Ron Paul, the Congressman, obviously has limited understanding of the processes of irrational exuberance. <"Second, we do know why financial bubbles occur, and we know from history that they are routinely associated with speculation, excessive debt, wild promises, greed, lying, and cheating. These problems were described by quite a few observers as the problems were developing throughout the 90s, but the warnings were ignored for one reason. Everybody was making a killing and no one cared, and those who were reminded of history were reassured by the Fed Chairman that "this time" a new economic era had arrived and not to worry. Productivity increases, it was said, could explain it all."
"But now we know that's just not so. Speculative bubbles and all that we've been witnessing are a consequence of huge amounts of easy credit, created out of thin air by the Federal Reserve. We've had essentially no savings, which is one of the most significant driving forces in capitalism. The illusion created by low interest rates perpetuates the bubble and all the bad stuff that goes along with it. And that's not a fault of capitalism. We are dealing with a system of inflationism and interventionism that always produces a bubble economy that must end badly." >
He repeats the silly idea that credit expansion creates bubbles. We should therefore now be in a giant bubble, but guess what, we aren't.
The cause of bubbles is very simply irrationally exuberant bidding wars, based on excessive hope and wishful thinking. Credit, speculation, lying, cheating, theft and other non-Asian values soon appear in the feeding frenzy, but they are not the causes of the frenzy. Lenders, not surprisingly, are willing to lend to cash in on the irrational exuberance. People around the world bought in, bidding the US$ up to do so.
There is no illusion created by low interest rates. Interest rates are a supply and demand balance - too low and people will not lend but will spend. After a while, interest rates will rise as borrowing increases again and the economy recovers. But right now, I'm not borrowing [because I don't want to] and neither is Worldcom [because nobody will lend to them]. There is some market clearing still to be done.
Ron Paul is out of touch, a day late and a dollar short.
<"If we were to choose freedom and capitalism, we would restore our dollar to a commodity or a gold standard. Federal spending would be reduced, income taxes would be lowered, and no taxes would be levied upon savings, dividends, and capital gains. Regulations would be reduced, special-interest subsidies would be stopped, and no protectionist measures would be permitted. Our foreign policy would change, and we would bring our troops home." >
Good grief, he wants to take the USA back to the stone age and Aztec incantations around gold. What a vast waste of resources to dig gold up only to bury it again at Fort Knox. No wonder the USA is dropping in value with people like him at the helm.
A lot of people around the world would be quite happy for USA soldiers to go home. But I don't think we'll see that any time soon. An empire can't run by remote control.
He does make some good points on 'protectionist' measures, excessive regulation, subsidies, federal spending reduction. Unfortunately, his good points are ignored.
Mqurice |
