Helping Poor People

Wednesday, Sep 16, 2009

Questioner: I actually lifted a speech that you made in the Banking Committee on September 10, 2003. I remember that day, because your words are so dramatic. Ron, you said, while everybody else was saying, "Oh, if we don't help people out through these loans with Fannie and Freddie, then we're just horrible people; we hate poor people." You said, and you predicted, you said, "If we continue to inflate the bubble this way, the housing crisis is going to cause an explosion and there's going to be damage worldwide." What did you know, Ron Paul, in 2003 that nobody else on the banking committee or in the United States Congress or in the media knew? What did you know?

Ron Paul: Well, I think it reflects an understanding of economics. I didn't know anything special, other than the fact that I have studied Austrian economics. Their understanding of the business cycle comes from the Federal Reserve - the creation of credit. We've been working with Keynesian economics since the Depression. We've had perpetual bubbles and recessions and ups and downs and inflation. Nixon really sealed it over when he said, "We're all Keynesians now." And we still are in Washington. They still use Keynesian economics to try to solve these problems. It isn't all that complex. Interest rates are very, very important. Prices are very, very important in a free market. And when you distort prices like in wage and price controls, everything seizes up. Nothing can happen. But when the Federal Reserve comes in and fixes the prices of interest rates, you deceive the savers and the spenders and the investors. People believe that there's been a lot of savings, and interest rates were very low and that wasn't the case. We weren't saving a penny. We were giving low interest rates because we were creating money out of thin air. And that's why I keep coming back to the Federal Reserve. It was the policies of the Federal Reserve that created this. We shouldn't have been as surprised at all that we eventually had this tremendous financial crisis.

Questioner: So Congressman, is your solution then to get rid of the Federal Reserve then, or what else are you proposing we do here to make sure this kind of stuff doesn't happen again?

Ron Paul: First off, we have to obey the Constitution, live within our means, balance the budget, quit war-mongering, and quit the Welfare state - those minor things like that. Eventually, you don't need the Federal Reserve. No, it's caused too much trouble. Central banking has always been harmful. It's a seductive way of financing big government. Conservatives love it, because you can pay the military bills. Liberals love it, because you can pay the Welfare State bill. But it's all deception and it's all a tax. It eventually destroys and hurts the very people you're trying to help. You try to help poor people by giving them stuff for free, but you end up giving them inflation. They're the first ones to lose their jobs. They're the ones who suffer the most from inflation. We have inflation today much more so than anybody admits, because that's why the cost of medicine is so high and the cost of education is so high. It's the devaluation of the Dollar. So with all the good intentions of helping poor people, the very people who are doing this are actually making it much more harmful, and hurting those they want to help.

September 15, 2009, http://www.youtube.com/watch?v=WjVpr3zIr8E.

On the quote above of "We're all Keynesians now," Nixon said something similar:

... "I am now a Keynesian in economics," said the President...

The New York Times, Nixon's Program -'I Am Now a Keynesian'; Economy, January 10, 1971, http://select.nytimes.com/gst/abstract.html?res=FB0B13FC3B5F127A93C2A8178AD85F458785F9&scp=1 (See also http://query.nytimes.com/search/sitesearch?query=%22I+am+now+a+Keynesian+in+economics%22&srchst=cse).

Nixon's quote was an adaptation of a mis-quote of Milton Friedman:

Sir: You quote me [Dec. 31] as saying: "We are all Keynesians now." The quotation is correct, but taken out of context. As best I can recall it, the context was: "In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian." The second half is at least as important as the first.

MILTON FRIEDMAN

The University of Chicago

Time Magazine, Letters: Feb. 4, 1966, http://www.time.com/time/magazine/article/0,9171,898916-2,00.html (See also http://books.google.com.au/books?id=Ennh28taSiEC&pg=PA231&as_brr=3&ei=Jw-YSfiAKpvukQS0-dzlCQ#v=onepage&f=false).

Milton Friedman demonstrated theoretical problems with Keynesianism first in 1967:

In 1967 Friedman made another seminal contribution to Keynesian-monetarist debates in his presidential address before the American Economic Association. In it he questioned the validity of another key Keynesian construct, the Phillips curve, which asserted that a stable trade-off exists between the rate of inflation and the unemployment rate. Friedman argued that the trade-off was temporary and depended on workers being “fooled” by unanticipated inflation into thinking that a rise in their nominal wage was a rise in their real wage, thus inducing them to produce more output. According to Friedman, the only way to reduce unemployment below what he dubbed the “natural rate” required not a one-time increase but accelerating inflation. The “stagflation” of the 1970s (literally, a combination of economic stagnation and inflation), impossible in a simplified Keynesian framework, was seen by many as confirmation of Friedman’s hypothesis. It was in any event the death knell for the dominance of the Keynesian model in macroeconomics.

Encyclopedia Britannica, Milton Friedman, http://www.britannica.com/EBchecked/topic/220152/Milton-Friedman#ref=ref833817.

Stagflation occurred in the 1970s due to Keynesian policies:

Keynes died in 1946. In addition to "The General Theory", he was part of a panel that worked on the Bretton Woods Agreement and the International Monetary Fund (IMF). His theory continued to grow in popularity and caught on with the public. After his death, however, critics began attacking both the macroeconomic view and the short-term aims of Keynesian thinking. Forcing spending, they argued, might keep a worker employed for another week, but what happens after that? Eventually the money runs out and the government must print more, leading to inflation.

This is exactly what happened in the stagflation of the 1970s. Stagflation was impossible within Keynes' theory, but it happened nonetheless. With government spending crowding out private investment and inflation reducing real wages, Keynes' critics gained more ears. It ultimately fell upon Milton Friedman to reverse the Keynesian formulation of capitalism and reestablish free market principles in the U.S. (Find out what factors contribute to a slowing economy, in Examining Stagflation and Stagflation, 1970s Style.)

Giants Of Finance: John Maynard Keynes, Andrew Beattie, http://www.investopedia.com/articles/economics/09/john-maynard-keynes-keynesian.asp.

This was not what Nixon was promising when he created Bretton Woods II:

Your dollar will be worth just as much tomorrow as it is today.

...

Accordingly, I have directed the Secretary of the Treasury to take the action necessary to defend the Dollar against the speculators. I have directed Secretary Connolly to suspend temporarily the convertibility of the Dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interests of monetary stability and in the best interests of the United States.

...

In full cooperation with the International Monetary Fund, and those who trade with us, we will press for the necessary reforms to set up an urgently needed, new, international monetary system.

August 15, 1971, http://www.youtube.com/watch?v=iRzr1QU6K1o.

Good evening. Seven weeks ago, I announced a new economic policy to stop the rise in prices, to create new jobs, and protect the American dollar.

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On the inflation front, I can report to you tonight that the wage/price freeze has been remarkably successful.

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Now, let's look at the future. Because of our strong beginning, because of the determination Americans have shown to pull together during the freeze, I am confident that our further action in stopping inflation will succeed as well.

Richard Nixon: Address to the Nation on the Post-Freeze Economic Stabilization Program: "The Continuing Fight Against Inflation," October 7, 1971, http://www.presidency.ucsb.edu/mediaplay.php?id=3183&admin=37.

I come before this special joint session to ask the cooperation of the Congress in achieving a great goal: a new prosperty without war and without inflation.

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When this temporary and necessarily drastic action [price and wage controls] is over, we shall take all the steps needed to see that America is not again inflicted by the virus of runaway inflation.

Richard Nixon: Address to the Congress on Stabilization of the Economy, September 9, 1971, http://www.presidency.ucsb.edu/mediaplay.php?id=3140&admin=37 (All Nixon Speeches).