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.

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zippy_uk's picture

A few more observations.

* Having been to the US several times, it looks to me to be an increadibly difficult place to govern. Huge land mass, huge population and competing wealth centres. To me that makes the US quite vulnerable to corruption. I am not entirely sure the local population gets that.

* One of the impressive things about the US presidential election is the fact that all candidates need to walk around farms in the Mid West in winter to stake a claim. The less impressive thing is the fact who ever raises the most money wins the presidency - something the US media is joyful to boast about. Surely that is the wrong message ?

* One of the key issues NOT being discussed it the relationship of corporations to the state. The state grants corporations the right to sell goods and services to the public. The quid pro quo is that in return they pay taxes and employ people. Now you think about that - corporations sell goods to your market, using money borrowed from overseas that create inflation and prices home labour out of a job. Yet the the money that gets raised does not get taxed due to flowing through tax havens and the jobs that are needed are sent overseas. Who said that was allowed ? Why is there no discussion of this and a public vote on it ?

* If you align your trade to China, then you effectively align your labour standards to Chinese, rather than western standardss (no unions, no legal workers rights, slave hours, slave wages, infact - just slavery). Who said that was OK ? Why allow China into the WTO on that basis ? Who do that decision ? Why is no-one talking about that in the debates ?

Big Ben's picture

While I agree with Ron Paul that the Fed has not done anything good for our country, I don't think that it is accurate to blame all of our problems on it. The fact is that the US was experiencing major booms and busts long before the Fed was formed.

The problem is with banking itself.

When bankers make loans, it expands the money in circulation, causing wages to rise, business to boom and infusing a (false) sense of optimism everywhere, which causes people take out risky loans, start risky businesses, etc.

Then when bankers call in the loans, money in circulation falls, wages fall, businesses fail, people become unemployed, asset prices fall, and the bankers are able to pick up valuable assets at bargain prices.

Then the cycle repeats.

Actually banking isn't really necessary for our economy. It could be replaced by alternative arrangements where the risk is shared by both parties. For example, mortgages could be replaced by rent-to-own agreements. This kind of system would be much more stable than our current system.

The only people who benefit from our current system are the bankers.

 

cranky-old-geezer's picture

 

 

Remember folks, JFK was assaniated for tyring to start a silver redeemable currency.  He had authority to do it by executive order.  It would have been legal. But the banker mafia wouldn't allow any such competition to their unredeemable fiat monopoly money currency.

Ron Paul wants to achieve the same result a different way, by shutting down the banker mafia and declaring their monopoly money currency no longer legal tender, a far larger challenge.

His chance of success is zero and his chance of ending up like JFK is nearly 100% if he was to be elected POTUS.

 

Joshua Falken's picture

WAKE UP AMERICA

The FED is not a governemnt agency

It is owned by the TBTF banks that Geithner and Bernanke will continue to protect at the expense of the American people.

"One nation under God, indivisible, with liberty and justice for all." has beem subverted

God did not create the world in seven days and the US executive does not work for the good of all.

LISTEN TO RON PAUL AND SAVE YOURSLVES


jackbooted gauleiter's picture

As anyone has attended the very first lecture on control theory will tell you, the reason for instability is positive feedback. Booms and busts are caused by positive feedback loops in the economy.

That is why the role of the central banker is to take away the punch bowl just as the party is getting going... i.e. introducing negative feedback into the economy.

Keynes was correct. In times of depression government should run a deficit... that is negative feedback, and in times of expansion government should run a surplus... again negative feedback. Unfortunately, politicians are uneducated arseholes and they reckon that if deficit spending works well during recessions, then it will put the economy on steroids if it is applied during a period of expansion, so they abandon Keynes and engage in deficit spending during an expansion, which is positive feedback. Then we get a boom, which eventually becomes unsustainable, and we get a bust.

The solution to this problem... only allow persons with an engineering degree into Congress.

Cthonic's picture

The solution to this problem... only allow persons with an engineering degree into Congress.

Everything old is new again...

http://www.authentichistory.com/1930-1939/2-newdeal/2-newdeal/technocrat...

There are (good) reasons why that movement didn't go anywhere.

Edelweiss's picture

The information above is common knowledge for most that frequent ZH.  Unfortunately, it doesn't seem to be for the average American.  The reactions I've gotten from friends, family, and co-workers to my comments (and occasional rants)  about the Fed are usually met with puzzled looks, limited interest, or outright apathy.  Clearly, some people are too dumb to connect the dots, but most have to wake up in their own time I suppose. 

Dr. Nancy's picture

 

All that's happening in the economy is predictable, as there are 7 stages that every major economy goes through.

Those who know how it works profit & massive wealth is transferred to them.

Several months ago I learned this information from a millionaire whose site I found & am sharing it with everyone I know.

You can see how you too can profit like the ultra-rich during these uncertain times.

His free video-

"How To Create Wealth in Today's Economic Crisis" is at:

http://theelevationgroup.net/presentation/register.php?a_aid=160667&a_bi...

Hope this helps everyone  as much as it has me.

Dr. Nancy