Bad Bank + Bad Debt + Bad Bankers = Bad Idea

In his latest speech to Congress, Ron Paul points out that allowing the liquidation of bad debt is politically unacceptable, but the alternative - dumping everything on the taxpayer - is even worse. It’s interesting that there is even such a thing as “politically unacceptable” in this day and age. One one hand, that’s good because it shows that when all is said and done, politicians are still afraid of the people, not the other way round. But it’s also bad because many Americans will fall for the “politically acceptable” alternative of bailing out everything and everyone, thereby guaranteeing a future collapse of the dollar, the nationalization of large parts of the economy, and the reduction of America’s status in the world to that of an angry third world banana republic with an aging stockpile of nuclear weapons. –tmartin

Audience: U.S. House
Channel: C-SPAN
Date: 1/22/2009

Ron Paul: Mr. Speaker, I rise and support of this resolution because I don’t believe the bailouts can work, and more spending isn’t the answer. Actually, we should have talked more about prevention of a problem like we have today than trying to deal with a financial cancer that we’re dealing with. But, the prevention could have come many decades ago and many free market economists predicted even decades ago that we would have a crisis like this.

But those warnings were not heeded and even in the last ten years there have been dire warnings by people who believe in sound money and not in the inflationary system that we have, that we will come to this point. Over those decades we were able to bail out to a degree and patch over and keep the financial bubble going. But today we’re in a massive deflationary crisis, and we only have two choices.

One is to continue to do what we’re doing. Inflate more, spend more and run out more deficits, but it doesn’t seem to be working, because it won’t work, because the confidence has been lost. The confidence in the post Bretton Woods system of the dollar fiat standard, it’s gone. And this whole effort to refinance it in this manner just won’t work.

Now the other option is to allow the deflation to occur, allow the liquidation of bad debt, and to allow the removal of all the bad investments. But that politically is unacceptable, so we’re really in a dilemma, because nobody can take a hands off position. Politicians have to feel relevant and say therefore they have to do something, but there’s no evidence that this is going to work.

Now we hear that there’s a proposal and we read about it in the paper, I don’t know who came up with this, but it’s the idea of having a bad bank. Let’s create a government bad bank. And this bad bank is to take the bad debt from the bad bankers and dump these assets onto the good citizens.

Well, I think that’s a very bad idea. I mean, it doesn’t make any sense for the innocent American citizen to bear the burden. But others will say, no we’ll bail out the citizens as well, but ultimately it’s the little guy that loses on this. The bankers got 350 billion dollars we can’t account for, their assets don’t look all that much better, and yet the American people are still suffering. It didn’t create any more new jobs, so the attempt now will be maybe to redirect this, but unfortunately it will not be any more successful.

The fallacy here is that we’re trying to keep prices high when prices should come down. What do we have against poor people? Lower the price of houses! Get them down, a $100,000 house get them down to $20,000, let the poor person buy these houses. That is what we want, but this is a remnant of the philosophy of the ’30s because it was thought we were in trouble because the farmers weren’t getting enough money for their crops. So people were starving in the streets, and guess what the policy was that came out of Washington? Pile under the crops, and maybe the prices would come up. Diminish the supply and it will solve our problems. It didn’t work then, it won’t work today.