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2008 Ron Paul Chapter 46
Statement
before the Financial Services Committee
Humphrey Hawkins Hearing on Monetary Policy
July 16, 2008
2008 Ron Paul 46:1
Mr. Chairman,
today we find ourselves on the
verge of an
economic crisis the likes of which the United States has not seen in
decades.
Our economy is very clearly in a recession, and every time
someone tells
us that the worst has passed, another serious event takes place, as we
saw once
again last week and early this week.
Everyone
now realizes that the situation is dire, yet either no one understands
the cause
behind the credit crisis, or no one is willing to take the necessary
steps to
ensure as orderly an end to the crisis as possible.
Instead, we hear talk of further bailouts.
The Fed-brokered takeover of Bear Stearns, a supposed one-off
incident,
has now been joined by a potential bailout of the Government-Sponsored
Enterprises, Fannie Mae and Freddie Mac.
2008 Ron Paul 46:2
The two GSE’s have
been
disasters waiting to happen, as I and many others have warned over the
years.
It was bad enough that Fannie and Freddie were able to operate
with
significant advantages, such as lower borrowing costs and designation
of their
debt as government debt.
Now, the
implicit government backstop has turned out to be an explicit backstop,
just as
we feared.
The Greenspan reflation
of the economy after the dot-com bust pumped additional liquidity into
an
already-skewed housing market, leading to an unsustainable boom that
from many
accounts has only begun to unravel.
With
a current federal funds rate of two percent, and inflation at over four
percent,
the Fed is currently sowing the seeds for another economic bubble.
2008 Ron Paul 46:3
At the heart of this
economic
malaise is the Fed’s poor stewardship of the dollar.
The cause of the dollar’s demise is not the result of a purely
psychological response to public statements on US dollar policy, but is
rather a
reaction to a massive increase in the money supply brought about
by the Federal Reserve’s loose monetary policy.
The policies that led to hemorrhaging of gold during the 1960’s
and the
eventual closing of the gold standard are the same policies that are
leading to
the dollar’s decline in international currency markets today.
Foreign governments no longer wish to hold depreciating dollars,
and
would prefer to hold stronger currencies such as the euro.
Foreign investors no longer wish to hold underperforming
dollars, and
seek to hold better-performing assets such as ports and beer companies.
2008 Ron Paul 46:4
Every government
bailout or
promise thereof leads to moral hazard, the likelihood that market
actors will
take ever riskier actions with the belief that the federal government
will bail
them out.
Bear Stearns was bailed
out, Fannie and Freddie will be bailed out, but where will the line be
drawn?
The precedent has been established and the taxpayers will end up
footing
the bill in these cases, but the federal government and the Federal
Reserve lack
the resources to bail out every firm that is deemed “too big to fail.”
Decades of loose monetary policy will lead to a financial day of
reckoning, and bailouts, liquidity injections, and lowering of the
federal funds
rate will only delay the inevitable and ensure that the final
correction will be
longer and more severe than it otherwise would.
For the sake of the economy, I urge my colleagues to resist the
temptation to give in to political expediency, and to oppose loose
monetary
policy and any further bailouts.
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