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High-Risk Credit
Ron Paul
Lew Rockwell.com
Tuesday Aug 21, 2007
As markets went on a rollercoaster ride last week, our economy
is coming close to a day of reckoning for loose credit policies
being followed by the Federal Reserve Bank. Simply, foreign banks
we have been relying on to buy our debt are waking up to the reality
of much higher default rates than predicted, and many mortgage-backed
securities have been reduced to “junk” ratings. Wall
Street fears the possibility of tightening credit and the tightening
of America’s belts. Why, they say, “if Americans spend
only what they can afford, think of the ripple effects throughout
the economy!” This is the cry, as the call comes for the
fed to cut rates and bail out companies in trouble.
More inflation is, however, never the answer to inflation.
The truth is that business involves risk, and businesses that
miscalculate risk should be liquidated, so their assets can be
reallocated to businesses that correctly judge risk and make profits.
Instead, the Fed has injected $64 billion into the jittery markets,
effectively amounting to a bailout that keeps these malinvestments
afloat, but eventually they will become the undoing of our economy.
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In addition to the negative reactions in financial markets, many
Americans have taken on too much personal debt owing to exotic
mortgage products and artificially low interest rates. Unfortunately,
these families are now in the position of losing their homes in
unprecedented numbers as the teaser rates expire and the real
bills are coming due.
The real answers are, and always have been, found in the principles
of the free market. Let the market set the interest rates. If
we had been functioning under a true and transparent free market
system, we would not be in the mess we are in today. Government,
like the American household, needs to live within its means to
get back on stable fiscal ground.
We’ve been headed in the wrong direction since 1971. This
week marks the 36th anniversary of Nixon’s decision to close
the gold window, which convinced me to seek public office to call
attention to the runaway money train that would come in the aftermath
of that decision. The temptation to print and spend money with
impunity, like the temptation to max out lines of credit, is too
strong to for government to resist. While Nixon brokered exclusivity
deals with OPEC to prop up demand for the tidal wave of green
pieces of paper the Fed pumped into the markets, the world is
tiring of marching to the beat of our drum in order to secure
their energy needs. The house of cards Nixon built is now on the
verge of collapsing on our heads, and on our children’s
heads.
As the dollar weakens, it becomes ever clearer that we need a
return to sound, commodity-based money for a secure future. Money
based on real value, not empty promises and secretive backroom
machinations, is the way to get out of the current calamity without
causing even bigger problems.
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