A link from a friend...

So, it seems that I must once again delve into a bit of economics. I find it amusing to watch people push numbers back and forth, but a link sent to me by a friend, who is a backer of Ron Paul, and the limitation of reply length in Facebook, means you are all seeing this here in my blog.

Without further adieu, the link:

http://www.cnn.com/2008/POLITICS/09/23/paul.bailout/index.html

First, I just have to draw attention to something outside of the article itself, namely the introduction some editor dropped in. Look, no matter how much anyone agrees or disagrees with Mr. Paul, you have to admit the statement about the number of babies he’s claimed to have delivered means nothing to this discussion of economics. When I had my gall bladder out a few years ago, the one thing I didn’t ask my doctor about was economic theory. So, why exactly is it important to note Ron Paul’s delivery count here? Asinine.

Moving on, I want to start out looking at the things at which Ron Paul says that are true:

1. The economy is messed up. Despite what some presidential candidates claimed for way too long, the economy is not fine. Far from it.
2. The Federal Reserve’s loose monetary policy did lead to poor lending practices. Leaving the interest rate at 1% for an entire year was asking for trouble. With that much easy and cheap money sloshing around for so very long, we are lucky things now are not worse. Yes, the economy was bad after 9/11. Yes, drastic measures were needed to restart the economy, but we went too far… and we’re getting close to that bad again.
3. Government takeover of private companies is never ideal.
4. The people who caused this mess should be held accountable.
   

1. While this economic crisis is probably the worst since the Great Depression, there are some very large differences between now and then, namely, a better understanding of economic theory, something Mr. Paul seems to be neglecting. First, right after the market crash that started the Great Depression, the Fed made the poorest choice possible and raised the interest rate up. Way up. So high, no one could afford to borrow money. Add that to increased taxes created by a knee-jerk reaction to the sudden shortfal in government revenues and an untimely drive by legislators to balance the budget, all of which led to the depression getting so bad. Thankfully, we have people who are a bit more wise in control of our economy right now. Unlike Mr. Paul, Mr. Bernanke knows economics, especially economics during the Great Depression. Mr. Bernanke has made the Great Depression an intregal part of his academic study, something that makes me especially glad he is at the helm at this moment in history. Those who study history are much less likely to repeat it.
2. Next up, the purchase and bail-out of numerous corporations. Wait, didn’t I just say in point 3 above I agreed with Ron Paul, so how can I now disagree with the same statement? While I agree that facilitating a buyout or just straight-out bailing out is generally not good, letting these companies fail is even worse. See my previous link about why the Great Depression was so bad, especially the part about 60 banks per month failing because of the complete lack of investor confidence, and you will see exactly why Ron Paul is wrong in this specific instance, although he is right in the general sense of his statement. Not stopping the bleeding now, when only a few companies have failed, will do nothing but continue the domino effect, taking the entire economy down with the banking and housing sectors.
   
3. Tossing the Community Reinvestment Act under the proverbial bus is nothing more than finding a personal pet annoyance on which to blame the entire mess. Even though the act likely did add to the problem, it was far from the cause. (See Criticism, and yes, I hate linking to Wikipedia, but they do link to some quality articles.) At worst, the act was responsible for half of the problem, and even then, that happened because of the abuse of the act. The act had the best of intentions, and is the source of some really good things, but as with all legislation, it is an imperfect tool and could use some revision.
4. The market, when unconstrained, will not act in everyone’s best interest. Deregulation is not our friend. Just look at where deregulation of AT&T got us… a new AT&T with a few major telecom failures along the way because people got greedy. I really don’t have to mention many other instances here where deregulation was supposed to be the best thing for the industries when in reality it drove the industries into dangerous practices, taking down the retirement accounts of average Americans along with the companies themselves. Yes, investors willingly chose to enter those markets and got what they paid for. All that said, what is good is right regulation. Not more, not less, but the correct application of regulation. The idea here is to keep industry from making stupid decisions just because they can (or because of rouge elements in a company that make bad decisions for the group). Yes, this does limit the upside potential, but the offset of the top is much less than the downside risk. That’s sound financial theory when correctly applied.