Ron Paul’s Opening Statement: The Federal Reserve Created the Crisis

Event: House Financial Services Committee Hearing
Date: July 21, 2009


Ron Paul: Thank you, Mr. Chairman. Good morning, Chairman Bernanke. The Federal Reserve in collaboration with the giant banks has created the greatest financial crisis the world has ever seen. The foolish notion that unlimited amounts of money and credit created out of thin air can provide sustained economic growth has delivered this crisis to us.

Instead of economic growth and stable prices, it has given us a system of government and finance that now threatens the world’s financial and political institutions. Real unemployment is now 20 percent and there has not been any economic growth since the onset of the crisis in the year 2000 according to non-government statistics.

Pyramiding debt and credit expansion over the past 38 years has come to an abrupt end as predicted by free market economists. Pursuing the same policy of excessive spending, debt expansion and monetary inflation can only compound the problems and prevent the required corrections. Doubling the money supply didn’t work; quadrupling it won’t work either. The problem of debt must be addressed.

Expanding debt, when it was the principal cause of the crisis, is foolhardy. Excessive government and private debt is a consequence of loose Federal Reserve monetary policy. Once a debt crisis hit, the solution must be paying it off or liquidating it. We’re doing neither.

Net US debt is now 372 percent of GDP and in the crisis of the 1930s, it peaked at 301 percent. Household debt services require 14 percent of disposable income and is at historic high. Between 2000 and 2007, credit debt expanded five times as fast as GDP. With no restraint on expending and revenues dropping due to the weak economy, raising taxes will be poison to the economy. Buying up the bad debt of privileged institutions and dumping worthless assets on the American people is morally wrong and economically futile. Monetizing government debt as the Fed is currently doing as desired is destined to do great harm.

In the past 12 months, the national debt has risen over $2 trillion. Future entitlement obligations are now reaching $100 trillion. US foreign indebtedness is $6 trillion. Foreign purchase of US securities in May were $7.4 billion, down from a monthly peak of $95 billion in 2006. The fact that the Fed had to buy $38 billion worth of government securities last week indicates that it will continue its complicity with Congress to monetize the rapidly expanding deficit. The policy is used to pay for the socialization of America and for the maintenance of an unwise American foreign policy and to make up for the diminished appetite of foreigners for our debt.

Since the attack on the dollar will continue, I would suggest that the problems that we have faced so far are nothing compared to what it will be like when the world not only rejects our debt, but our dollar as well. That’s when we’ll witness political turmoil, which will be to no one’s benefit.

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  • Carz

    It all started with The Bush Administration. Had their administration been able to control what’s best for the country and the best policies to effect change, we would not have been in the mess we are in right now.

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  • Lawrence Beattie

    The real problem started when Bush and Congress paniced and approved $700,000,000,000 last year on no real facts about the so called toxic assets that have been on the books for years. This was triggered by the Regulators who, all of a sudden, decided the assets on the bank books were not valued properly – could not meet mark to market (although they did for months and years before). This required the banks to reprice the assets at an almost zero value, which required the banks to have more capital reserves to cover the new valuations. So, all of a sudden the banks did not have the minimum capital to meet regulator requirements, creating massive devaluation of bank stocks and market panic. We still don’t know what percentage of these toxic assets were really failing. It could have been just the normal percentage and the whole panic was for nothing.

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  • longshotlouie

    It was heard. ‘Nuff Said

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  • Lancelot

    What i heard from this, was a great speech, a great truth of what is occurring in this country. What the politicians heard was blah blah blah. What average Americans heard, was a form of Chinese because they don’t understand one word he just said.

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