emazur
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- Oct 26, 2008
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Back in 2001, New York Times Keynesian econonomist and columnist Paul Krugman called for just such a housing bubble when he suggested the Fed keep interest rates low. During the jittery aftermath of the 9/11 terrorsit attacks, he wrote "Meanwhile, economic policy should encourage other spending to offset the temporary slump in business investment. Low interest rates, which promote spending on housing and other durable goods, are the main answer." Later in 2005, he wrote
So what happens if the housing bubble bursts? It will be the same thing all over again, unless the Fed can find something to take its place. And it's hard to imagine what that might be. After all, the Fed's ability to manage the economy mainly comes from its ability to create booms and busts in the housing market. If housing enters a post-bubble slump, what's left?
Mr. Roach believes that the Fed's apparent success after 2001 was an illusion, that it simply piled up trouble for the future. I hope he's wrong. But the Fed does seem to be running out of bubbles.
It is interesting to note that Krugman acknowledges that the bubbles the Fed creates can indeed pop and leave citizens in a messy economic aftermath. Notheless, he seems to think that it's worth the gamble. Followers of the Austrian free-market economic school like Dr. Paul do not. After the housing bubble popped, Paul in March of 2010 eventually had the opportunity to question former head of the New York Federal Reserve and current Secretary of Treasury Tim Geithner on the financial meltdown and prefaced by stating that the Austrian free-market economists predicted the crisis and placed the blame on the the Fed fixing interest rates too low for too long, the moral hazard created by the line of credit given by the Federal Reserve to Fannie Mae and Freddie Mac, and the unrestricted ability for the Fed to buy mortgage debt.
So my question is, are you familiar with the explanation of the Austrian economists, of the business cycle, how bubbles are formed and what we should do, and you shake your head yes, and if so, if you do understand that, which part of it don’t you like? And why don’t we look more carefully at those economists? They were right 10 years ago, I believe they’re right now. Why aren’t they consulted?
Tim Geithner: Congressman, I agree with much of what you said and as you and I have talked before in this hearing, I think you’re right to point out that a long period of low real interest rates around the world played a major role in contributing to this financial crisis, this real estate boom, this credit boom. You’re also right that moral hazard played a very important role, most dangerously in Fannie and Freddie and those institutions were allowed to grow to enormous size, take on enormous risk without capital to support those commitments because of the expectation the government would come in and protect them from the failures. I completely agree with you. Completely agree with you.
Once again, Ron Paul had been proven right. The financial crisis that occurred in September 2008 was blamed on a lack of government regulation. But back in May of 2008, Paul had the opportunity to question former Fed Chairman Greenspan's predecessor Paul Volcker on the topic of regulation.
Paul: And, I believe in regulation. But I don’t believe for a minute that it’s a lack of government regulation that is our problem. It was the fact that the government had licensed the Federal Reserve to distort the market, create capital out of thin air, distort interest rates, cause the malinvestment, the excessive debt.
The market is a good regulator. The market, through interest rate changes, gives us signals that we should follow, but we don’t have that anymore. But just to say “all we need is more regulation”, I think it’s sort of like saying that we need regulations for something that is unregulatable, because the system is so artificial. It has nothing to do with the market economy.
So I really fear when I hear statements “well it’s the free market that is the problem”, rather than asking, “where did the bubble come from?”. And I think it’s very, very precise and very clear where financial bubbles come from and we have to deal with that.
Volcker: Look, supervision and regulation aren't going to solve all these problems, you're quite right. You have to get the basic structure of the system right. One point of concern I think touches upon what you're saying is that you can't lose sight of the fact that if people get used to the notion that the creditors of financial institutions are going to be protected, that will effect their behavior and they will take more risks than they otherwise would take.
Ron Paul had been validated again. You cannot unregulate the unregulatable and the moral hazard that is brought upon by the implicit promise of a bailout by the federal government or the Federal Reserve causes banks to take excessive risks. Through his accurate predictions of economic crisis and the validation of his theories why they happen through his interactions with figures like Volcker and Geithner, Ron Paul's credibility had become rock-solid. In a reversal from previous headlines regarding Keynesians and socialists, in November 2010 CNBC ran the headline "Here's Why the Fed Plan Is Failing: We’re All Austrians Now". Author John Carney writes
Not since the New Deal has Austrian economics enjoyed the political popularity it does now. Austrian economists are awfully popular with the Republican Party, especially its Tea Party wing. Peter Schiff, the Austrian economics-inflected investment advisor, is a very popular guest on business television. Tom Woods' book “Meltdown”—which provided an Austrian economics explanation for the financial crisis—was a best seller. Congressman Ron Paul and Senator-elect Rand Paul are both devotees.
Perhaps more importantly, there has been widespread blame assigned to Alan Greenspan’s Federal Reserve for initiating the housing bubble with its low interest rate policies. I cannot remember when the last time was that there was widespread public appreciation of the role of central banks in causing the boom-bust cycle... All of which points to me to the possibility that Austrian business cycle theory has gone mainstream
Not only that, Ron Paul seems to have made a tentative ally in the Federal Reserve. In a television interview, St. Louis Federal Reserve president James Bullard said of Dr. Paul
I love that he talks about markets and how markets work... I think his rhetoric on that is excellent. I'd like to see more of that around Washington... I'm not too keen on him ending the Fed
But others around the country have started to become keen on abolishing the Federal Reserve, which until recently had neither been conceived nor talked about in the media. Now, "End the Fed" rallies attended by dozens are held every year at different branches of the Federal Reserve throughout the country. Even popular radio and television political commentator Glenn Beck regularly rails against inflation and money printing and stated in a June 18, 2009 TV broadcast that "The Fed needs to be shut down." A bill with a more moderate proposal with the goal of auditing the Federal Reserve was introduced by Dr. Paul in 2009 and received more than 320 cosponsors in the House of Representatives. In the end the bill was watered down to include a limited 1-time audit of the Fed. That was not good enough for Paul, but good fortune shined upon him when in December 2010 he was selected as Chair of the House Sub-Committe on Domestic Monetary Policy. This position will give Ron Paul oversight of the Federal Reserve as well as subpeona power. We might expect to see fireworks as current Fed Chariman Ben Bernanke is raked over the coals. Coverage of these interactions is sure to increase Ron Paul's exposure and popularity which will hopefully generate more discussion on abolishing the central bank.
So what happens if the housing bubble bursts? It will be the same thing all over again, unless the Fed can find something to take its place. And it's hard to imagine what that might be. After all, the Fed's ability to manage the economy mainly comes from its ability to create booms and busts in the housing market. If housing enters a post-bubble slump, what's left?
Mr. Roach believes that the Fed's apparent success after 2001 was an illusion, that it simply piled up trouble for the future. I hope he's wrong. But the Fed does seem to be running out of bubbles.
It is interesting to note that Krugman acknowledges that the bubbles the Fed creates can indeed pop and leave citizens in a messy economic aftermath. Notheless, he seems to think that it's worth the gamble. Followers of the Austrian free-market economic school like Dr. Paul do not. After the housing bubble popped, Paul in March of 2010 eventually had the opportunity to question former head of the New York Federal Reserve and current Secretary of Treasury Tim Geithner on the financial meltdown and prefaced by stating that the Austrian free-market economists predicted the crisis and placed the blame on the the Fed fixing interest rates too low for too long, the moral hazard created by the line of credit given by the Federal Reserve to Fannie Mae and Freddie Mac, and the unrestricted ability for the Fed to buy mortgage debt.
So my question is, are you familiar with the explanation of the Austrian economists, of the business cycle, how bubbles are formed and what we should do, and you shake your head yes, and if so, if you do understand that, which part of it don’t you like? And why don’t we look more carefully at those economists? They were right 10 years ago, I believe they’re right now. Why aren’t they consulted?
Tim Geithner: Congressman, I agree with much of what you said and as you and I have talked before in this hearing, I think you’re right to point out that a long period of low real interest rates around the world played a major role in contributing to this financial crisis, this real estate boom, this credit boom. You’re also right that moral hazard played a very important role, most dangerously in Fannie and Freddie and those institutions were allowed to grow to enormous size, take on enormous risk without capital to support those commitments because of the expectation the government would come in and protect them from the failures. I completely agree with you. Completely agree with you.
Once again, Ron Paul had been proven right. The financial crisis that occurred in September 2008 was blamed on a lack of government regulation. But back in May of 2008, Paul had the opportunity to question former Fed Chairman Greenspan's predecessor Paul Volcker on the topic of regulation.
Paul: And, I believe in regulation. But I don’t believe for a minute that it’s a lack of government regulation that is our problem. It was the fact that the government had licensed the Federal Reserve to distort the market, create capital out of thin air, distort interest rates, cause the malinvestment, the excessive debt.
The market is a good regulator. The market, through interest rate changes, gives us signals that we should follow, but we don’t have that anymore. But just to say “all we need is more regulation”, I think it’s sort of like saying that we need regulations for something that is unregulatable, because the system is so artificial. It has nothing to do with the market economy.
So I really fear when I hear statements “well it’s the free market that is the problem”, rather than asking, “where did the bubble come from?”. And I think it’s very, very precise and very clear where financial bubbles come from and we have to deal with that.
Volcker: Look, supervision and regulation aren't going to solve all these problems, you're quite right. You have to get the basic structure of the system right. One point of concern I think touches upon what you're saying is that you can't lose sight of the fact that if people get used to the notion that the creditors of financial institutions are going to be protected, that will effect their behavior and they will take more risks than they otherwise would take.
Ron Paul had been validated again. You cannot unregulate the unregulatable and the moral hazard that is brought upon by the implicit promise of a bailout by the federal government or the Federal Reserve causes banks to take excessive risks. Through his accurate predictions of economic crisis and the validation of his theories why they happen through his interactions with figures like Volcker and Geithner, Ron Paul's credibility had become rock-solid. In a reversal from previous headlines regarding Keynesians and socialists, in November 2010 CNBC ran the headline "Here's Why the Fed Plan Is Failing: We’re All Austrians Now". Author John Carney writes
Not since the New Deal has Austrian economics enjoyed the political popularity it does now. Austrian economists are awfully popular with the Republican Party, especially its Tea Party wing. Peter Schiff, the Austrian economics-inflected investment advisor, is a very popular guest on business television. Tom Woods' book “Meltdown”—which provided an Austrian economics explanation for the financial crisis—was a best seller. Congressman Ron Paul and Senator-elect Rand Paul are both devotees.
Perhaps more importantly, there has been widespread blame assigned to Alan Greenspan’s Federal Reserve for initiating the housing bubble with its low interest rate policies. I cannot remember when the last time was that there was widespread public appreciation of the role of central banks in causing the boom-bust cycle... All of which points to me to the possibility that Austrian business cycle theory has gone mainstream
Not only that, Ron Paul seems to have made a tentative ally in the Federal Reserve. In a television interview, St. Louis Federal Reserve president James Bullard said of Dr. Paul
I love that he talks about markets and how markets work... I think his rhetoric on that is excellent. I'd like to see more of that around Washington... I'm not too keen on him ending the Fed
But others around the country have started to become keen on abolishing the Federal Reserve, which until recently had neither been conceived nor talked about in the media. Now, "End the Fed" rallies attended by dozens are held every year at different branches of the Federal Reserve throughout the country. Even popular radio and television political commentator Glenn Beck regularly rails against inflation and money printing and stated in a June 18, 2009 TV broadcast that "The Fed needs to be shut down." A bill with a more moderate proposal with the goal of auditing the Federal Reserve was introduced by Dr. Paul in 2009 and received more than 320 cosponsors in the House of Representatives. In the end the bill was watered down to include a limited 1-time audit of the Fed. That was not good enough for Paul, but good fortune shined upon him when in December 2010 he was selected as Chair of the House Sub-Committe on Domestic Monetary Policy. This position will give Ron Paul oversight of the Federal Reserve as well as subpeona power. We might expect to see fireworks as current Fed Chariman Ben Bernanke is raked over the coals. Coverage of these interactions is sure to increase Ron Paul's exposure and popularity which will hopefully generate more discussion on abolishing the central bank.
