[Congressional Record (Bound Edition), Volume 156 (2010), Part 1]
[Extensions of Remarks]
[Pages 385-387]
[From the U.S. Government Publishing Office, www.gpo.gov]




                  IS THAT ALL THERE IS TO A RECESSION?

                                 ______
                                 

                             HON. RON PAUL

                                of texas

                    in the house of representatives

                      Wednesday, January 20, 2010

  Mr. PAUL. Madam Speaker, as we start the new year 2010, the 
establishment politicians, economists and Wall Street are trying to 
convince themselves that we have turned the corner and economic growth 
has once again begun. The predictions that conditions are getting back 
to normal come from those who never saw the crisis coming and don't 
have the vaguest notion what caused it. Some of them concede that it 
could be a jobless recovery. That will establish a new definition for a 
recovery.
  Official unemployment is at 10 percent but even the government knows 
that if everyone is counted, including those individuals that are too 
discouraged to even be looking for work, the unemployment rate is 17 
percent. Free-market economists claim the actual unemployment rate is 
closer to 22 percent.
  There's reason to believe that the correction is just barely started 
and has a long way to run. If the financial bubble came from excess 
credit created by the Federal Reserve, doubling the money supply can 
hardly be a solution. It wouldn't make much sense for a doctor taking 
care of a very sick patient from severe infection to deliberately give 
the patient another infection. Yet that's what the PhD doctors are 
doing to our very sick economy. It can't work. It will make the economy 
much sicker. If our leaders don't wake up soon, the economy will be 
brought to its knees. Great danger lies ahead.
  In foreign policy, it's always crucial that the motives of those who 
would do us harm are understood. Denial of the truth and accepting more 
politically palatable excuses will guarantee that threats to our safety 
will continue as we pursue a seriously flawed involvement overseas.
  It's the same in economic policy. If there's denial or ignorance of 
the real cause of financial bubbles and the inevitable corrections that 
must follow, the economy cannot be reenergized.
  We should have learned the lesson from the Depression of the 1930s 
that it was a predictable result from the Federal Reserves orchestrated 
excesses of the 1920s. Instead, the new-born Keynesian economists who 
took charge made certain that the correction would not be a one or two 
year affair as were the previous corrections in our history. The 
aggressive intervention by Hoover and Roosevelt, the Republicans and 
the Democrats, turned a short recession into the Great Depression, 
which lasted until the end of World War II.
  The real tragedy was that the interpretation of the 1930s 
institutionalized bad economic theories. Unfortunately, and 
erroneously, the Depression was blamed on the gold standard, free 
markets and a lack of regulations. Though monetary policy was analyzed, 
its importance was 100 percent misinterpreted. The low interest rates 
and excess credit of the 1920s, driven by Federal Reserve policy, was 
not considered a factor in producing the stock market bubble and the 
mal-investment.
  Instead, the 1930s analysts and even later analysis by Milton 
Freidman and the monetarists, along with academic ``scholars'' like 
Bernanke, came to an opposite conclusion: the Fed was at fault but only 
because it was too tight, arguing that massive monetary inflation was 
the only answer to the slumping economy.
  And now we are witnessing a grand experiment by the very person who 
for years claimed special knowledge regarding the Depression. Chairman 
Bernanke is in the midst of trying to solve the problem of massive 
monetary inflation and excessively low interest rates instituted by his 
predecessor, Alan Greenspan, by implementing even more inflation at 
historic rates. The sad part is the answer to his very risky experiment 
with the wealth of our country and the health of our economy will take 
years to analyze. The conclusions will be just as flawed as they were 
in the aftermath of the Great Depression by an intellectual and 
political community that had totally rejected commodity money and the 
principle of free market with the current understanding in Washington.
  One hope, though, is that free-market thinking and Austrian economic 
theories will have greater influence in the next decade or two, since 
their influence is now on a dramatic upswing. But there are a lot of 
hurdles to overcome.
  In the 1930s, in an effort to find the true cause of the crisis, 
Congress ordered an official investigation. It became known as the 
``Pecora Investigation'' named after Ferdinand Pecora, the aggressive 
chief council of the hearings. It received a lot of public attention 
and brought about many major changes but, tragically, every conclusion 
made and new policies implemented caused the depression to worsen and 
legitimized bad economic theories that continue to haunt us to this 
day.
  The Federal Reserve was not blamed except for not printing enough 
money fast enough. Artificially low interest rates and mal-investment, 
the main source of the grossly distorted economy and bubble of the 
1920s were exonerated. Not enough regulations were blamed, thus the 
Glass-Stiegall Act and the Securities Act of 1933 were passed and 
deepened the depression. Separating commercial and investment banking 
and the newly created SEC were to have solved all future problems--as 
long as the Fed was free from any restraint in its money creation 
operation to serve big-government spenders and members of the banking 
cartel.
  Since the flaws in the monetary and economic system were not 
corrected but made worse after the Depression, it was to be expected 
that periodic booms and busts would persist. The longer these cycles 
could be papered over with new money and credit, the greater would be 
the distortions and debt that would one day have to undergo a major 
correction.
  That correction is now in its early stages. Since the dollar was the 
reserve currency of the world and totally fiat since 1971, without any 
linkage to gold, the financial bubble became worldwide. This bubble 
that burst in 2008 was the largest in history. During the formation of 
the bubble, the U.S. as the issuer of the world currency received 
undeserved benefits. We essentially became the counterfeiter of the 
world and no one called us on it. Even today, the trust in the dollar 
that persists has buffeted the pain of the correction for us. This 
unique setup was a prime cause for our balance of payment deficits and 
the huge foreign debt we owe--the largest in the history of the world. 
The discord in the world financial system is telling us that it's time 
for us to pay for our profligate spending and massive foreign 
indebtedness. We have lived, as a nation, far beyond our means and the 
message is, for the foreseeable future, that we will be forced to live 
beneath our means as this debt is paid.
  The inflation optimists are excited about current signs of economic 
growth and have even announced the end of the recession. It is 
conceivable that a reprieve can be achieved and the penalty that our 
economy must endure delayed. A reprieve must not be confused with a 
pardon; one is a temporary delay, the other an exemption. The payback 
for our excesses is certain to come.
  Massively increasing debt and monetary inflation can slow the crash 
and change some government statistics encouraging the optimists. But 
real job growth and return of prosperity will remain elusive. The odds 
of us once again becoming an exporter of manufactured goods, like 
steel, cars, and textiles, are remote.
  Ironically, a reprieve may well restore some confidence and motivate 
some spending and investment. But instead of restoring long-term 
growth, it may well act perversely by precipitating price inflation and 
higher interest rates. Since today's interest rates are artificially 
set, much of our investing is unproductively misdirected.

[[Page 386]]

  Current enthusiasm in the stock market is once again a reflection of 
the message that low interest rates send. Thus too, the government's 
stimulus package has helped to sustain the bond bubble, which in time 
must be deflated in order to get back to sound economic growth. All of 
this activity poses a threat to the dollar.
  Governments are very powerful, and when in partnership with the 
monetary authorities that can inflate the currency at will, big 
government thrives. Welfare demands and senseless wars can be financed 
for long period of time through inflation, as long as trust in the 
currency lasts. Trust, though ultimately controlled by facts, can be 
misleading, since currency values can gain benefit from a country that 
has a strong military and wealth and a reasonably healthy economy. 
Eventually, markets and reality overwhelm, and illusions about a 
currency's worth become a reality.
  Today, reality is setting in and the first of three major events has 
begun. The worldwide financial system, built on a foundation of paper, 
has received the shock waves of an impending collapse.
  The wild speculation and the derivatives market, the stock market 
bubble, the insurmountable debt--public and private--and the massive 
mal-investments have been shattered.
  The only solution so far offered worldwide, but led by the United 
States has been to ``print money'' faster, keep interest rates low at 
practically zero percent, and remove all stops for controlling 
deficits. These are the very policies that caused the disequilibrium, 
and doing more of the same, but only faster, can hardly help our 
economy. The addiction to easy credit and deficit defies a wise 
political solution. Politicians are incapable of delivering the message 
of frugality, common sense, and sound money.
  We can expect that the course we are on to continue and accelerate, 
since the first event, the collapse of the financial system, is still 
in its early stage.
  The housing crisis is far from over; the commercial property crisis 
has not yet gotten much attention, and the financial obligations of the 
government are growing exponentially. And none of this forces the 
slightest pause in the expanding of welfare growth. The number of 
regulations, which are indeed a tax, are exploding though the market 
was already suffering from regulatory excesses. There's a consensus in 
Washington that ``wise'' regulations can compensate for all the 
mistakes made by the Federal Reserve, the Executive Branch, and 
Congress. This fallacy has been around a long time and will be 
difficult to overcome.
  The pessimism of the middle class continues to get worse despite the 
prognostication of Wall Street and the Administration. Most Americans 
know that the standard of living and real wages have not gone up for 
the past 10 years. If you're not a shrewd stock trader and instead 
invested in stocks 10 years ago and held on, in real terms you would 
have lost 20 percent of your savings. The middle class is poorer also 
because house prices have crashed and many have lost their homes. On 
top of this, all we hear about is the trillions of dollars of debt and 
entitlement obligations that have been racked up for future taxpayers 
to pay. When it is revealed that the insider friends of the Fed and 
Congress get billions of dollars in bailout at the expense of the 
middle class, it's no wonder the people are taking to the streets and 
directing their hostilities toward both Republicans and Democrats in 
Washington. Many would agree it's well-earned anger and properly 
directed.
  This anger and frustration will certainly grow as the consequences of 
the collapse of the financial system become more severe. The concerted 
effort to prevent the correction the market demands, guarantees a 
prolonged agonizing crisis. Every effort to reverse the tide will 
depend on spending, higher deficits, increased taxes and money 
creation. This effort is now providing another grand bubble: the 
dollar/bond bubble.
  The next event will be a dollar crisis. A full-blown dollar crisis 
will be worse than our current financial crisis. The extent of a dollar 
crisis depends on whether or not the Washington politicians wake up and 
change their ways--a dubious hope.
  More likely, the insanity will continue until some not yet known 
event will undermine the confidence of the dollar worldwide. Signs of 
less desire by foreigners to hold our dollars are already present. I'm 
certain our Treasury and Federal Reserve are pulling out all stops to 
prevent a massive run on the dollar. At present the ``orderly'' retreat 
from the dollar is working. But it won't last.
  China is quite active in investing in national resources around the 
world, and including in Iran. While we live in the dark ages and 
believe only our military presence and military threats can protect our 
access to oil, China is actually spending some of their savings 
investing in their future access to energy and other precious metals 
and minerals.
  But the orderly retreat from the dollar won't last forever. Since 
1973, shortly after the breakdown of the Bretton Woods Agreement, the 
dollar has lost 32 percent of its value against a Federal Reserve 
basket of currencies. But that doesn't tell the real story, since that 
is a measurement against all other currencies, and they are fiat 
currencies as well. This gave the dollar an artificial benefit from its 
position of power in great wealth and military prowess. The dollar in 
relationship to gold, however, is down 97 percent since 1971, and 82 
percent as measured by the CPI. The dollar, mismanaged by the Fed, has 
not been a benefit to the savers who sought to responsibly take care of 
themselves. They've been cheated by a rotten system and are just 
beginning to understand exactly how the Federal Reserve has been 
responsible for the swindle.
  It is impossible to predict the time when confidence will be lost, 
but it can come quickly. Resorting to buying other paper currencies 
will not be of much help. When the dollar crashes, most likely the 
purchasing power of all currencies--since all countries hold dollars as 
a reserve--will go down as well.
  This means that dollars and other currencies will go into buying 
consumer items, precious metals and other physical properties. Consumer 
prices will soar, as well as interest rates. The central bank will lose 
control; and the more they inflate, the worse the confidence becomes. 
The interest rates will respond to these efforts by rising sharply.
  If the Fed tries to reverse the run on the dollar, interest rates 
will also soar, and the pain on the American citizens will be of such 
proportion that political chaos will result. Either scenario leads to 
political and social chaos--the third event, and the most dangerous.
  With no ability of the federal government to fund its commitments, 
international or domestic, major changes will occur in our system. The 
social unrest will elicit cries for government to exert unusual force 
to head off a complete breakdown of law and order. The ultimate trap 
will be set for a system of government claiming to protect a free 
society. If more power and police authority are not given to the 
federal government, it will be argued that only anarchy will result. If 
more government policing power is given, it will mean a lethal threat 
to civil liberties. Already we have permitted the notion that a single 
person, the Attorney General or President, can decide who is an ``enemy 
combatant'', thus denying that individual the right to habeas corpus, 
permitting indefinite detentions without charges made. This attitude 
toward civil liberties has changed significantly since the fear built 
around 9/11.
  Yes, I know declaring one an ``enemy combatant'' is reserved for the 
radical Muslims engaged in terrorism against the United States. To be 
reassured by this reasoning is quite dangerous and naive. Logic should 
not lead us to equate suspects with terrorists, and include American 
citizens, and yet this has already been set by precedent. Under 
difficult circumstances, our political leaders will not be hesitant to 
use these powers to maintain order. Tragically, the people may even 
demand it.
  We are rapidly moving toward a dangerous time in our history. Society 
as we know it is vulnerable to political and social chaos.
  This impending crisis comes as a consequence of our flawed foreign 
and domestic economic policies, a silly notion about money, ignorance 
about Central Banking, ignoring the onerous power and mischief of our 
out-of-control intelligence agencies, our unsustainable welfare state, 
and a willingness to sacrifice privacy and civil liberties in an 
attempt to achieve safety and security from an inept government. 
Dangerous times indeed!
  What can be done about it? Must we wait for the inevitable and expect 
to restore our liberties in a street fight against the overwhelming 
power of the state? Not a good option!
  The only way that we can prevent blood from running in the streets is 
to offer a better idea of the proper role of government in a society 
that desires first and foremost--liberty.
  And that is impossible without a firm commitment by our thought 
leaders to the ideas of freedom, the source of all creative energy and 
prosperity. An all-powerful state is the threat to that ideal.
  The prevailing attitude of the people--as it once was in early 
America--must be that of liberty and self reliance, rather than the 
nanny state and dependency relying on government force to mold all 
private choices.
  If this is understood, a smooth--although not painless--transition to 
a free society is achievable. Ignoring this option will be very 
destructive to everything that is dear to the hearts of most Americans.

[[Page 387]]

  What is it that we must do? We must immediately embark on:
  Balance the budget by reducing spending;
  Change our foreign policy to that of non-intervention;
  A full audit and more supervision of the Federal Reserve leading to 
abolishing the Federal Reserve;
  Legalize competition to the Federal Reserve with competing 
currencies;
  Regain respect for civil liberties and privacy while reigning in the 
CIA;
  Wean ourselves off the dependence of wealth transfers by government;
  Abolish crony capitalism--no subsidies, no bailouts, no regulatory or 
tax privileges to protect the powerful elite especially the military 
industrial complex; and
  Eliminate the income tax, inheritance tax and taxes on savings and 
dividends.
  None of this can happen without the restoration of Congress to its 
dominant position of the three Branches of Government as was originally 
intended by the Constitution. The Executive and Judicial must be reined 
in, and Congress must assert its prerogatives over all legislation 
curtailing all unconstitutional agendae through budgetary controls.
  Signs abound that angry Americans are now more ready than ever before 
for a change in direction that is indeed real. If this program were 
improvised--even suddenly and dramatically--the adjustment, though 
significant and to a degree somewhat painful, would be much shorter and 
of minor consequence compared to the chaos and poverty that will result 
if we refuse to change our gluttonous appetite for a free lunch.

                          ____________________