Dear Friends:

The financial meltdown the economists of the Austrian School predicted has arrived.

We are in this crisis because of an excess of artificially created credit at the hands of the Federal Reserve System. The solution being proposed? More artificial credit by the Federal Reserve. No liquidation of bad debt and malinvestment is to be allowed. By doing more of the same, we will only continue and intensify the distortions in our economy - all the capital misallocation, all the malinvestment - and prevent the market's attempt to re-establish rational pricing of houses and other assets.

Last night the president addressed the nation about the financial crisis. There is no point in going through his remarks line by line, since I'd only be repeating what I've been saying over and over - not just for the past several days, but for years and even decades.

Still, at least a few observations are necessary.

The president assures us that his administration "is working with Congress to address the root cause behind much of the instability in our markets." Care to take a guess at whether the Federal Reserve and its money creation spree were even mentioned?

We are told that "low interest rates" led to excessive borrowing, but we are not told how these low interest rates came about. They were a deliberate policy of the Federal Reserve. As always, artificially low interest rates distort the market. Entrepreneurs engage in malinvestments - investments that do not make sense in light of current resource availability, that occur in more temporally remote stages of the capital structure than the pattern of consumer demand can support, and that would not have been made at all if the interest rate had been permitted to tell the truth instead of being toyed with by the Fed.

Not a word about any of that, of course, because Americans might then discover how the great wise men in Washington caused this great debacle. Better to keep scapegoating the mortgage industry or "wildcat capitalism" (as if we actually have a pure free market!).

Speaking about Fannie Mae and Freddie Mac, the president said: "Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk."

Doesn't that prove the foolishness of chartering Fannie and Freddie in the first place? Doesn't that suggest that maybe, just maybe, government may have contributed to this mess? And of course, by bailing out Fannie and Freddie, hasn't the federal government shown that the "many" who "believed they were guaranteed by the federal government" were in fact correct?

Then come the scare tactics. If we don't give dictatorial powers to the Treasury Secretary "the stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet." Left unsaid, naturally, is that with the bailout and all the money and credit that must be produced out of thin air to fund it, the value of your retirement account will drop anyway, because the value of the dollar will suffer a precipitous decline. As for home prices, they are obviously much too high, and supply and demand cannot equilibrate if government insists on propping them up.

It's the same destructive strategy that government tried during the Great Depression: prop up prices at all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year.

The president also tells us that Senators McCain and Obama will join him at the White House today in order to figure out how to get the bipartisan bailout passed. The two senators would do their country much more good if they stayed on the campaign trail debating who the bigger celebrity is, or whatever it is that occupies their attention these days.

F.A. Hayek won the Nobel Prize for showing how central banks' manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day - and which are being proposed, just as destructively, in our own:

Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.

To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection - a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end... It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.

The only thing we learn from history, I am afraid, is that we do not learn from history.

The very people who have spent the past several years assuring us that the economy is fundamentally sound, and who themselves foolishly cheered the extension of all these novel kinds of mortgages, are the ones who now claim to be the experts who will restore prosperity! Just how spectacularly wrong, how utterly without a clue, does someone have to be before his expert status is called into question?

Oh, and did you notice that the bailout is now being called a "rescue plan"? I guess "bailout" wasn't sitting too well with the American people.

The very people who with somber faces tell us of their deep concern for the spread of democracy around the world are the ones most insistent on forcing a bill through Congress that the American people overwhelmingly oppose. The very fact that some of you seem to think you're supposed to have a voice in all this actually seems to annoy them.

I continue to urge you to contact your representatives and give them a piece of your mind. I myself am doing everything I can to promote the correct point of view on the crisis. Be sure also to educate yourselves on these subjects - the Campaign for Liberty blog is an excellent place to start. Read the posts, ask questions in the comment section, and learn.

H.G. Wells once said that civilization was in a race between education and catastrophe. Let us learn the truth and spread it as far and wide as our circumstances allow. For the truth is the greatest weapon we have.

In liberty,

Ron Paul

Why would it result in a collapse of economy? It should only collapse if the banks have no true value. If they go bankrupt, they go into receivership. The value of the company remains, and a new CEO comes in. Bankruptcy does not mean there is no value.

I'm not saying all banks will go bankrupt. Only some will go bankrupt. Once they do go bankrupt, another group or bank can take on the liability and the value held by said bank. For example, if your bank goes bankrupt, you still have to pay off your mortgage, loans, and credit cards to the new bank that will take on your debt. There's still a lot of debt that will be paid, and there will still be plenty of people that want to make a profit off the value owned by the bank that goes bankrupt.

We can still get loans. The banks will want to give out loans so it has more money.

They won't want to give out loans recklessly like before, thinking the Government will take on the bad debt if it doesn't work out.

Making the taxpayer take on the risk, but the banker to take on the profit is not a good idea. It leads to risky behavior.

Another bad part about the bailout is that it will also devalue the American dollar. Since the USA will have to loan itself the 700 billion, it will lower the American dollar even further than it has already devalued itself.

In fact, some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy.

"It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number."

To be fair, I don't think most of them were expecting a government bailout when the made the loans.

SYSTEMIC SHOCKS
A top-level conclusion from my book Brave New War is that security in the future, from economic to physical to environmental to social, will be measured by our responses to a never-ending series of global systemic shocks derived from a plethora of sources. Unfortunately, we are likely to fare badly. The reasons for this are simple, the global system is:


Too Big. Simply, the system's scale is far beyond the ability of nation-states, or a community of nation-states, to manage when it suffers a breakdown. In the case of the current financial collapse, the global shadow banking system (a globally inter-networked collection of unregulated financial products) is approximately $450 trillion, as compared to a US GDP of $15 trillion or a global GDP of ~$60 trillion. Put another way, the financial liabilities of the highly leveraged Deutsche Bank are 80% of Germany's GDP and Barclay's liabilities are 100% of the UK's GDP. As the leverage underlying the shadow banking system unwinds and more banks fail, the scale of the loses experienced will rapidly exceed nation-state budgets.


Too Fast. The speed at which shocks spread in this globally interconnected system is faster than the response time of governmental institutions (tight coupling). In this financial crisis, the cascade of failure in the system spreads at the speed of information networks and computer automation in trillion dollar increments. The upshot is that the government's impacted will likely take hasty measures, like the 3 page Paulson plan in the US, without the analysis, orientation, or synthesis necessary to produce high quality results.


Too Complex. The system's function is beyond understanding. This is due to a lack of data (opacity either due to the nature of the system or by design as in the shadow banking system), the number of variables or connected systems, a lack of long term historical data on its operation in its current configuration, etc. The result is that efforts to mitigate the system's excesses produces pyrrhic victories (where the corrective action produces negative outcomes, like how efforts to ramp biofuel production impacted food prices). Worse, due to the system's complexity and the lack of an effective means to address its excesses, we are reduced to treating symptoms of failure (as with the Paulson plan) and even then under violent debate.

Epilogue

The inevitable outcome of systemic shocks at this magnitude will be an inevitable delegitimization of the nation-state as our trust in the ability of leaders to take effective corrective action evaporates. Further, nation-states will expend the majority of their resources on hasty and relatively ineffective corrective actions, which will make them collectively more prone to damage in the future and which will preclude the investments required to mitigate future crises. The cycle of delegitimization and resource depletion will continue until the nation-state is unable to respond at all to future calamity (the scale of this financial crisis is such, we may as well forget about any chance of early action to delay or prevent global warming, peak oil, water scarcity, food shortfalls, pandemics, etc.). In short, we will see a proliferation of hollow states.


NOTE: Due to the networked design of our global system, small events can be amplified into global shocks -- either through unmitigated positive feedback loops or a breakdown in the system's core assumptions.

What if 700 billion isn't enough, would any one have any issues after investing so many billions, investing another 300 billion the following year? And what if needed another 50 billion every 6 months?

What's 700 billion plus interest?

So here's the question. If 700 billion is added to the system, why would that prevent a collapse of the economy? How would it prevent it? Would it prevent it for a month, a year, a decade? How long will it prevent it from happening?

As for how long it would prevent it, I guess until these companies get all their assets locked up in questionable debt again.

One thing I'm not entirely sure on is why everyone is convinced it has to happen right now!  Seems like this is the kind of thing where taking the time to do it right would be a good idea, but those in favor seem to want it now, now, now! 

Socialism is bad, it doesn't reward anyone for taking a risk.

Did y'all know that Hershey failed at least twice before he started to put milk in his chocolate?  Once he succeeded he started to grow and in 1900 sold his company for a cool mill, which was a large sum then and moved.  Under socialism his company, as soon as it became large enough, would be gobbled up by the government.

Why bother taking the risk?  You can see this in what the world thinks of the socialist countries.  England and Canada are jokes.  When was the last time you heard a good idea come out either one?  All socialism is is communism for bleeding hearts.

Source: © Center for Global Development and Carnegie Endowment for International Peace. From “Ranking the Rich,” Foreign Policy, May/June 2004. Reprinted with permission.

I just tier of all the welfare mommas and dog-like daddys sucking up all my hard work is all, telling the government they need help while they drive lexuses and wear Apple Bottom jeans.  While I have to decide hot dogs and mac and cheese for how many days intermixed with spaghetti and have to buy from Good Will or Wal-Mart clearance racks.

I have thought about that.  Did you know that until 1862 we didn't have any income taxes?  Instead we taxed only "sinful" goods and some business transactions(1).  Also make sure you read down on what Reagan did to the tax system.

I understand that the government needs money to do civil services that benefit all, but how does welfare benefit all?

I don't want half a billion going to Alaska every year by Alaska's Senetor who is now being investigated for fraud.

Oh and my wife works at a local school and sees it all the time, and I have seen myself.  I see it everyday as I drive my semi around making deliveries.  And as a final example, my wife's cousin's baby momma won't marry him because she is getting to much in benefits.  She doesn't work a full time job, she works two jobs, but one of them pays her under the table so she doesn't get caught.  I drives me absolutely bonkers and she and I have had a few heated arguements over it.

Its not the cost, though high, and its not seeing people getting more than they should.  Its getting what they didn't work for that bothers me the most.

I went back and read the parable and I see that it really wouldn't apply either way.  In the begining it says, "The kingdom of heaven is like. . ."  So this parable has nothing to do with earthly wages or greed, but more over it is pointing out that we should be happy that others are saved and not worry about when they were.  Basically a person who has been saved since 6 years old shouldn't begrudge an 80 year old man who converted on his death bed.  It ends with "So the last will be first, and the first will be last" which sets up how we are to treat others.

What I have been trying to get at is that the government shouldn't be forcing me to be charitable or tell me what needs be fixed by taking taxes and then turning around and wasting it on pork barrel and people who just want a hand out.

I got to thinking about my earlier additude about welfare recipients.  Tycho was right, I was angry that they had and I didn't, but I came to a realization today while driving the 2+ hours to my first stop.

They are stealing!