The following is Representative Ron Paul’s (R-TX) statements regarding government bailouts of financial institutions, with my analysis sprinkled throughout his comments:
Many Americans today are asking themselves how the economy got to be in such a bad spot.
For years they thought the economy was booming, growth was up, job numbers and productivity were increasing. Yet now we find ourselves in what is shaping up to be one of the most severe economic downturns since the Great Depression.
Unfortunately, the government’s preferred solution to the crisis is the very thing that got us into this mess in the first place: government intervention.
And here’s the sad part – it’s been people like Paul, and his followers and others who believe like him that have predicted things like this would happen. I’ve always been against government intervention into stuff like this, although, due to my age, haven’t had the opportunity to voice this as much as Dr. Paul.
Ever since the 1930s, the federal government has involved itself deeply in housing policy and developed numerous programs to encourage homebuilding and homeownership.
Blame a lot of it on FDR – he’s the one who started all this crap TRYING to get us out of the Great Depression. Emphasis on “trying.” None of FDR’s plans really worked–what got us out was going to war.
Government-sponsored enterprises Fannie Mae and Freddie Mac were able to obtain a monopoly position in the mortgage market, especially the mortgage-backed securities market, because of the advantages bestowed upon them by the federal government.
Well, they were, after all, created by the federal government – the first mistake that was made here.
Laws passed by Congress such as the Community Reinvestment Act required banks to make loans to previously underserved segments of their communities, thus forcing banks to lend to people who normally would be rejected as bad credit risks.
And even the Economic Stimulus Package did this. It INCREASED loan limits for people using adjustable rate mortgages, and increased the amount of people getting loans–people who NEVER should’ve been able to get loans with their credit.
These governmental measures, combined with the Federal Reserve’s loose monetary policy, led to an unsustainable housing boom. The key measure by which the Fed caused this boom was through the manipulation of interest rates, and the open market operations that accompany this lowering.
When interest rates are lowered to below what the market rate would normally be, as the Federal Reserve has done numerous times throughout this decade, it becomes much cheaper to borrow money. Longer-term and more capital-intensive projects, projects that would be unprofitable at a high interest rate, suddenly become profitable.
Because the boom comes about from an increase in the supply of money and not from demand from consumers, the result is malinvestment, a misallocation of resources into sectors in which there is insufficient demand.
In this case, this manifested itself in overbuilding in real estate. When builders realize they have overbuilt and have too many houses to sell, too many apartments to rent, or too much commercial real estate to lease, they seek to recoup as much of their money as possible, even if it means lowering prices drastically.
And this is evident in my home state of Michigan. Where I live, there are some housing areas just recently built that are largely still up for sale. Either that, or people will buy the new houses before selling their own houses, and then the original houses are left up for sale. But not all of this is the government’s fault. My mother was telling me other day that the sister of her friend was going to have the bank repossess her house, so she left in the middle of the night, went down to South Carolina, and bought a house the next day, before the credit caught up with her. Not only is that dishonest and despicable, it’s detrimental to the economy! Or you have people vandalizing their own houses right before banks repossess them. IT’S NOT THE BANK’S fault that you can’t make your payments (it’s the bank’s fault if they gave an undeserving person a loan, but still, these actions are NOT helping!).
This lowering of prices brings the economy back into balance, equalizing supply and demand. This economic adjustment means, however that there are some winners — in this case, those who can again find affordable housing without the need for creative mortgage products, and some losers — builders and other sectors connected to real estate that suffer setbacks.
The government doesn’t like this, however, and undertakes measures to keep prices artificially inflated. This was why the Great Depression was as long and drawn out in this country as it was.
I am afraid that policymakers today have not learned the lesson that prices must adjust to economic reality. The bailout of Fannie and Freddie, the purchase of AIG, and the latest multi-hundred billion dollar Treasury scheme all have one thing in common: They seek to prevent the liquidation of bad debt and worthless assets at market prices, and instead try to prop up those markets and keep those assets trading at prices far in excess of what any buyer would be willing to pay.
Additionally, the government’s actions encourage moral hazard of the worst sort. Now that the precedent has been set, the likelihood of financial institutions to engage in riskier investment schemes is increased, because they now know that an investment position so overextended as to threaten the stability of the financial system will result in a government bailout and purchase of worthless, illiquid assets.
And that was the attitude that Freddie and Fannie executives had. “The government will HAVE to bail us out” mentality HAS GOT TO STOP!
Using trillions of dollars of taxpayer money to purchase illusory short-term security, the government is actually ensuring even greater instability in the financial system in the long term.
The solution to the problem is to end government meddling in the market. Government intervention leads to distortions in the market, and government reacts to each distortion by enacting new laws and regulations, which create their own distortions, and so on ad infinitum.
Easier said than done. Once you start bailouts, it’s hard to stop. It’s similar to returning to the gold standard. Our money is so inflated now that it would take national cooperation to return to the gold standard. Prices for anything purchased as well as wages would have to significantly decrease, and Americans are too greedy to do this. People wouldn’t want their wages cut, even though they’d still be able to afford everything that they can now, because “it would look bad on paper.” Getting out of the Great Depression would’ve been simple, if everybody agreed to a plan, but if one greedy person doesn’t agree to the set plan, that throws off the whole rest of the plan. Complete cooperation is necessary, but in today’s world, it will never happen (unles the government forces you, but then you’re dealing with extreme government involvement, which STILL doesn’t work as evidenced in the massive failures of communism).
It is time this process is put to an end. But the government cannot just sit back idly and let the bust occur. It must actively roll back stifling laws and regulations that allowed the boom to form in the first place.
But where will they get their money from if they lose their corporate backers! How’s a politician supposed to live if he doesn’t have businesses feeding him money!
The government must divorce itself of the albatross of Fannie and Freddie, balance and drastically decrease the size of the federal budget, and reduce onerous regulations on banks and credit unions that lead to structural rigidity in the financial sector.
And unfortunately neither of our major Presidential candidates will do this. I’d like to see what Senator Hagel (R-NE) would’ve done about the Fannie and Freddie situation, since he voted AGAINST the Economic Stimulus Package.
Until the big-government apologists realize the error of their ways, and until vocal free-market advocates act in a manner which buttresses their rhetoric, I am afraid we are headed for a rough ride.
A very rough ride indeed, Dr. Paul.
And again, Paul shows just how smart he is when it comes to economic issues. I disagree with him on a couple other issues (kinda a half disagreement on Iraq), but I honestly wouldn’t have been disappointed if he were the Republican nominee.
I just hope that people (especially McCain) start listening to him and realize that we can’t keep doing what we’ve been doing.
Tags: 2008 Election, Adjustable Rate Mortgage, ARM, Chuck Hagel, Community Reinvestment Act, Economic Crisis, Economic Stimulus Act of 2008, Economic Stimulus Package, Economics, economy, Election, Elections, Fannie MAe, FDR, Federal Reserve, Finances, Financial Institution, Franklin Delano Roosevelt, Franklin Roosevelt, Freddie Mac, Government, Government Sponsored Enterprises, GSEs, Housing, Housing Crisis, Interest, Interest Rate, John McCain, Michigan, Money, Mortgage, Mortgage Crisis, Nebraska, Politics, Representative, Republican, Republicans, Ron Paul, Senator, South Carolina, Texas