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.

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.


  • Great reading material. I’ve learned a lot by reading here. Thanks!

  • Pingback: Cartoon: You’re Going to Audit OUR Bank? | Austrian Economics Blog()

  • Jai

    Keep going Ron, you have a good heart and speak truth, we the people have spoken through Ron Paul. Money is just paper they can print unlimitedly, corrupt mongrels should be ashamed of themselves.

    Real economy is Gold, Silver, Jewels and commodities like Food, Clothing, Silk, Materials etc. You can’t eat money and land should be freely distributed to the people.

    Vote Ron Paul 2012.

  • Brian

    I love Ron Paul and traditional American policies that our founding fathers initiated. I support Ron Paul and all of his ideas. I voted for him in 2008 and will vote for him again in 2012. With that said…….I wish Ron Paul would do a piece on how the “average American” can himself take actions in his own personal life to protect his wealth/make new wealth for himself and his family. My questions personally are the following: should I buy more guns and ammo? Should I invest in Gold? What small businesses does Ron Paul think will work well in Great Depression 2? Should I invest in real estate or rent and stay in cash? Should I move to a third world country and live well among poverty, if the USA is going down into for 3rd worldism itself? If so, which countries have a better primary school system, lower tax rate, are business friendly and not hostile towards white people? The question is this-I am not going to be taxed into poverty under Obama’s wealth redistribution scheme and I am not going down with the USA? Is it time to abanded ship?

    • Dean

      Just saw your reply, Brian and must say that I too have those same questions. For me at this point – I will not access credit. I have my house payment and my motorcycle, and that’s it. If I can’t pay cash for it then I’m not buying it. I have been saving cash too and looking to buy gold as well.

      What we really need to do is to organize a 60 minute prime time TV special with Ron as the moderator with the objective of not giving in to the “Bankers” games anymore.

      As a nation we need to stand up and shout in unison that we are not going to take it any longer – Keep your credit, I’ll get by on my own Thank You!!!

      As a nation, we need to push the government into getting out (and staying out) of free markets. The FED needs to be abolished, Gov spending needs to be cut at least 20% across the board now, and we need to get out of foreign affairs.

  • to dissent and expose

    I fear for Mr. Paul.

  • Pingback: Dude, Where’s My Government? | theCL Blog()

  • Tseday M

    Thank you Ron Paul for standing for the truth!
    I pray your colleagues will hear your call and act now!
    America has to change before it is too late. Keep it up!

    From Canada

  • Jimmy Stewart

    Thank you Ron Paul, for always telling the truth to the American people! The ruling politicians in Washington today are lying to us about most everything. But contrary to what those conniving bums think, the people of this country certainly do have the right to know the truth. Lay in them, Dr. Paul!

  • Frank R Nelson

    When I hear this bravehearted man Ron Paul speak, I wonder if it wasn’t something like hearing Thomas Jefferson or Old Tom Paine speak out in the early days of American history. I expect they are standing right there with him, we just can’t quite see them.

  • Old Tom Paine

    The voice of truth and honesty, speaks again! Ron Paul in 2012!

  • Ken Freeman

    Stay safe Ron.

  • Dean

    Dear Ron,

    Why aren’t any of these people in Washington listening to you? Warren buffett refers to what’s happening as an economic apocalypse. I’ve been referring to this for a long time as an Economic Armageddon.

    What do we need to do to keep this ship from sinking? Can all these politicians be so blatantly blind and stupid? None of them has a clue what’s going on, or what’s going to happen as a result of the FEDS economic suicidal behavior. Keynesian Economics is DEAD (period). Bernake and company needs to realize this and start to let every company survive or die based on their own entrepreneurial spirit. The FED needs to be abolished, the government need to slash spending – across the board by 20% NOW, and we need to start protecting our own boarders and stop forcing our democratic beliefs on other nations. Sure, you mess with us we’ll come get you when you least expect it, but for now, we just have too much on our plate at home to deal with your trite religious border wars.

    God bless the ignorant for they know not what they do- in Washington and other Nations, and may Ron Paul’s message resonant with fever among all politicians that can hear.

    You’re our only hope in Washington, Ron – God speed my friend!

  • longshotlouie

    Having abandoned the sound-money principle, governments’ central banks are in the very process of forcing down the interest rate over time, by way of strongly expanding credit and money supply. This, in turn, leads to asset price inflation, misallocation of scarce resources, inducing cyclical swings (“boom and bust”).

    To make things worse, central banks allow credit supply growth to systematically outpace income growth, and so the economies’ overall debt-to-GDP ratios are brought up over time. Such a development is economically unsustainable, even though it might go on for quite some time as the central bank keeps pushing down the interest rate.

    – Mises

    Not much wiggle room left.

  • Ken Freeman

    Unfortunately most of the sheeple have no idea what’s going on…..

    • Reg

      I can honestly say I am no longer a sheaple. I am not sure how this is all going to play out…but its not going to pretty.

  • Nate