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2008 Ron Paul Chapter 9
Financial
Services Committee Hearing
“Monetary Policy and the State of the Economy”
February 27, 2008
2008 Ron Paul 9:1
Mr. Chairman,
2008 Ron Paul 9:2
A topic that is on the lips of many people during the past
few months, and one with which I have greatly concerned myself, is that
of moral
hazard.
We hear cries from all
corners, from politicians, journalists, economists, businessmen, and
citizens,
clamoring for the federal government to intervene in the economy in
order to
forestall a calamitous recession.
During
the boom, many of these same individuals called for no end to the Fed’s
easy
credit.
Now that the consequences of
that easy money policy are coming home to roost, no one wants to face
those ill
effects.
2008 Ron Paul 9:3
We have already seen a plan from the administration to
freeze mortgages, a plan which is alleged to be only a temporary
program.
As with other programs that have come through this committee, I
believe
we ought to learn from history and realize that “temporary” programs
are
almost anything but temporary.
When
this program expires and mortgage rates reset, we will see new calls
for a
rate-freeze plan, maybe for two years, maybe for five, or maybe for
more.
2008 Ron Paul 9:4
Some drastic proposals have called for the federal government to purchase existing mortgages and take upon itself the
process of
rewriting these and guaranteeing the resulting new mortgages.
Aside from exposing the government to tens of billions of
dollars of
potentially defaulting mortgages, the burden of which will ultimately
fall on
the taxpayers, this type of plan would embed the federal government
even deeper
into the housing market and perpetuate instability.
The Congress has, over the past decades, relentlessly pushed for
increased rates of homeownership among people who have always been
viewed by the
market as poor credit risks.
Various
means and incentives have been used by the government, but behind all
the
actions of lenders has been an implicit belief in a federal bailout in
the event
of a crisis.
2008 Ron Paul 9:5
What all of these proposed bailouts fail to mention is the
moral hazard to which bailouts lead.
If
the federal government bails out banks, investors, or homeowners, the
lessons of
sound investment and fiscal discipline will not take hold.
We can see this in the financial markets in the boom and bust of
the
business cycle.
The Fed’s
manipulation of interest rates results in malinvestment which, when it
is
discovered, leads to economic contraction and liquidation of
malinvested
resources.
But the Fed never allows
a complete shakeout, so that before a return to a sound market can
occur, the
Fed has already bailed out numerous market participants by undertaking
another
bout of loose money before the effects of the last business cycle have
worked
their way through the economy.
2008 Ron Paul 9:6
Many market actors therefore continue to undertake risky
investments and expect that in the future, if their investments go
south, that
the Fed would and should intervene by creating more money and credit.
The result of these bailouts is that each successive recession
runs the
risk of becoming larger and more severe, requiring a stronger reaction
by the
Fed.
Eventually, however, the Fed
begins to run out of room in which to maneuver, a problem we are facing
today.
2008 Ron Paul 9:7
I urge my colleagues to resist the temptation to call for
easy fixes in the form of bailouts.
If
we fail to address and stem the problem of moral hazard, we are doomed
to
experience repeated severe economic crises.
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