The Evil of Bailout

Ron Paul
Tuesday, Oct 14, 2008

One of the burning questions regarding the recently passed bailout, and the one that almost no one has bothered to answer, is how the government intends to pay for it. Governments have three main methods by which they can raise funds: taxation, printing new money, and debt. As our $10 trillion national debt shows, the federal government has always enjoyed raising money by issuing new debt. Money is gained upfront, while the cost of repaying that debt is pushed onto future generations.

This method is especially favored today, since imposing $700 billion worth of taxes would lead to widespread public dissatisfaction. When the cost of all the recent bailouts plus the cost of all the new lending facilities the Federal Reserve has initiated are added together, we quickly reach a figure in the trillions of dollars. Even with the debt ceiling being raised to $11.3 trillion, the issuance of debt alone cannot begin to cover the cost of all the bailouts in which the government is engaged. Every indication is that the government will use both debt and inflation in its attempt to keep the economy running at full speed.

Debt financing has begun in earnest, as the national debt has increased $600 billion over the past three weeks, and most of that increase came even before the $700 billion bailout bill was passed. I fully expect that trend to continue in the near future and would not be surprised if we see another debt-limit increase slipped into another economic stimulus package that might be passed before the new year. Now that our foreign creditors are less willing to purchase our debt, what debt we cannot sell to foreigners will be monetized through the Federal Reserve, resulting in increased inflation.

In fact, money supply data for the narrowest measure, the adjusted monetary base, show an unprecedented increase, far higher than when Chairman Alan Greenspan attempted to reflate us out of trouble after the dot-com stock bubble burst. That intervention on Greenspan’s part, pumping in liquidity and driving interest rates down, led to the real estate bubble, and Chairman Ben Bernanke unfortunately seems to be following the same script as his predecessor in resorting to credit creation and low interest rates. Even were this effort to succeed, it would only delay the inevitable. In order for the economy to return to normal, the Federal Reserve must cease the creation of new credit, overvalued assets must be allowed to fall in price, and malinvested resources must be allowed to liquidate and be put to use in more productive sectors.

Ron Paul: Bailout Will Destroy Dollar, World Economy (video)

As a vote nears on the $700 billion dollar plus bailout bill, Congressman Ron Paul took to the House floor this morning to warn that the passage of the legislation will destroy the dollar and the world economy.

Stating that the passage of the bailout bill would only make the problem worse, the Congressman from Texas said, “This has nothing to do with free market capitalism, this has to do with a managed economy, an inflationary system, corporatism, a special interest system, and this has nothing to do with the failure of our free markets and capitalism.”

Ron Paul on the flaws on the Bailout Plan (video)

9/24/08
Congressman Ron Paul lectures Bernanke on the flaws of the bailout plan and the hazard of the attempt to fix prices versus letting them correct naturally in the free market at the Congressional Hearing today.

Ron also questions Bernanke's authority and constitutionality of using the printing press to generate all this extra money needed for the bailout.




9/26/08
Messages to Congress as high as 300 to 1 against the bailout

Quote of the Day:

"Party is the madness of many for the gain of a few."
-- Alexander Pope

First the Republicans were for it (the Big Bailout), and then they were against it. What happened?

What happened is YOU, and others like you, pounding on Congress to NOT pass the Big Bailout.

There were constant reports on CNBC yesterday, and in other places, that calls and messages to Congress were running roughly 300 to 1 against the Big Bailout. This is what made the Republicans reverse course.

Your messages and calls to Congress do make a difference!

But pressure from powerful special interests also has an impact, so we must maintain OUR pressure.

It would also help to provide Congress with an alternative plan that is better than the Big Bailout. Fortunately, we can do that. All Congress has to do is remove the mark-to-market accounting rule, and replace it with a "discounted cash flow" accounting rule. Doing so would . . .

* Enable firms to record a more realistic value for their assets
* Boost balance sheets and restore credit ratings
* Provide useful information that would serve to create a liquid market for these assets

In short, this one simple regulatory change would accomplish everything the Big Bailout is supposed to achieve, with NO expenditure of federal funds!

If you want to learn more about mark-to-market accounting vs. discounted-cash-flow there's a good write-up of it here.

Please send another message to Congress right now. The message for the campaign we're using for this purpose reads: "Please cut federal spending." Use your personal comments to add something like the following . . .

"The Big Bailout moves in the wrong direction, toward more spending and more debt. Oppose the bailout! Instead, remove the mark-to-market accounting regulation, and replace it with a discounted-cash-flow accounting rule. This will free up the markets at no cost to the taxpayer."

You can send your message here.

Thank you for being a part of the growing Downsize DC army.

Perry Willis
Communications Director
DownsizeDC.org, Inc.