Ron Paul: No More Bailouts! Banks Should Be Allowed to Fail…

by Ron Paul

French businessman and economist Jean-Baptiste Say is credited with identifying the fundamental economic principle that aggregate demand for goods in an economy will equal the aggregate supply of goods when markets are permitted to operate.  Or in Say’s words, “products are paid for with products.”

English classical economist David Ricardo, among others, more fully developed this principle into what has become known as “Say’s Law.”  Say’s Law, according to Ricardo, leads us to understand that market equilibrium for goods is constant. This simply means that markets, when left alone by government planners or other fraudulent actors, inexorably tend toward an “equilibrium price” which eventually balances supply and demand for any particular good.  Thus markets will clear themselves of any surpluses or shortages in the form of excess supply and demand.

This important corollary of Say’s Law– that markets clear– is critical to understanding the moribund US housing market.  In housing, perhaps more than any other good, we see the terrible consequences of government and central bank interference with market forces.

First, the Federal Reserve Bank relentlessly increased the money supply over the last few decades.  Much of this newly created money and credit flowed from Fed member banks into the residential and commercial real estate markets, causing prices to rise dramatically prior to the housing bust of 2007.

At the same time, the Fed systematically suppressed interest rates for decades.  This led to tremendous malinvestment both by homebuilders and individuals, and encouraged a seedy subprime mortgage industry to make nonviable loans that would not make economic sense under market interest rates.

Congressional meddling in the mortgage market also added tremendously to the problem. Inane legislation like The Community Reinvestment Act literally forced banks to make thousands of loans to bad credit risks.  Similarly, Fannie Mae and Freddie Mac put taxpayers on the hook for millions of mortgages that never would meet market underwriting criteria.  And of course the real estate and homebuilder lobbies made sure mortgage interest debt (unlike most personal debt) remains tax-deductible.

The ultimate result of these interventions by our caring friends in Congress and the Fed has been the biggest housing bubble and crash in US history, leaving millions of Americans underwater on their mortgages if they have not already lost their houses altogether.  Congress and the Fed are directly responsible for millions of shattered lives, and almost unknowable economic damage in the form of trillions of dollars in mortgage backed securities.

The only solution to this mess is to allow the US housing market to clear.  All of the bad mortgage debt must be liquidated, whether via foreclosure or bankruptcy.  Banks holding substantial mortgages or mortgage backed assets must face the music and adjust their balance sheets to reflect today’s reality.  Undoubtedly this will force many banks into immediate insolvency, but such banks must be allowed to fail without receiving another nickel of taxpayer money.  Banks took the risks and made money during the bubble years; those who exercised bad judgment must now accept the consequences of their actions.

Never in American history have we needed to adopt a policy of laissez faire more desperately; never has government seemed more determined to artificially prop up an industry.  But only by allowing the housing market to clear can we hope to rebuild our shattered economy from a stable foundation.  Clearly there will be pain in the short term, but we owe it to younger Americans and future generations to allow the reemergence of a rational housing market.

  • http://www.youtube.com/profile?user=kevreilly7 kevreilly7

    a total waste 4:41 minutes

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  • http://www.youtube.com/profile?user=kevreilly7 kevreilly7

    “NO MORE BAILOUTS”,,,,What is this a 2008 headline?????,,,,ain’t nothin going to change

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  • http://www.youtube.com/profile?user=GaryHarden Gary Harden

    I voted for Ron Paul. There was no way I wasn’t going to say: “I told you so…” when Romney or Obama fail us.

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  • http://www.youtube.com/profile?user=kevreilly7 kevreilly7

    not likely, but you never know,,,,the delayers sure do come up with new ways of kicking the can down the road

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  • http://www.youtube.com/profile?user=5dnibiru 5dnibiru

    agreed friend

    : )

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  • http://www.youtube.com/profile?user=TheRealBubfield405 TheRealBubfield405

    Yeah we ain’t going to go another 4 years. The government realizes that they must put us in the FEMA camps before then, otherwise there would be too many people waking up and supporting Ron Paul and Gary Johnson. So they must dispose of us within these next 4 years before we become too big for them control.

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  • http://www.youtube.com/profile?user=toppgunn2232 toppgunn2232

    dont put your hope into men put it into the bill of rights and constitution

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  • http://www.youtube.com/profile?user=5dnibiru 5dnibiru

    what did he do?
    i knew everything he has believed in for 11 years.
    if you have to have someone else tell you about freedom.
    get an obama phonzzzz.

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  • http://www.youtube.com/profile?user=CurtisWeiss Curtis Weiss

    TELL ME SOMETHING I DONT KNOW

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  • http://www.youtube.com/profile?user=rross27 rross27

    Jefferson summed up the noninterventionist foreign policy position perfectly in his 1801 inaugural address: “Peace, commerce, and honest friendship with all nations – entangling alliances with none.” Washington similarly urged that the US must “Act for ourselves and not for others,” by forming an “American character wholly free of foreign attachments.” Since Capitol Hill (Neo-Con Zionist/Progressive Marxists) apparently now believe the founders were wrong, they should be compelled to admit it.

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  • http://www.youtube.com/profile?user=CurtisWeiss Curtis Weiss

    NO SHIT

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  • http://www.youtube.com/profile?user=CurtisWeiss Curtis Weiss

    DUH

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  • http://www.youtube.com/profile?user=5dnibiru 5dnibiru

    2016?
    you really think we are going to go another 4 years?
    ill be in my bunker within the next few weeks.
    have fun everyone.
    : )

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  • http://www.youtube.com/profile?user=ghola2010 ghola2010

    he gived us hope

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  • http://www.youtube.com/profile?user=HandyMan101 HandyMan101

    Ron Paul’s only flaw.. if he has one.. Is that he believed there were enough smart people for him to win.

    If he proved anything its that the people who supported him were the only smart ones among us.

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  • http://www.youtube.com/profile?user=AzuAtoms AzuAtoms

    spread the message of liberty ten times as much as the Libertarian Party ever did.

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  • http://www.youtube.com/profile?user=ReachDeep1 ReachDeep1

    Its sad to know that the baby boomers simply weren’t armed well enough (with education) to protect the fortune which their parents had fought for. The only way to save our nation now is through education and activism.

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  • http://www.youtube.com/profile?user=toppgunn2232 toppgunn2232

    what did he do

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  • http://www.youtube.com/profile?user=toppgunn2232 toppgunn2232

    why do they need a bailout when the fed is buying 40 to 80 billion dollars of toxic mortgage backed securities every month.nov 1 the banks get another buy from the fed talk about welfare the first of the month and people worry about foodstamps for the poor crunch the numbers who gets more of your tax dollars

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  • http://www.youtube.com/profile?user=xxguitarhero48xx xxguitarhero48xx

    What are you talking about? Did you not watch the Iowa caucus? Ron Paul won. His ideas were spread around the country, and the world. And eyes were opened. Vote for Garry Johnson this year. If the libertarian nominee gets 5% of the grand total vote, they get to participate in the debates in 2016, and gets mega government funding by law.

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