It has been long understood that our federal government is going deeper into debt, consistently raising the debt ceiling and demonstrating no fiscal restraint. In recent years, debt ceiling increases have been placed in “must pass” legislation as a means to guarantee that Republicans as well as Democrats would vote for them when Congress was under Republican control.

We also know our nation’s “negative savings rate” reflects the habits of private citizens, showing those habits to be not tremendously different than the habits of the public sector. Yet, the signs of decline are becoming ever more apparent. So apparent, in fact, that it seems unlikely that bailouts or other gimmicks will have even short-term success.

More inflation, and creating moral hazard by bailing out egregious offenders, is a recipe for disaster. These activities can seem to provide some short-term relief, but it seems we are now at a significant crisis point, where monetary policy gimmicks don’t provide the band-aids they did in the past.

Not only is our nation on the verge of bankruptcy, but so are its people and private institutions. We are now repeatedly hearing about businesses “needing to access the credit market to make payroll.” This is an unmistakable sign of more dire consequences ahead for the economy. If businesses must borrow just to make payroll, this is evidence of a severe undercapitalization that cannot be sustained, even for the short run.

Couple these facts with items such as the explosion of the “payday loan” industry and the unmasking of the false sense of economic well-being is nearly complete. These payday loan companies use preferred access to easy credit to inject cash into the hands of the working poor. They are nearly always set up in lower-income neighborhoods.

These people, who are struggling to buy food and pay rent, get addicted to the credit drug. Their standard of living is only further depressed by the interest payments on these loans that make them profitable to their providers. Thus, the recipients are left even less capable of paying for items such as food and housing in the long run, without using this credit again and again.

These people are often the very ones being paid by businesses who “borrow to make payroll.” This is the dark underbelly of the fiat money, borrow-and-spend economy this nation has been building. As the government takes over more and more functions of the economy many see the rise of socialism as an antidote to this failure of “capitalism.”

However, the fact remains that our economy has been increasingly running on debt, not capital. Capitalism does not exist without capital and debt is not, has never been and will never be a form of capital. Only now are we seeing the more dire implications of an economy without capital.

Ron Paul is a republican member of Congress from Texas.

The title of this post is loosely taken from Pirates of the Caribbean: The Curse of the Black Pearl:
“…the code is more what you’d call ‘guidelines’ than actual rules”

Readers of my posts here will know that I think the courts often get very far from the original intent of our Founding Fathers when they wrote the U.S. Constitution. There is a process for changing the Constitution (i.e. amendments), and that power is not supposed to be just in the hands of a handful of justices or a single judge, nor is it supposed to be in the hands of the legislature along.

The new “Bail-Out Bill” that just passed is a good example of losing sight of the basic theory of the Constitution. The bill authorizes the Secretary of the Treasury to “ensure the economic well-being of Americans.” Well, I certainly with for all Americans to have economic well being, but the Federal Government was not originally empowered to do that so directly.

The Preamble of the Constitution says (boldface added by me):
“We the people of the United States, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America.”

Looking at definitions of those bold-face words at dictionary.com, we see the following:

establish: to found, institute, build, or bring into being on a firm or stable basis

insure: to guarantee against loss or harm

provide: to make available; furnish

promote: to help or encourage to exist or flourish; further

secure: to get hold or possession of; procure; obtain

Of all those words, the weakest is “promote” because it does not offer assurance of a result; it simply encourages the result. So the Federal Government must assure us of several things, but should promote the general welfare. It should not try to guarantee the general welfare; it can not promise our general welfare; it will help and encourage our welfare (as many would say to the government, “Just get out of our way and let us do it”).

But this bill tells the Secretary to “ensure the economic well-being of Americans.” Dictionary.com says this means, “to secure or guarantee.” Again, that’s a nice idea, but such power is not given by the Constitution (if it is even possible).

Let’s not forget the 10th Amendment, the last of the Bill of Rights, which says, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

Examples like this are why I am trying to show a more “originalist” side of the Constitution. My specialty is the First Amendment’s religion clauses, but this Bail-Out Bill shows how our government so often goes beyond their given power in other area and in general. The Framers wrote this often-copied document to keep the central government from grabbing more and more power. But by ignoring inconvenient parts of the Constitution, and by our general lack of education about and knowledge of the Constitution, lawmakers and judges are able to claim more power than they are entitled to.

It has not been a good week for the Republic.  It took quite a bit of trampling of the Constitution, but the bailout bill passed, as I suspected it would.

The bailout failed the first time it was brought to the House.  Undaunted, the Senate pressed on by attaching the bailout as an amendment to another House passed bill that was pending in the Senate.  The new bailout version had new taxes, so according to the Constitution it should not have originated in the Senate.

The rallying cry heard all over the Hill the past two weeks was that Congress must act.  Our economy is facing a meltdown.  Would this bill fix it?  Nobody could really explain how it would.  In fact, few demonstrated any real understanding of credit markets, of derivatives, of credit default swaps or mortgage-backed securities.  If they did, they would have known better than to vote for this bill.

All they knew was that this administration was saying some frightening things, and asking for a lot of money.  And when has Congress ever been able to come up with a better solution to a problem than to throw more of your money at it?  So that is what Congress did, enacting a financial PATRIOT Act in the process.

In its embarrassment at being called a “Do-Nothing Congress” the 110th Congress took decisive action and did SOMETHING.  No matter that it was the wrong thing.  In fact, it wasn’t until the Senate had a chance to load it up with even MORE spending, when it was finally inflationary and horrible enough, at $850 billion instead of a mere $700 billion, that it passed – and with a comfortable margin, in spite of constituent calls still coming in overwhelmingly against it.  57 members switched their vote!

The market went down anyway.  Our nation is now just that much more in the hole.  You will pay your part of this mess through inflation, and very likely hyperinflation.

Sometimes doing nothing is much better than thrashing about aimlessly.  When one is caught in quicksand, for example, or when one doesn’t understand economics and finds oneself in the position Congress was in for the past two weeks, with decades of irresponsible monetary policy coming to a head.

Why should we trust the same people who said just a few months ago that the economy was perfectly sound?  The same people who just knew there were weapons of mass destruction?  The same people that crammed the PATRIOT Act down our throats?  Why not consult the people who had the foresight and understanding to see this coming?  They would have recommended such logical actions as repealing the Community Reinvestment Act, which forces banks to make bad loans, or allowing the market to set interest rates instead of the Federal Reserve system.

How about abolishing the Federal Reserve altogether?  There are many things that could have been done, but don’t expect Congress take a course of action that comes from a place of understanding and competence when they could just spend money.

This bailout will be the legacy of the 110th “Do-Something” Congress, along with record low approval ratings.  Here’s hoping the 111th Congress will be a “Do the Right Thing” Congress, and will focus on repealing and abolishing what is wrong with government instead of reinforcing it.

Ron Paul is a republican member of congress from Texas.

The financial meltdown the economists of the Austrian School predicted has arrived.

We are in this crisis because of an excess of artificially created credit at the hands of the Federal Reserve System. The solution being proposed? More artificial credit by the Federal Reserve. No liquidation of bad debt and malinvestment is to be allowed. By doing more of the same, we will only continue and intensify the distortions in our economy – all the capital misallocation, all the malinvestment – and prevent the market’s attempt to re-establish rational pricing of houses and other assets.

Last night the president addressed the nation about the financial crisis. There is no point in going through his remarks line by line, since I’d only be repeating what I’ve been saying over and over – not just for the past several days, but for years and even decades.

Still, at least a few observations are necessary.

The president assures us that his administration “is working with Congress to address the root cause behind much of the instability in our markets.” Care to take a guess at whether the Federal Reserve and its money creation spree were even mentioned?

We are told that “low interest rates” led to excessive borrowing, but we are not told how these low interest rates came about. They were a deliberate policy of the Federal Reserve. As always, artificially low interest rates distort the market. Entrepreneurs engage in malinvestments – investments that do not make sense in light of current resource availability, that occur in more temporally remote stages of the capital structure than the pattern of consumer demand can support, and that would not have been made at all if the interest rate had been permitted to tell the truth instead of being toyed with by the Fed.

Not a word about any of that, of course, because Americans might then discover how the great wise men in Washington caused this great debacle. Better to keep scapegoating the mortgage industry or “wildcat capitalism” (as if we actually have a pure free market!).

Speaking about Fannie Mae and Freddie Mac, the president said: “Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk.”

Doesn’t that prove the foolishness of chartering Fannie and Freddie in the first place? Doesn’t that suggest that maybe, just maybe, government may have contributed to this mess? And of course, by bailing out Fannie and Freddie, hasn’t the federal government shown that the “many” who “believed they were guaranteed by the federal government” were in fact correct?

Then come the scare tactics. If we don’t give dictatorial powers to the Treasury Secretary “the stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet.” Left unsaid, naturally, is that with the bailout and all the money and credit that must be produced out of thin air to fund it, the value of your retirement account will drop anyway, because the value of the dollar will suffer a precipitous decline. As for home prices, they are obviously much too high, and supply and demand cannot equilibrate if government insists on propping them up.

It’s the same destructive strategy that government tried during the Great Depression: prop up prices all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year.

The president also tells us that Senators McCain and Obama will join him at the White House today in order to figure out how to get the bipartisan bailout passed. The two senators would do their country much more good if they stayed on the campaign trail debating which one is the bigger celebrity, or whatever it is that occupies their attention these days.

F.A. Hayek won the Nobel Prize for showing how central banks’ manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day – and which are being proposed, just as destructively, in our own:

Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion..

To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection – a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end.. It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.

The only thing we learn from history, I am afraid, is that we do not learn from history.

The very people who have spent the past several years assuring us that the economy is fundamentally sound, and who themselves foolishly cheered the extension of all these novel kinds of mortgages, are the ones who now claim to be the experts who will restore prosperity! Just how spectacularly wrong, how utterly without a clue, does someone have to be before his expert status is called into question?

Oh, and did you notice that the bailout is now being called a “rescue plan”? I guess “bailout” wasn’t sitting too well with the American people.

The very people who with somber faces tell us of their deep concern for the spread of democracy around the world are the ones most insistent on forcing a bill through Congress that the American people overwhelmingly oppose. The very fact that some of you seem to think you’re supposed to have a voice in all this actually seems to annoy them.

I continue to urge you to contact your representatives and give them a piece of your mind. I myself am doing everything I can to promote the correct point of view on the crisis. Be sure also to educate yourselves on these subjects – the Campaign for Liberty blog is an excellent place to start. Read the posts, ask questions in the comment section, and learn.

H.G. Wells once said that civilization was in a race between education and catastrophe. Let us learn the truth and spread it as far and wide as our circumstances allow. For the truth is the greatest weapon we have.

Ron Paul is a republican member of congress from Texas.