The Austrians were Right

House.gov ^ | 11/20/08 | Ron Paul

[ovrtaxt]

Madame Speaker, many Americans are hoping the new administration will solve the economic problems we face.  That’s not likely to happen, because the economic advisors to the new President have no more understanding of how to get us out of this mess than previous administrations and Congresses understood how the crisis was brought about in the first place. Except for a rare few, Members of Congress are unaware of Austrian Free Market economics.  For the last 80 years, the legislative, judiciary and executive branches of our government have been totally influenced by Keynesian economics.  If they had had any understanding of the Austrian economic explanation of the business cycle, they would have never permitted the dangerous bubbles that always lead to painful corrections. Today, a major economic crisis is unfolding.  New government programs are started daily, and future plans are being made for even more.  All are based on the belief that we’re in this mess because free-market capitalism and sound money failed.  The obsession is with more spending, bailouts of bad investments, more debt, and further dollar debasement.  Many are saying we need an international answer to our problems with the establishment of a world central bank and a single fiat reserve currency.  These suggestions are merely more of the same policies that created our mess and are doomed to fail. At least 90% of the cause for the financial crisis can be laid at the doorstep of the Federal Reserve.  It is the manipulation of credit, the money supply, and interest rates that caused the various bubbles to form.  Congress added fuel to the fire by various programs and institutions like the Community Reinvestment Act, Fannie Mae and Freddie Mac, FDIC, and HUD mandates, which were all backed up by aggressive court rulings. The Fed has now doled out close to $2 trillion in subsidized loans to troubled banks and other financial institutions.  The Federal Reserve and Treasury constantly brag about the need for “transparency” and “oversight,” but it’s all just talk — they want none of it.  They want secrecy while the privileged are rescued at the expense of the middle class. It is unimaginable that Congress could be so derelict in its duty.  It does nothing but condone the arrogance of the Fed in its refusal to tell us where the $2 trillion has gone.  All Members of Congress and all Americans should be outraged that conditions could deteriorate to this degree.  It’s no wonder that a large and growing number of Americans are now demanding an end to the Fed. The Federal Reserve created our problem, yet it manages to gain even more power in the socialization of the entire financial system.  The whole bailout process this past year was characterized by no oversight, no limits, no concerns, no understanding, and no common sense. Similar mistakes were made in the 1930s and ushered in the age of the New Deal, the Fair Deal, the Great Society and the supply-siders who convinced conservatives that deficits didn’t really matter after all, since they were anxious to finance a very expensive deficit-financed American empire. All the programs since the Depression were meant to prevent recessions and depressions.  Yet all that was done was to plant the seeds of the greatest financial bubble in all history.  Because of this lack of understanding, the stage is now set for massive nationalization of the financial system and quite likely the means of production. Although it is obvious that the Keynesians were all wrong and interventionism and central economic planning don’t work, whom are we listening to for advice on getting us out of this mess?  Unfortunately, it’s the Keynesians, the socialists, and big-government proponents. Who’s being ignored?  The Austrian free-market economists—the very ones who predicted not only the Great Depression, but the calamity we’re dealing with today.  If the crisis was predictable and is explainable, why did no one listen?  It’s because too many politicians believed that a free lunch was possible and a new economic paradigm had arrived. But we’ve heard that one before--like the philosopher’s stone that could turn lead into gold.  Prosperity without work is a dream of the ages. Over and above this are those who understand that political power is controlled by those who control the money supply.  Liberals and conservatives, Republicans and Democrats came to believe, as they were taught in our universities, that deficits don’t matter and that Federal Reserve accommodation by monetizing debt is legitimate and never harmful.  The truth is otherwise.  Central economic planning is always harmful.  Inflating the money supply and purposely devaluing the dollar is always painful and dangerous. The policies of big-government proponents are running out of steam.  Their policies have failed and will continue to fail.  Merely doing more of what caused the crisis can hardly provide a solution. The good news is that Austrian economists are gaining more acceptance every day and have a greater chance of influencing our future than they’ve had for a long time. The basic problem is that proponents of big government require a central bank in order to surreptitiously pay bills without direct taxation.  Printing needed money delays the payment. Raising taxes would reveal the true cost of big government, and the people would revolt.  But the piper will be paid, and that’s what this crisis is all about. There are limits.  A country cannot forever depend on a central bank to keep the economy afloat and the currency functionable through constant acceleration of money supply growth.  Eventually the laws of economics will overrule the politicians, the bureaucrats and the central bankers.  The system will fail to respond unless the excess debt and mal-investment is liquidated.  If it goes too far and the wild extravagance is not arrested, runaway inflation will result, and an entirely new currency will be required to restore growth and reasonable political stability. The choice we face is ominous:  We either accept world-wide authoritarian government holding together a flawed system, OR we restore the principles of the Constitution, limit government power, restore commodity money without a Federal Reserve system, reject world government, and promote the cause of peace by protecting liberty equally for all persons.  Freedom is the answer.

[Toddsterpatriot]

1) The “huge booms and busts” were done and finished in a matter of months.

I know it's Wikipedia, but what happened in 1873?

[Moonman62]

2) The biggest “boom and bust” we have seen before the present c f was exclusively the product of the federal reserve’s money policies 3) The present boom and then bust is ALSO the result of the idiotic monetary policies of the fed.

I pretty much agree. If you were familiar with my posting history (and obviously you aren't), then you would know I've been for FOMC reform for many years. But just because the Fed gets it wrong, doesn't mean we should try something even more damaging like Austrian economics.

[slnk_rules]

So every CDS you can find you can enforce. Excellent!

If they are subject to US law. Many of these are interbank contracts not under US jurisdiction, nor do the cds swaps specify where jurisdiction is to be found in the event of default.

So when you said, "There are no requirements that contracts be enforceable", you were confused?

Substitute "which are" for "be" and you have the idea of what I was trying to say. These may as well be cocaine deals in a back alley for all the enforcement provisions in them. You understand the difference between default and unenforceable?

In contracts which are not jurisdiction specific, I am afraid that I do not understand that distinction. That is the problem with these things. No one knows where the enforcement provisions are. AIG in Egypt did a swap with some bank out of Malaysia and they do not know who to go to to enforce it. Literally. Right now, it is a stare down. Is that a default? Is it a stiffed contract? I don't know, and the actuaries in Bermuda don't know, and the bank in Indonesia who hedged the contract in Malaysia doesn't know, either.

thanks for responding. I have some stuff on the 1873 panic later. It is full of typical Mises rantings about federal manipulation of the money supply, which, of course, you don't need a central bank for

[Toddsterpatriot]

Many of these are interbank contracts not under US jurisdiction,

Many?

nor do the cds swaps specify where jurisdiction is to be found in the event of default.

You have a few CDS contracts in front of you?

Substitute "which are" for "be"

"There are no requirements that contracts which are enforceable" Is that even English?

These may as well be cocaine deals in a back alley for all the enforcement provisions in them.

You have any proof for this feeling of yours?

In contracts which are not jurisdiction specific, I am afraid that I do not understand that distinction.

So a swap between Goldman Sachs and Merrill is still enforceable? That's a relief.

[x]

They thought they had obviated risk and overcome the laws of the “Market” with derivates and other “financial instruments”.

They not the “Market” failed.

We were at the end of History, we had the cure for recessions and that dreaded Depression. We put a man on the moon. Solving the Market was easy. Pass a few laws, add more when needed.

Eliminate risk by spreading it so far that none knew the risk of the paper they held and when all else fails change the rules and or bail them out.

You're talking as though "they" were outside of the market. But at least some of the "they" who screwed this up were part of the market. They were big people in the financial markets. They'd played the market for a very long time. A lot of the people who are going to suffer from this were only marginally in the market if at all.

My point is that something about long prosperity encourages the people in financial markets to become overconfident and do silly things. While the government certainly was involved in this mess, it's not like markets automatically purge themselves of overconfidence and folly. Or rather, they do purge themselves in slumps and crashes -- not before the slump or crash happens.

I won't say that the "market" is responsible for the mess or that "markets" failed. But I'm also not going to say that "markets" are perfect and all the trouble came from outside of them. I can live with what the markets do, but I don't want to make an idol out of them.

[slnk_rules]

Many of these are interbank contracts not under US jurisdiction,

Many?

Yep. Of course, I think, Maybe. Well, truth of the matter is, no one really knows. We have 10% of these outfits which voluntarily report (there is no mandatory reporting). From that 10%, we have about 58 trillion in CDS liability. I make the statement because these "grew out" of swaps in the interbank market, which is, as you know, founded almost entirely on trust between bankers.

You have a few CDS contracts in front of you?

No. Do you?

There are no requirements that contracts which are enforceable" Is that even English?

It is reformed Ugaritic. I spared you the cuneiform script in the interests of brevity..... No really, it should read something like "There are no requirements pertaining to contracts which are enforceable." That is still barely decipherable, so I will say it this way: "there is no standard, accepted, universally binding form for these type contracts. each lives in a world of its own. the enforceablility of these is entirely predicated on the honesty and forthrightness and solvency of the parties involved...., and these things are not required to be revealed..... so they aren't"

So a swap between Goldman Sachs and Merrill is still enforceable? That's a relief.

Thanks for letting me know that. I would hate to be the cause of any stress here. If it is between the US branches, it would fall under US contract enforcement provisions, subject to the different states, I suppose. I am not a lawyer.

Under all this, there is an objection on my part that for contracts to be truly enforceable, there must be discoverable assets necessary to complete the transaction on both sides. Otherwise, the contracts themselves are fraudulent. The CDS market was a wildass spree of people collecting premiums with no thought for the nature or quantity of the risk involved....., or a hubris that was convinced they could eliminate the risk by dissecting it correctly. This is no less fraud than if I open amalgamated insurance and promise to insure every car in Texas for a dollar per vehicle. The contract is fraudulent on the face because the risks are inherently greater than the assets by such a factor that no informed person could possibly assume my ability to pay.

Most financial instruments are self-policed, and the various regulatory agencies just add "muscle" to the stated guidelines from within the industry. In this case, we have none. I am not opposed to that, but what I am opposed to is claiming they are "essential" to the economic health of the world. They are not. Fraud is fraud and we let em go bust. There are good, valuable assets in these institutions that are worth something that someone will pick up. That is what diversification and bankruptcy is for.

[slnk_rules]

But just because the Fed gets it wrong, doesn't mean we should try something even more damaging like Austrian economics.

What precisely do you find "damaging" in the idea of free and open contracts and a money supply which is tied to something more tangible than the histrionics of Ben Bernanke?

I am glad you are are for FOMC reform. I think we should "reform" it by dismantling the damn thing. It has become (I would say it has always been since inception) an agency which allows Congress to shirk its Constitutionally prescribed function of overseeing the money supply. Anyone who argues that the "reports" of the fed chairman to Congress is in compliance with the spirit of this is wack.

[Moonman62]

Our currency is already backed by goods and services.

The FOMC needs to give up on the idea that economic growth and full employment cause inflation.

Did the Congress also shirk its duties by creating the Treasury, the DOJ, and the federal court system?

[Toddsterpatriot]

Yep. Of course, I think, Maybe. Well, truth of the matter is, no one really knows.

If no one knows, maybe you should stop claiming you do.

You have a few CDS contracts in front of you?

No. Do you?

No, but I'm not the one making silly claims about them.

Under all this, there is an objection on my part that for contracts to be truly enforceable, there must be discoverable assets necessary to complete the transaction on both sides.

That sounds like the difference between not getting paid because "the contract is unenforceable" and not getting paid because "the counterparty defaulted".

[slnk_rules]

If no one knows, maybe you should stop claiming you do.

My but we are humorless today, aren't we? Ok. Let me say that I am not an actuary nor a lawyer in DC. So I do not have first hand knowledge. But then again, I am not an astronomer and I haven't mapped the distances to the various nebulae, either, and that does not preclude me from making meaningful statements about the universe. If you have a claim that the statements I made are not factual, then say so. I know that it is a commonly held assumption that many of these swaps originated outside the USA. If you want a link for that, I will be happy to try and scare one up.

YOU:You have a few CDS contracts in front of you?
ME: Do you?
YOU: No, but I'm not the one making silly claims about them.

What claims am I making that are silly? Look. If a financial instrument can trade, like the index swaps on LIFFE, then they are at least packaged instruments that you can look at and evaluate in an ISDA format. I have seen some of your posts and you have a background in finance stuff, so you know that these so call "contracts" have allowed people to put risk out there to parties whose capacity for risk makes the transaction fraudulent in all but name only. If you want to get legally pissy and claim that the contract is "enforceable" against some hedgie with 10 million in assets who puts 4 million (or more!) up on a single CDS, in the Canary Islands, then I will retract my statement. They are eminently enforceable for every dime these clowns don't got. They can, will and HAVE simply scooped up their remaining assets, closed up shop, and walked away. Again, you know this.

I am not a lawyer, and the term "unenforceable" has obviously set you off, so I should say that the contract itself is legally unenforceable (I contract to murder your wife, or sell you an 8ball of coke) is different than saying that what is legally "enforceable" as a technically valid contract is practically unenforceable and tantamount to fraud because of the lack of assets on the part of one of the parties. Further, you know that if you have assets in the USA and default in something like this, you can and will be sued -- or at least you will have some very bright lawyers looking for ways to pierce the corporate veil -- as well as facing the possibility of criminal activity and fraud, so that just snatching up the money off the table and closing up shop is not the end of the matter. THAT is why it matters that many of these CDS instruments originated overseas.

[Toddsterpatriot]

What claims am I making that are silly?

1)There are no requirements that contracts be enforceable.
2)You can’t enforce what you can’t find.

If you want to get legally pissy and claim that the contract is "enforceable" against some hedgie with 10 million in assets who puts 4 million (or more!) up on a single CDS, in the Canary Islands, then I will retract my statement.

Is the hedgie in your example buying or selling the CDS?

They are eminently enforceable for every dime these clowns don't got. They can, will and HAVE simply scooped up their remaining assets, closed up shop, and walked away.

Counterparty risk is not the same as "unenforceable contracts".

I am not a lawyer, and the term "unenforceable" has obviously set you off, so I should say that the contract itself is legally unenforceable

Goldman buys a CDS from Merrill. Is it enforceable? Why?

THAT is why it matters that many of these CDS instruments originated overseas.

Buyers or sellers are overseas?

You never posted an explanation for your previous claim, "For example at least 2 billion dollars of CDS risk from SOMEONE is now gone and unenforceable because of Bear Stearns". You have a link that explains your point? Thanks.

[slnk_rules]

Our currency is already backed by goods and services.

Yeah. So is Zimbabwe's

The FOMC needs to give up on the idea that economic growth and full employment cause inflation.

Why are you telling me this? You already know I am a Mises fan. Printing paper money causes inflation, not "full employment"

Did the Congress also shirk its duties by creating the Treasury,

NO Chapter XII. An Act to establish the Treasury Department. (a) Section 1. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That there shall be a Department of Treasury, in which shall be the following officers, namely: a Secretary of the Treasury, to be deemed head of the department; a Comptroller, an Auditor, a Treasurer, a Register, and an Assistant to the Secretary of the Treasury, which assistant shall be appointed by the said Secretary.

Did the Congress also shirk its duties by creating....the DOJ

The DOJ is actually an executive branch of government, charged with representing the USA in legal matters. Since Congress was never charged with this activity, it would be hard to call that shirking its duty. No one expects the President to show up and argue cases in the court.

Did the Congress also shirk its duties by creating....the federal court system?

No. Article I, section eight and Article III section one of the Constitution give Congress authority specifically to do that.

Look, I am not arguing that Congress has to be micromanaging the coining of money. Of course they can and should delegate. The problem is that they have completely abandoned any pretense of oversight. The Fed won't even release its minutes!!!!! They (the fed) have DESTROYED the value of the dollar and are deep-sixing even more each day. It is a horrible, inefficient, immoral, secretive outfit that would be better of destroyed than in charge of our nation's currency.

[slnk_rules]

ME:What claims am I making that are silly?

YOU:
1)There are no requirements that contracts be enforceable.
2)You can’t enforce what you can’t find.

If I enter a contract with you for something, it is common to place a jurisdiction clause in the contract, so that litigation occurs in a particular jurisdiction. You have seen the ISDA forms, haven't you? Is there any specificity as to court jurisdiction in those? NEVER. There is no demand that you demonstrate that you have the assets you say you do! You have an "enforceable contract" only in the sense that the court can command the corporation (if it still exists) to pay any money you haven't withdrawn towards the contract obligations.

Is the hedgie in your example buying or selling the CDS?

In this particular case, they sold. Citi is trying to collect.

Buyers or sellers are overseas?

The big problems we have seen so far are sellers in default. What remains to be seen is what that does to the portfolios of institutions who thought they had hedged mortgages/bonds with the promised returns of that defaulted swap, so I would say "both" but with the emphasis on the overseas seller for right now.

The rest of your post is essentially taking me to task for using the term "unenforceable" when I should have used the term .... what? "Defaulted?" OK. I dont' have any problem with saying that just because you can't make an obligee pay that you should not use terms like "fraudulent" rather than "unenforceable." You then asked me for a link for the 2 bil in defaulted Bear Stearns CDS obligations. I ran across this back when they rolled over. I will look for it. I am sorry not to have it at my fingertips.

[Toddsterpatriot]

The rest of your post is essentially taking me to task for using the term "unenforceable"

Yeah, it sounded silly to claim that a market can grow to what, $100 trillion or more, based on unenforceable contracts.

[slnk_rules]

You are right. It was an unbelievably dumb choice of words. No cure for stupid, is there? The worst thing about it was that I was stone cold sober when I typed it.

I hope you can decipher my incoherence to discern my underlying reservations about the CDS situation, which is based on nondisclosure more than the fundamentals of the contracts themselves.

[Toddsterpatriot]

You are right. It was an unbelievably dumb choice of words.

I've seen worse. My favorite is the one about banks being able to loan $10 for every $1 in deposits.

I hope you can decipher my incoherence to discern my underlying reservations about the CDS situation

You're worried about counterparties in different countries, small illiquid counterparties in the US and large illiquid counterparties in the US. Those are all problems.

[Zanton]

Ron Paul is pretty much a lone voice of reason in an irrational anti-freedom world! :-(

[sickoflibs]

Love the “ philosopher’s stone that could turn lead into gold.” analogy. What great words!

Great speech.