Thursday, September 25, 2008

Dear Friends:

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

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.

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.

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."

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

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.

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:

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

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

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