Liberty Forged

the State has no money of its own, so it has no power of its own. ` Nock

America’s Monetary Policy. Easy credit n bailouts = moral hazard.

Posted by Jesse on March 4, 2008

Financial Services Committee Hearing

Monetary Policy and the State of the Economy
by Ron Paul

A Statement to the House Financial Services Committee, February 27, 2008

Mr. Chairman,

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.

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.

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.

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.

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.

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.

——————–

The Dollar is a Big Element of U.S. Security (2/29/08)

The following letter to the editor from Dr. Paul ran in today’s Wall Street Journal:

“I was delighted to read in Judy Shelton’s op-ed, “Security and the Falling Dollar” (Feb. 15), that at long last the security implications of the dollar’s collapse have made their way into the mainstream media. The dollar’s strength (or lack thereof) has been of paramount concern to me, and the subject of many of my statements over the past several years. Decades of manipulation by the Federal Reserve have benefited the government and certain politically-connected firms, while gradually destroying the purchasing power of middle-class Americans. Despite numerous warnings in the past, it is only now at a point of acute crisis that Washington insiders are beginning to awaken to the reality of the end of dollar hegemony.

“While I desire reform of our current monetary system, my own proposals have not been as all-encompassing as Ms. Shelton’s suggestion to return to a Bretton Woods-style system. Her recommendation, though, that gold backing should make up a component of a future monetary system, is one that we would all do well to heed. My own legislative proposals focus around eliminating the taxes and laws that dissuade individuals and institutions from using gold as currency or as a backing for currency. By allowing market processes to determine the issuance of currency, we can allow individuals to decide for themselves what currency they wish to use. This would lead to a gradual reintroduction of sound money and avoid the market shocks that occur when monetary decisions are mandated by government fiat.”

Rep. Ron Paul (R., Texas)
Washington

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12 Responses to “America’s Monetary Policy. Easy credit n bailouts = moral hazard.”

  1. […] Original post here […]

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  3. […] America’s Monetary Policy. Easy credit n bailouts = moral hazard. 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 … […]

  4. […] credit cards poor credit […]

  5. […] unknownnHWhen this aggregation expires and mortgage rates reset, we power gaming infant calls for a rate-freeze plan, maybe for member years, maybe for five, or maybe for more. Some drastic proposals impact named for the federal order to take existing … […]

  6. […] AlianthanHThe Fed’s impinging of welfare rates results in malinvestment which, when it is discovered, leads to plot shortening and enforcement of malinvested resources. But the FRS never allows a surpass shakeout, so that before a … […]

  7. […] dr@dailyreckoning.com.au (The Daily Reckoning)nHWhen this aggregation expires and mortgage rates reset, we power gaming infant calls for a rate-freeze plan, maybe for member years, maybe for five, or maybe for more. Some drastic proposals impact named for the federal order to take existing … […]

  8. […] America’s Monetary Policy. Easy credit n bailouts = moral hazard. …decades, relentlessly pushed for increased rates of homeownership among people who have always been viewed by the market as poor credit risks. […]

  9. […] wemedianHWhen this aggregation expires and mortgage rates reset, we power gaming infant calls for a rate-freeze plan, maybe for member years, maybe for five, or maybe for more. Some drastic proposals impact named for the federal order to take existing … […]

  10. […] unknownnHWe impact already seen a methodicalness from the monument to keep mortgages, a methodicalness which is supposed to be inner a temporary program. As with added programs that impact embellish ended this committee, I conceptualise we ought to wager from news and … […]

  11. I’m not sure why the gov’t encourages the taking on of debt, but it certainly has made a mess of things. However, we as individuals can turn things around if we strive to remove debt from our lives.

    Housing, Cars, anything debt related would have to begin to lower prices.

    We don’t have to take the bait.

  12. […] to find any remaining traces of the landscape as it was between 1680 andgreengalloway.blogspot.comAmerica??s Monetary Policy. Easy credit n bailouts = moral hazard. Financial Services Committee Hearing Monetary Policy and the State of the Economy by Ron Paul A […]

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