Emailing: Monetary Policy and the State of the Economy by Ron Paul

Monetary Policy and the State of the Economy by Ron Paul


Monetary Policy and the State of
the Economy

by Ron

by Ron Paul


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

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

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

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

See the Ron Paul File








March 4,

Dr. Ron Paul
is a Republican member of Congress from Texas.

Copyright 2008

Ron Paul





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