the folly of trying to fix the price of time, which in a way is the most valuable thing any human can have, it's also important to point out the overarching tax implications of monetary policy.

So many people blindly get caught up in the class warfare of a progressive income tax code.  It's arguing about rain drops in the midst of a hurricane.  The REAL tax on all of us is the devaluation of our currency, which robs from everyone, but most pointedly from the poor who are least able to shelter themselves from its effects.  Inflation is the most dire, regressive tax the world has ever known.  And yet instead of addressing it, people are more concerned with what the top marginal rate is in our nightmare of an income tax code.  If they only knew!  If they only knew, the revolution would have occurred already.

When it comes down to it, all we really own in this life is time and our labor.  The Fed steals both of them from us.

 

 

LongBallsShortBrains's picture

Well said RP.
(both of you)
I am sending $

XitSam's picture

Get this. My roommate thinks that up to 10% (price) inflation per year is ok. Why? Because we get paid more.

His argument against owning gold? "How will you know when to sell it?" Skipping any other reasons (store of wealth), he just ignores my answer, "How do you know when to sell any investment?"

Good grief.

Temporalist's picture

Well this article may wake him up a bit too (from ZeroHedge):

Median Male Worker Makes Less Now Than 43 Years Ago

"While the fact that a record number of Americans are living in poverty should not surprise anyone at this point, what should surprise many is that according to Table P-5 of the Census report of (Lack of) Income, the median male is now worse on a gross, inflation adjusted basis, than he was in... 1968! While back then, the median income of male workers was $32,844, it has since risen declined to $32,137 as of 2010."

http://www.zerohedge.com/news/median-male-worker-makes-less-now-43-years...

 

Comes with chart too!

 

Libertarian777's picture

Actually pretty easy argument to win.

Just ask your roommate, if his salary goes up 10% a year, and the price of everything also goes up 10% a year, if he agrees his standard of living won't change.

Then ask him what happens in 10 years when his 50,000 salary is now 100,000 due to inflation, everything costs twice as much, but now he's in the 35% tax bracket instead of the 25% bracket. Ask him if his standard of living is higher or lower. Then again try and ask any American about their plan for next month, never mind their thoughts of what life is going to be like in 10 years and a lot will say they have no idea.

Then again I'm using logic here.. Something that escapes a lot of mainstreamers.

XitSam's picture

He knows that income:price is the same 1:1 as 5:5. Being in a different tax bracket will get through though.  He does think long term, but only based on past performance in his lifetime in the US, which means really bad things cannot happen.

Mike2756's picture

I'd say it's the other way around, he's painting a nice bullseye on you know whos' back.

RemiG2010's picture

@Ahmeexnal

3...2...1... and the II American Civil War begins!

maddogs's picture

The way they used to do it was food poisoning, at a State dinner..lol. Opps, just figured out why he has so many young people around him.(..would you mind tasting this for me..)

Hook Line and Sphincter's picture

Yep, RP is about to get an 'I' put between his R&P if he keeps it up.

Deadpool's picture

with QE3 coming this winter will we have enough ink left over on earth for ballots by next winter?

dizzyfingers's picture

Deadpool:

Any bets on whether congress will delay the election? They're talking about it.

Cthonic's picture

Who is 'they'? This is the second time I've seen this rumor of a delay or canceled presidential election; would appreciate some credible URLs to peruse.  Thx in advance.

 

edit:  Not the Borowitz Report, lol.  And not the Bev Perdue Rotary Club comedy routine.

Ripped Chunk's picture

RP may need to focus a bit more. Did he think his appearance in "Bruno" would help his image with the youngsters?  

imperative reaction's picture

Ron Paul gets crushed when a helicopter from the Fed "accidently" drops a pallate of freshy printed Bernanks.

Milestones's picture

Bravo!! Probably one of the most concise, concrete economic statements made on this site. Hell. even I could understand it.     Milestones

chipshot's picture

no friend .... he knows the score and has a capable seal team 6 at his bedside....this is big. the euro trash crumbling ...this means its an inevitable battle between the NWO and free marketeer Nationalist--- NWO losing by a touchdown late in the forth but proud and want  to win. hence bob and weave and  kill kaddafi  and osama --done... bomb and kill some ugandans ---pending. bomb abd kill syrain and iranian leaders ...pending. this is all NWO in flux pushing agenda , telling you tough shit what the f@#$ ARE YOU GOING TO DO ABOUT IT?? direct threat. do we have the gonads to slice them off and shove those chick peas  nuts down their NWO throat??

one pissed and disenchanted chipper

Fake Jim Quinn's picture

I'm surprised the MSM carried the piece.  I guess they can all claim that RP gets his fair share of coverage now. Expect total blackout until primary season is concluded

Quixotic_Not's picture

FYI, Rupert Murdhoch's WSJ is now parting with the US Lame Street media...I know this first hand.

The WSJ is going through HUGE transformations from what it once was, and the reporters are getting re-trained as I type this...

With that said, Ron Paul isn't the perfect candidate for POTUS, but at this point he's the ONLY candidate that isn't or won't be co-opted by the bankster/politeer Ponzi!

I too sincerly hope Dr. Paul is careful on his journey, and that those close to him are watching his back...

Troll Magnet's picture

LoL @ WSJ going rogue.

I'll believe it when I see it.  As they say, you can't teach old dogs new tricks.  Once a shill, always a shill.

Quixotic_Not's picture

I didn't say that the WSJ has gone rogue, it's just breaking away from the US Lame Stream media...

It has become apparent, even to the likes of Murdoch and his ilk, that We The People are leaving the LSM in droves, and this is mostly just an attempt to remain viable, because without readership selling advertisement, the lifeblood of ANY publication, becomes impossible.

Got it?

Troll Magnet's picture

I wasn't laughing at you, QN.  Just the premise that an old institution like the WSJ can evolve into something credible in this day and age.  A few months ago, they said the same thing about CNN, about how they're breaking away from the LSM and blah blah blah.  Then they retained every shill they already had in Blitzer, King, Crowley, etc, then added another shill albeit a pretty one from CNBC.  And they remain more unwatchable than ever.  So you may be right that they're changing.  But I'll believe it when I see it is all.

Quixotic_Not's picture

I didn't mean to imply that the WSJ is morphing into something credible, I assume you have read Murdoch's tabloid pablum, no?

As long as "reporters" are indoctrinated via "journalism" schools/kamps to worship the Ponzi, you are correct that evolution into something credible is a stretch, but with the ability for real journalism to spread- As has been happening at a good pace via the blogosphere - The stranglehold that the LSM once had continues to fade...

One can only hope that the sheeple will raise their heads from grazing on pastures of ignorant bliss and pay notice.

Troll Magnet's picture

Agreed.  And that is also why I'd like to see high speed Internet to become easily accessible to every American.  To my knowledge, I think a large chunk of our sheeple are still on dial-ups or worse, have no access to the Internet.  I'm sure TPTB are busily working behind the scene to keep it that way, too.

Troll Magnet's picture

thanks. ever since pladizow sold his soul to the devil and went Rated PG on us, i thought i'd carry the torch by posting photos of my future wife.

UP Forester's picture

There's always satellite internet.  I prefer BlueSky, HughesNet is a little too spendy.  But, luckily, both my wife and I have poor-paying jobs....  and chickens and arable land.

Dr. Richard Head's picture

Palin, Hannity, and Rush have given tepid approval of Ron's foreign policy from Palin, and Ron's financial plan, from Rush and Hannity.  Perhaps some neoconservatives that got in the way of the last election can be swayed by these endorsements?

s2man's picture

"WSJ is now parting with the US Lame Street media"

I've noticed some of that on MarketWatch, which is owned by WSJ. 

Not that I like MW.  Tyler, if we could get some tickers on ZH I wouldn't have to read MW's lame headlines just to see what the markets and currencies are doing. Nudge, nudge. Hint, hint.

mick_richfield's picture

I second.

It has become actively painful for me to go to that page.  And I can't use yahoo!finance because -- they changed it.  And anyway I hate them.

Oh, and -- nice avatar, old timer.

DosZap's picture

Quixotic_Not

 

Rupert Murdhoch's news sources are almost the only halfway truthful sources available in the US today.(as far as MSM is concerned).

Sweet Chicken's picture

What the fuck are you smoking!?!?!

Ripped Chunk's picture

Your mom's pubic hairs you idiot

seek's picture

He does, but hopefully has more today than he did in '08. I was priveledged enough to spend 15 minutes talking to him alone (well, with my girlfriend at the time) in a hotel lobby during the last campaign. No security whatsoever.

It was a very enlightening conversation. I have no doubt he is the real deal, and I'm rapidly approaching the federal campaign donantion limit this go-round.