Tags: ron | paul | economics

Ron Paul: Don't Bail Out Wall Street

By David Alliot   |   Tuesday, 23 Sep 2008 03:13 PM

Blame government intervention for the current economic crisis, Rep. Ron Paul, R-Texas, says in an article on CNNPolitics.com.

“The bailout of Fannie and Freddie, the purchase of AIG, and the latest multi-hundred billion dollar Treasury scheme all have one thing in common: They seek to prevent the liquidation of bad debt and worthless assets at market prices, and instead try to prop up those markets and keep those assets trading at prices far in excess of what any buyer would be willing to pay,” he writes.

He says the mess started in the 1930s when the government wanted to encourage home ownership and was looking to stimulate the economy through home building.

Quasi-governmental entities Fannie Mae and Freddie Mac, created to ensure banks and mortgage companies had enough funds to lend to home buyers, enjoyed monopoly status because of advantages doled out to them by the government.

Then Congress created laws, such as the Community Reinvestment Act, to ensure that just about every segment of population could have easy access to loans — including risky loans to people with spotty credit histories.

Add to this mix the Federal Reserve’s manipulation of the interest rates, according to Paul, and voilà — instant unsustainable housing boom, leading to a housing bubble.

Overbuilding, too many units to rent, and unequal supply-to-demand ratio combine to form a perfect storm all beginning with the prick of the housing bubble. Plummeting prices ensue. Paul points out that there are winners in this tragedy — those who find affordable housing who don’t have to rely on “creative” lending tactics for loans.

Left to their own devices, supply and demand eke out an equilibrium and the country begins an economic comeback.

The government is keen on keeping prices artificially inflated, Paul is quick to point out, however. Keeping prices high is what led to the Great Depression, he says.

Moreover, bailouts only exacerbate the problem, according to Paul: “Additionally, the government's actions encourage moral hazard of the worst sort. Now that the precedent has been set, the likelihood of financial institutions to engage in riskier investment schemes is increased” — meaning institutions will misbehave if they are certain of a bailout as a final means of correction.

Paul writes that the solution is a hands-off government. “Government intervention leads to distortions in the market, and government reacts to each distortion by enacting new laws and regulations, which create their own distortions, and so on ad infinitum.”

He says these bailouts do not work and ultimately taxpayers are saddled with the fallout: “Using trillions of dollars of taxpayer money to purchase illusory short-term security, the government is actually ensuring even greater instability in the financial system in the long term.”

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