Our central bankers are intellectually bankrupt

Ron Paul, Financial Times

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.

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.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.

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

Libertem a moeda!

Engole essa, Bernanke! Ron Paul vai direto ao ponto neste discurso feito hoje. Ouro e prata não deveriam ser vistos como um ATIVO pelo governo, e portanto taxados por ganho de capital. É hora de repelir o Legal Tender do Fiat Money e permitir que cada cidadão tenha, como MOEDA, ouro e prata em bancos, assim como referência em contratos privados. Hayek, Nobel de Economia, tem um livro sobre a desestatização da moeda que vale a pena ser lido. Segue uma pequena resenha que fiz.

PS: Se Ron Paul deixasse sua visão ingênua de política externa de lado, ele seria "o cara" mesmo!

Why Ron Paul Matters

By EDWARD H. CRANE, wSJ

The controversy surrounding decades-old newsletters to which GOP presidential aspirant Ron Paul lent his name is regrettable. First, it is regrettable because the sometimes bigoted, intolerant content of those newsletters is inconsistent with the views of the congressman as understood by those of us who know him. Yet, while Mr. Paul disavows supporting those ideas, he refuses to repudiate his close association with their likely source, Lew Rockwell, head of the Alabama-based Mises Institute.

Second, the New York Times editorialized recently that these unsavory writings "will leave a lasting stain on . . . the libertarian movement." That is wishful thinking on the part of the Times, but it adds to the background noise surrounding Mr. Paul's candidacy, obscuring the real libertarian policy initiatives that have made his candidacy the most remarkable development of the 2012 campaign.

Ron Paul's libertarian campaign has traction because so many Americans respond to his messages:

• Tax and spending. If ever there were sound and fury signifying nothing, it has to be the recent "debate" over the budget. Covered by the media as though it was negotiations on the Treaty of Versailles, the wrestling match between Republicans and Democrats centered on the nearly trivial question of whether the $12 trillion increase in the national debt over the next decade should be reduced by 3% or 2%.

Mr. Paul would cut the federal budget by $1 trillion immediately. He can't do it, of course, but voters sense he really wants to. As Milton Friedman once explained, the true tax on the American people is the level of spending—the resources taken from the private sector and employed in the public sector. Whether financed from direct taxation, inflation or borrowing, spending is the burden.

• Foreign policy and military spending. As the only candidate other than Jon Huntsman who says it is past time to bring the troops home from Afghanistan, Mr. Paul has tapped into a stirring recognition by limited-government Republicans and independents that an overreaching military presence around the world is inconsistent with small, constitutional government at home.

The massive cost of these interventions, in treasure and blood, highlights what a mistake they are, as sensible people on the left and right recognized from the beginning. Of course we want a strong military capable of defending the United States, but our current expenditures equal what the rest of the world spends, which makes little sense. It is futile to try to be the world's policeman—to try to create an American Empire as so many neoconservatives promote. And we can't afford it.

• Civil liberties. Libertarians often differ with conservatives over issues related to civil liberties. Mr. Paul's huge support among young people is due in large part to his fierce commitment to protecting the individual liberties guaranteed us in the Constitution. He would work to repeal significant parts of the so-called Patriot Act. Its many civil liberties transgressions include the issuance by the executive branch of National Security Letters (a form of administrative subpoena) without a court order, and the forbiddance of American citizens from mentioning that they have received one of these letters at the risk of jail.

The Bush and Obama administrations have claimed the right to incarcerate an American citizen on American soil, without charge, without access to an attorney, for an indefinite period.

President Obama even claims the right to kill American citizens on foreign soil, without due process of law, for suspected terrorist activities. Meanwhile, the Stop Online Piracy Act moving through the House is a clear effort by the federal government to censor the Internet. Mr. Paul stands up against all this, which should and does engender support from limited government advocates in the GOP.

• Austrian economics. Mr. Paul is often criticized for references to what some consider obscure economists of the so-called Austrian School. People should read them before criticizing. Nobel laureate Friedrich von Hayek and his mentor Ludwig von Mises were two of the greatest economists and social scientists ever to live.

Modern Austrian School economists such as Lawrence H. White, now at George Mason University, and Fred Foldvary at Santa Clara University predicted the housing bubble and the recession that followed the massive, multitrillion-dollar malinvestment caused by government redirection of capital into housing. Mr. Paul, like Austrian School economists, understands that we would be better off with a gold standard, competing currencies or a monetary rule than with the arbitrary and discretionary powers of our out-of-control Federal Reserve.

Mr. Paul should be given credit for his efforts to promote these ideas and other libertarian policies, all of which would make America better off. He'd be the first to admit he's not the most erudite candidate to make the case, but surely part of his appeal is his very genuine persona.

Which is not to say that Mr. Paul is always in sync with mainstream libertarians. His seeming indifference to attempts to prevent Iran from obtaining nuclear weapons, his support for a constitutional amendment to deny birthright citizenship to children of illegal aliens, and his opposition to the Nafta and Cafta free trade agreements in the name of doctrinal purity are at odds with most libertarians.

As for the Ron Paul newsletters, the best response was by my colleague David Boaz when the subject was raised publicly in 2008. About them he wrote in the Cato Institute's blog:

"Those words are not libertarian words. Maybe they reflect 'paleoconservative' ideas, though they're not the language of Burke or even Kirk. But libertarianism is a philosophy of individualism, tolerance, and liberty. As Ayn Rand wrote, 'Racism is the lowest, most crudely primitive form of collectivism.' Making sweeping, bigoted claims about all blacks, all homosexuals, or any other group is indeed a crudely primitive collectivism. Libertarians should make it clear that the people who wrote those things are not our comrades, not part of our movement, not part of the tradition of John Locke, Adam Smith, John Stuart Mill, William Lloyd Garrison, Frederick Douglass, Ludwig von Mises, F. A. Hayek, Ayn Rand, Milton Friedman, and Robert Nozick. Shame on them."

Support for dynamic market capitalism (as opposed to crony capitalism), social tolerance, and a healthy skepticism of foreign military adventurism is a combination of views held by a plurality of Americans. It is why the 21st century is likely to be a libertarian century. It is why the focus should be on Ron Paul's philosophy and his policy proposals in 2012.

Mr. Crane is co-founder and president of the Cato Institute.

What Ron Paul Thinks of America

By DOROTHY RABINOWITZ, WSJ

Ron Paul's supporters are sure of one thing: Their candidate has always been consistent—a point Dr. Paul himself has been making with increasing frequency. It's a thought that comes up with a certain inevitability now in those roundtables on the Republican field. One cable commentator genially instructed us last Friday, "You have to give Paul credit for sticking to his beliefs."

He was speaking, it's hardly necessary to say, of a man who holds some noteworthy views in a candidate for the presidency of the United States. One who is the best-known of our homegrown propagandists for our chief enemies in the world. One who has made himself a leading spokesman for, and recycler of, the long and familiar litany of charges that point to the United States as a leading agent of evil and injustice, the militarist victimizer of millions who want only to live in peace.

Hear Dr. Paul on the subject of the 9/11 terror attacks—an event, he assures his audiences, that took place only because of U.S. aggression and military actions. True, we've heard the assertions before. But rarely have we heard in any American political figure such exclusive concern for, and appreciation of, the motives of those who attacked us—and so resounding a silence about the suffering of those thousands that the perpetrators of 9/11 set out so deliberately to kill.

There is among some supporters now drawn to Dr. Paul a tendency to look away from the candidate's reflexive way of assigning the blame for evil—the evil, in particular, of terrorism—to the United States.

One devout libertarian told me recently that candidate Paul "believes in all the things I do about the menace of government control, and he's a defender of the Constitution—I just intend to take what I like about him." The speaker, educated and highly accomplished in his field (music), is a committed internationalist whose views on American power are polar opposites of those his candidate espouses. No matter. Having tuned out all else that candidate has said—with, yes, perfect consistency—it was enough for him that Dr. Paul upheld libertarian values.

This admirer is representative of a fair number of people now flocking to the Paul campaign or thinking of doing so. It may come as a surprise to a few of them that in the event of a successful campaign, a President Paul won't be making decisions based just on the parts of his values that his supporters find endearing. He'd be making decisions about the nation's defense, national security, domestic policy and much else. He'd be the official voice of America—and, in one conspicuous regard, a familiar one.

The world may not be ready for another American president traversing half the globe to apologize for the misdeeds of the nation he had just been elected to lead. Still, it would be hard to find any public figure in America whose views more closely echo those of President Obama on that tour.

Most of Dr. Paul's supporters, of course, don't actually imagine he can become president. Nor do they dwell on the implications of the enlarged influence conferred on him by a few early primary victories (a third-party run is not something he rules out, the ever-consistent Dr. Paul has repeatedly said under questioning).

A grandfatherly sort who dispenses family cookbooks on the campaign trail, candidate Paul is entirely aware of the value of being liked. He has of late even tried softening the tone of some of his comments on the crime of foreign aid and such, but it doesn't last long. There he was at the debate last Thursday waving his arms, charging that the U.S. was declaring "war on 1.2 billion Muslims," that it "viewed all Muslims as the same." Yes, he allowed, "there are a few radicals"—and then he proceeded to hold forth again on the good reasons terrorists had for mounting attacks on us.

His efforts on behalf of Iran's right to the status of misunderstood victim continued apace. On the Hannity show following the debate, Dr. Paul urged the host to understand that Iran's leader, Mahmoud Ahmadinejad, had never mentioned any intention of wiping Israel off the map. It was all a mistranslation, he explained. What about Ahmadinejad's denial of the Holocaust? A short silence ensued as the candidate stared into space. He moved quickly on to a more secure subject. "They're just defending themselves," he declared.

Presumably he was referring to Iran's wishes for a bomb. It would have been intriguing to hear his answer had he been asked about another Ahmadinejad comment, made more than once—the one in which the Iranian leader declares the U.S. "a Satanic power that will, with God's will, be annihilated."

There can be no confusions about Dr. Paul's own comments about the U.S. After 9/11, he said to students in Iowa, there was "glee in the administration because now we can invade Iraq." It takes a profoundly envenomed mindset—one also deeply at odds with reality—to believe and to say publicly that the administration of this nation brought so low with grief and loss after the attack had reacted with glee. There are, to be sure, a number of like-minded citizens around (see the 9/11 Truthers, whose opinions Dr. Paul has said he doesn't share). But we don't expect to find their views in people running for the nation's highest office.

The Paul comment here is worth more than a passing look. It sums up much we have already heard from him. It's the voice of that ideological school whose central doctrine is the proposition that the U.S. is the main cause of misery and terror in the world. The school, for instance, of Barack Obama's former minister famed for his "God d— America" sermons: the Rev. Jeremiah Wright, for whom, as for Dr. Paul, the 9/11 terror assault was only a case of victims seeking justice, of "America's chickens coming home to roost."

Some in Iowa are reportedly now taking a look at Dr. Paul, now risen high in the polls there. He has plenty of money for advertising and is using it, and some may throw their support to him, if only as protest votes. He appears to be gaining some supporters in New Hampshire as well. It seemed improbable that the best-known of American propagandists for our enemies could be near the top of the pack in the Iowa contest, but there it is. An interesting status for a candidate of Dr. Paul's persuasion to have achieved, and he'll achieve even more if Iowans choose to give him a victory.

Ms. Rabinowitz is a member of the Journal's editorial board.

Blame the Fed for the Financial Crisis

By RON PAUL, WSJ

To know what is wrong with the Federal Reserve, one must first understand the nature of money. Money is like any other good in our economy that emerges from the market to satisfy the needs and wants of consumers. Its particular usefulness is that it helps facilitate indirect exchange, making it easier for us to buy and sell goods because there is a common way of measuring their value. Money is not a government phenomenon, and it need not and should not be managed by government. When central banks like the Fed manage money they are engaging in price fixing, which leads not to prosperity but to disaster.

The Federal Reserve has caused every single boom and bust that has occurred in this country since the bank's creation in 1913. It pumps new money into the financial system to lower interest rates and spur the economy. Adding new money increases the supply of money, making the price of money over time—the interest rate—lower than the market would make it. These lower interest rates affect the allocation of resources, causing capital to be malinvested throughout the economy. So certain projects and ventures that appear profitable when funded at artificially low interest rates are not in fact the best use of those resources.

Eventually, the economic boom created by the Fed's actions is found to be unsustainable, and the bust ensues as this malinvested capital manifests itself in a surplus of capital goods, inventory overhangs, etc. Until these misdirected resources are put to a more productive use—the uses the free market actually desires—the economy stagnates.

The great contribution of the Austrian school of economics to economic theory was in its description of this business cycle: the process of booms and busts, and their origins in monetary intervention by the government in cooperation with the banking system. Yet policy makers at the Federal Reserve still fail to understand the causes of our most recent financial crisis. So they find themselves unable to come up with an adequate solution.

In many respects the governors of the Federal Reserve System and the members of the Federal Open Market Committee are like all other high-ranking powerful officials. Because they make decisions that profoundly affect the workings of the economy and because they have hundreds of bright economists working for them doing research and collecting data, they buy into the pretense of knowledge—the illusion that because they have all these resources at their fingertips they therefore have the ability to guide the economy as they see fit.

Nothing could be further from the truth. No attitude could be more destructive. What the Austrian economists Ludwig von Mises and Friedrich von Hayek victoriously asserted in the socialist calculation debate of the 1920s and 1930s—the notion that the marketplace, where people freely decide what they need and want to pay for, is the only effective way to allocate resources—may be obvious to many ordinary Americans. But it has not influenced government leaders today, who do not seem to see the importance of prices to the functioning of a market economy.

The manner of thinking of the Federal Reserve now is no different than that of the former Soviet Union, which employed hundreds of thousands of people to perform research and provide calculations in an attempt to mimic the price system of the West's (relatively) free markets. Despite the obvious lesson to be drawn from the Soviet collapse, the U.S. still has not fully absorbed it.

The Fed fails to grasp that an interest rate is a price—the price of time—and that attempting to manipulate that price is as destructive as any other government price control. It fails to see that the price of housing was artificially inflated through the Fed's monetary pumping during the early 2000s, and that the only way to restore soundness to the housing sector is to allow prices to return to sustainable market levels. Instead, the Fed's actions have had one aim—to keep prices elevated at bubble levels—thus ensuring that bad debt remains on the books and failing firms remain in business, albatrosses around the market's neck.

The Fed's quantitative easing programs increased the national debt by trillions of dollars. The debt is now so large that if the central bank begins to move away from its zero interest-rate policy, the rise in interest rates will result in the U.S. government having to pay hundreds of billions of dollars in additional interest on the national debt each year. Thus there is significant political pressure being placed on the Fed to keep interest rates low. The Fed has painted itself so far into a corner now that even if it wanted to raise interest rates, as a practical matter it might not be able to do so. But it will do something, we know, because the pressure to "just do something" often outweighs all other considerations.

What exactly the Fed will do is anyone's guess, and it is no surprise that markets continue to founder as anticipation mounts. If the Fed would stop intervening and distorting the market, and would allow the functioning of a truly free market that deals with profit and loss, our economy could recover. The continued existence of an organization that can create trillions of dollars out of thin air to purchase financial assets and prop up a fundamentally insolvent banking system is a black mark on an economy that professes to be free.

Mr. Paul, a congressman from Texas, is seeking the Republican presidential nomination.

Ron Paul's Fantasy Empire

By BRET STEPHENS, WSJ

"We're under great threat because we occupy so many countries. We're in 130 countries. We have 900 bases around the world."

So spoke presidential hopeful and libertarian favorite Ron Paul at this week's GOP debate in Florida. But is it true?

You might think so, given how often the figures get bandied about on the Internet. In 2008, the late Chalmers Johnson claimed the U.S. deployed troops in no fewer than 151 foreign countries and operated 761 military bases. These figures were the basis for his claim that since 9/11 the U.S. has "undergone a transformation from republic to empire that may well prove irreversible."

The reality is a tad less alarming. The Pentagon's 2010 Base Structure Report notes that the U.S. maintains a total of 662 bases abroad. But of those, only 20 were listed as "large sites" and another 12 as "medium sites." The rest (630) were listed as either "small" or "other" sites. That's one reason the total number of bases changes from year to year.

Then there's Mr. Paul's line about U.S. forces being "in 130 countries." Really? The truth is that American soldiers are in even more countries than that—but only if you count the small Marine detachments that provide security for our embassies world-wide. By that measure, we're in every country from Albania, where we have eight Marines, to Zimbabwe, where we have nine.

In fact, according to figures compiled by the Defense Manpower Data Center, as of September 2010 the bulk of U.S. forces deployed overseas (not including those on ships or in transit) are stationed in just seven countries: Afghanistan, Iraq, Japan, South Korea, Germany, the U.K. and Italy, all of which are home to at least 9,000 troops. Aside from Afghanistan and Iraq (which may soon drop off that list) all of these are World War II and Cold War legacies. Another five countries—Spain, Turkey, Belgium (the headquarters of NATO), Bahrain and Djibouti—have between 1,000 and 1,500 troops. The next largest deployments are Portugal (703), Qatar (555) Honduras (403) and Greece (338).

There's an intellectually respectable argument to be made that perhaps the U.S. doesn't need so many troops in rich and peaceful countries like Germany or Japan. But to say, as Congressman Paul does, that we're in 130 countries isn't just factually inaccurate. It's absurd.