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Editor’s Note: Congressman Ron Paul explains why the monetary policies of the Federal Reserve
are responsible for financial
and economic crises spanning
several decades, including the one in which we currently find ourselves. Putting the brunt of the blame for our situation on the Fed, government
intervention and neo-capitalists dependent on easy central bank money, Paul notes that these policies not only led to the bursting of the housing bubble in 2008, but that they will
lead to an even worse crisis down the road as our currency is destroyed
and our debt becomes un-serviceable. We opine that, while Ron Paul lays out a common sense approach to stop the madness, those in power will continue to
pursue strategies and policies that work only to enrich the upper echelons of society while the
masses continue to struggle with an untenable situation where prices for essential commodities
like food and energy continue to rise, debts pile up to levels that can never
be repaid, and the
productive capacity that
made America great shifts
to slave labor driven third world countries and emerging
economies.
Article
Via The Daily Crux
Originally
Published by Ron Paul at FT
Our
central bankers are intellectually
bankrupt
by Ron Paul
The
financial crisis has fully exposed the intellectual bankruptcy of the world’s central bankers.
Why? Central bankers
neglect the fact that interest rates are prices. Manipulating those prices through credit expansion or
contraction has real and deleterious effects on the economy. Yet while socialism
and centralised economic
planning have largely been rejected
by free-market economists,
the myth persists that central banks are a necessary component of market economies.
These economists
understand that having wages or commodity prices established by government fiat would cause shortages, misallocations of capital and hardship.
Yet they accept at face value the notion
that central banks must determine not only the supply of one particular commodity – money – but also
the cost of that commodity via the setting of interest
rates.
Printing
unlimited amounts of
money does not lead to unlimited
prosperity. This is readily apparent from observing the Fed’s monetary policy over the past two decades.
It has pumped trillions of dollars into the economy, providing money to banks with the hope that this new money will spur lending
and, in turn, consumption.
These interventions are intended
to raise stock prices, lower borrowing costs for companies and individuals, and maintain high housing prices.
But
like their predecessors in the 1930s, today’s
Fed governors behave as
if the height of the credit
bubble is the status quo to which we need to return. This
confuses money with wealth,
and reflects the idea that prosperity stems from high asset prices and large amounts of
money and credit.
The
push for easy money is
not new. Central banking was
supposed to have ended
the types of periodic financial
crises the US experienced throughout
the 19th century. Yet US financial panics have only got worse since
the centralisation of monetary policy
via the creation of the Fed in
1913. The Depression in the 1930s; the haemorrhaging of gold reserves during the 1960s; the stagflation of the 1970s; the dotcom bubble of the early 2000s; and the current recession all have their root in the Fed’s loose monetary policy.
Each of these
crises began with an inflationary monetary policy that led
to bubbles, and the solution to the busts that inevitably
followed has always been
to reflate the bubble.
This
only sows the seeds for the next crisis. Lowering interest rates in an attempt to
forestall a recession in
the aftermath of the dotcom
bubble required massive credit creation that led to the housing bubble, the collapse of
which we still have not recovered from today. Failing
to learn the lesson of
the bursting of both the dotcom bubble and the housing bubble, the Fed has pumped trillions of dollars into
the economy and has promised
to leave interest rates at zero through
to at least 2014. This will
only ensure that the next crisis will be
even more destructive than
the current one.
Not
content with its failed attempts to prop up the US economy, the Fed
has set its sights on bailing out Europe, too. Through currency swaps, it has committed to offering potentially hundreds of billions of US dollars to the European Central Bank and we cannot rule out the possibility of direct intervention.
The
Fed’s response to
the crisis suggests that it believes
the current crisis is a problem of liquidity. In fact it is a problem
of poorly allocated investments caused by improper pricing of money and credit, pricing which is distorted
by the Fed’s inflationary
actions.
The
Fed has made banks and corporations dependent on cheap money. Instead
of looking for opportunities
to invest in real products
that will serve the needs of consumers, Wall Street
awaits the minutes of each
Federal Open Market Committee meeting with bated breath, hoping that QE3 and QE4 are just around the corner. It is no wonder that long-term investment and business planning are stagnant.
We live in a world that seems to have abandoned the concept of savings
and investment as the source of real wealth and economic growth. Financial markets clamour for more cheap money creation
on the part of central banks. Hopes
of further quantitative easing
from the Fed, the Bank of England,
or the Bank of Japan – or further
longer-term refinancing operations from the ECB –
buoy markets, while decisions not to intervene can cause stocks to plummet. Policy makers focus on
spurring consumption, while ignoring production. The so-called capitalists have forgotten that capital cannot be created
by government fiat.
Control
of the world’s economy
has been placed in the hands of a banking cartel, which holds great danger for all of
us. True prosperity requires sound money, increased productivity, and increased savings and investment. The world is awash in US dollars, and a currency
crisis involving the world’s reserve currency would be an unprecedented catastrophe.
No amount of monetary
expansion can solve our current financial
problems, but it can make those
problems much worse.
The
writer is a US congressman and a candidate for the Republican party’s presidential
nomination
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