There are many economists,
politicians, and journalists that think they have a miraculous way to make
bailouts work. Thus far, our government and Federal Reserve Bank have limited
the bailout debate to who should get what money and how much. Yet,
all this argument over how to best manipulate our economy is totally irrelevant
if we don't recognize the fundamental problems our monetary policy creates in
the first place. You can have a house made of gold, but it will surely
sink if your foundation rests on quicksand.
To stabilize our markets, Congress should enforce strictly enforce basic principles. With strict adherence to the principle that one should not commit fraud, our government would not allow the Federal Reserve and other banking institutions to lend and print money it doesn't have. For example, for the Federal Reserve stimulated the housing market by droving down the interest rate. When interest rates fall, money becomes relatively cheap. So, people borrow more money and more houses are bought. Now there are all kinds of economic theories that advocate monetary expansion as a means to spur growth, and thus pose a net benefit to society, so they are necessary for the greater good. But, can we really support the greater good using fraudulent practices?
And how does the Federal Reserve lower the interest rate in the first place? Where does the Federal Reserve get the authority to print our money? It can only continue such lending practices with the cooperation of our congress. It is important to also note that the Federal Reserve is a private bank to emphasize the absurdity of its special privileges. Some congressmen have requested an audit of the Federal Reserve year after year, only to be denied each time.
To acquire new money to lend, the Federal Reserve must either 1) borrow, or 2) print the money. Either way, the loser is the taxpayer. In the event the Federal Reserve borrows the money, using the American taxpayer's labor as collateral, the interest on the debt is paid for by raising taxes. So, some people might get a sweet loan on a home, but everybody gets stuck with higher taxes. If the Federal Reserve prints the money, we can expect the same natural consequences because, whenever the money supply is increased, the value of money people already own (such as the money in their savings account) goes down. For example, if you own the only Babe Ruth rookie baseball card that exists in the world, it will probably be worth a lot. Imagine now that our government gave the Federal Reserve the special privilege to print "authentic" Babe Ruth rookie cards, identical to yours; the value of yours would naturally go down. This principle is no different with money. But when the Federal Reserve does it, it results in an indirect tax on everybody, called an inflation tax. Because the dollar is worth less, the cost of the things you buy goes up (just go to the grocery store to verify). Although conventional economists would have you believe inflation is the rise in prices, inflation is traditionally considered to be the increase in the money supply, which causes higher prices. When prices rise, real income drops, demand for goods drop, and our entire economy suffers.
So whose fault is it when high prices and real interest rates cause people to fail on their loans and our booming economy to bust? The people who got loans they couldn't afford? The lenders? The Federal Reserve? I would say all of them are responsible. But, the supreme responsibility is that of our congress. Had they not allowed the Federal Reserve to lend artificially cheap money, an act of fraud, there would have been no bubble to blow up.
So, who do our representatives make pay the bill? The taxpayer. Even the ones that were responsible and lived within their means. Even the banking institutions that only lent to qualified lenders. So first you pay an inflation tax blow up the housing bubble. Then, you are asked to bailout the financial industry when they pop it! Why? Because the rule of law is not strictly enforced. Our leaders claim that allowing a big bank to fail will hurt you more than losing your right to keep the fruits of your labor and be rewarded for your responsibility. Therefore, the "right to property" is reduced to, the "right to your property so long as banks don't get too big and irresponsible that their demise might cause a disruption in the normal financial markets, even if those financial markets perpetuated the problem."
Yet, aside from HR 2755, introduced to address concerns about the Federal Reserve and the inability of a central bank to stabilize markets and protect the value of our dollar, no answers from congress or our conventional economists deal with the fundamental problems in our monetary policy. The central bank and bailout advocates can try all they want, but when you have a system that is fundamentally built on fraud, central bank or not, it will surely fail.