Friday, September 26, 2008

Ron Paul’s Joint Economic Committee Statement

Although widely available elsewhere on the Internet, I want to go on record as supporting the position taken by Congressman Ron Paul on the mortgage bailout. He makes these points:

1. These are the same policies that created and prolonged the Great Depression.
2. The wealth of American workers is being used to reward those who should experience the consequences of their own mismanagement.
3. Not a single person who signed the Constitution would say that the power to purchase private sector companies was given to the federal government. None of the politicians supporting the bailout are keeping their oath to support the Constitution. They are repudiating the Free Market system in favor of socialism and fascism.
4. Like the war in Iraq, this is $700 billion that is being diverted from helping enrich America and raise our standard of living into a black hole of malinvestment.
5. At least the bailout isn't killing innocent men, women, and children outright, and turning hospitals, schools, and universities into rubble with "smart bombs." But it is lowering our standard of living in a more indirect way.
6. Every politician who supports this bailout is incompetent and/or untrustworthy as a "public servant" and steward of the "Liberty Under God" for which America's Founders fought.


Ron Paul’s Joint Economic Committee Statement
Mr. Chairman, I believe that our economy faces a bleak future, particularly if the latest $700 billion bailout plan ends up passing. We risk committing the same errors that prolonged the misery of the Great Depression, namely keeping prices from falling. Instead of allowing overvalued financial assets to take a hit and trade on the market at a more realistic value, the government seeks to purchase overvalued or worthless assets and hold them in the unrealistic hope that at some point in the next few decades, someone might be willing to purchase them.

One of the perverse effects of this bailout proposal is that the worst-performing firms, and those who interjected themselves most deeply into mortgage-backed securities, credit default swaps, and special investment vehicles will be those who benefit the most from this bailout. As with the bailout of airlines in the aftermath of 9/11, those businesses who were the least efficient, least productive, and least concerned with serving consumers are those who will be rewarded for their mismanagement with a government handout, rather than the failure of their company that is proper to the market. This creates a dangerous moral hazard, as the precedent of bailing out reckless lending will lead to even more reckless lending and irresponsible behavior on the part of financial firms in the future.

This bailout is a slipshod proposal, slapped together haphazardly and forced on an unwilling Congress with the threat that not passing it will lead to the collapse of the financial system. Some of the proposed alternatives are no better, for instance those which propose a government equity share in bailed-out companies. That we have come to a point where outright purchases of private sector companies is not only proposed but accepted by many who claim to be defenders of free markets bodes ill for the future of American society.

As with many other government proposals, the opportunity cost of this bailout goes unmentioned. $700 billion tied up in illiquid assets is $700 billion that is not put to productive use. That amount of money in the private sector could be used to research new technologies, start small business that create thousands of jobs, or upgrade vital infrastructure. Instead, that money will be siphoned off into unproductive assets which may burden the government for years to come. The great French economist Frederic Bastiat is famous for explaining the difference between what is seen and what is unseen. In this case the bailout’s proponents see the alleged benefits, while they fail to see the jobs, businesses, and technologies not created due to this utter waste of money.

The housing bubble has burst, unemployment is on the rise, and the dollar weakens every day. Unfortunately our leaders have failed to learn from the mistakes of previous generations and continue to lead us down the road toward economic ruin.

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