Ron Paul’s Economic Theories Winning GOP Converts

[GibbsFactor]

He has been calling it since 2002 and has been dead on. I don't know how many things he needs to be right about, before people stop thinking he is the crazy one.

What do they call it? 5%ers?

[Hubbs]

The more I read about how convoluted the relationship between the fiat monetary system, the wall street elite, higher ups in federal government and reserve, the less crazy Ron Paul seems to me. Or maybe I'm the one that's going crazy.

One take on how the Great Depression actually took hold: http://seekingalpha.com/article/134219-plunge-protection-team-attacks-bofa-this-ends-now

The similarities to our current situation are striking. Anyone care to set me straight?

There's nothing to set you straight about. You're right, and you've had a very similar experience to my own. When I first heard about Paul, about two years ago, I hadn't thrown myself into economics yet. I quickly found out about his stance on the Fed, and while I liked a lot of his policies, I thought that one just seemed absurd.

Fast forward two years. About a third of the stuff I put up on my site is way-too-nerdy analysis of things like credit default swaps, hyperinflationary pressures, and fraudulent accounting at the big banks. And one conclusion I've come to is that Paul is right; the Fed is part of the problem, not part of the solution. For example, you have to really dig into the numbers and be able to understand them to see that, while the housing bubble already existed in 2001, between then and now is when it turned into an absolute monster, and it's largely because of the Fed. The tech bubble popped, and the Fed, wanting to avoid what could have been as bad as a late 70's/early 80's recession, slashed interest rates ridiculously low so as to allow cheap credit to flow abundantly. Most of it wound up flowing into the housing market, because stocks were on shaky ground. Housing was safe. Housing was easy. Prices always go up, right? In fact, the "growth" we've experienced since 2001 has been almost entirely a housing-based illusion, because housing prices are part of GDP. Since the 80's, included in the government's official measurement of our GDP has been - and I still can't believe that I'm not making this up - the assumption that every homeowner in the country is also renting their own homes from themselves, and all that rent is added to GDP.

Think I'm wrong? Hey, don't trust me - trust the Bureau of Economic Analysis:

The largest imputation in the GDP accounts is that made to approximate the value of the services provided by owner-occupied housing. That imputation is made so that the treatment of owner-occupied housing in the GDP is comparable to that of tenant-occupied housing, which is valued by rent paid. That practice keeps GDP invariant as to whether a house is owner-occupied or rented. In the GDP, the purchase of a new house is treated as an investment; the ownership of the home is treated as a productive activity; and a service is assumed to flow from the house to the occupant over the economic life of the house. For the homeowner, the value of that service is measured as the income the homeowner could have received if the house had been rented to a tenant.

Think that makes sense? It's written to. What's conveniently left out is the fact that every single home sale is also included in GDP. In other words, both the hypothetical rental scenario and the ownership scenario are counted. If you rented at $900/month, that would count, but if you bought a house for $200,000, that sale would go into GDP and your $900/month would still be counted. In other words, the number-crunchers have decided that not only can they treat millions of annual home sales as economic activity, but they can also pretend that those home sales never happened. It's no different than if they tallied up every single purchase of, well, anything as part of GDP (which they do), but also added in the imaginary scenario of those purchases never being made, and the owners of the items are leasing them out to different people instead.

Why do I mention this? Because I'm gonna go back to 2001. If we go into a hypothetical world for a moment in which we can simply poof the Fed out of existence in 2001 and don't spend paragraphs going over the nitty-gritty details about Congress managing the currency and various interest rate laws and so forth - just keeping it simple - then 2001 would have sucked, yes. But it wouldn't have been this. Moreover, we wouldn't have spent the next six-seven years racking up extreme amounts of debt while the economy was still shrinking - which it's been doing. If you remove the imaginary rentals, along with other fuzzy math the government has adopted like pretending that free checking isn't actually free (see that same link), we've actually been in a recession since 2001. The growth of this decade has been an illusion, and we've all made decisions based on the notion that the illusion was real. And the illusion was caused by... the Fed.

[GibbsFactor]

The problem I have with the Fed is that it essentially tries to outsmart a phenomenon that no one really understands.

I wonder if a simpler answer is the right one. Paul's ideas are much simpler. All he wants to do anyways is legalize gold and silver as tender to compete with fiat monies. I don't see the problem with that. It's essentially that way now. I mean, why can't I give you a pound of gold for a new car? If you accept it, what's the problem? It's a barter, a trade.

Most think Paul wants to go back to the original gold standard, that simply isn't true. But he does believe in sound money. Perhaps it isn't that bad to be unable to increase your money supply. Just think of the tax we are all paying in inflation. No one talks about that.

But I think most don't want to get rid of the Fed, but just keep it in check. And I'm all for that. While credit/debt sucks, it's how we get wealthier. I bet we'd have much smaller shocks and panics if we could only manipulate the rate at dire times. The problem with that is that the Fed is a business and that's bad for it's bottom line.

[Burgundy Burner]

http://video.google.com/videoplay?docid=7886780711843120756

[Larry]

Glad you made yourself clear, even if that is not what you said initially:)

Lassez-fair policy did not cause the GD. It's your logic that is flawed.

It's a myth pushed forward by the very same Keynsians that claim we need to spend our way to prosperity this go around.

From what I've read from many economists of the era and their contemporaries there were many "causes" of the GD, and Laissez-faire policy is not one of them.

for example:

The restoration of the international gold standard, following the massive monetary expansions that took place during and after World War I, could only be lastingly secured by means of aggressive devaluation or deflation or a combination of both.

The post-WWI attempt to limit the need for deflation or devaluation, by erecting a "cheap" gold exchange standard, was doomed from the start because a crisis in any of the participant countries could cause the entire house-of-cards to come tumbling down, spreading the crisis worldwide.

Add in a fragmented, unit banking system that increase the risk of bank failures owing to sector-specific or regional shock. (first principles of finance)

Also, consider the widespread bank failures that cause a run into currency, which lead to monetary contraction. and state-declared bank "holidays" will only cause more people to withdraw their deposits.

Don't forget price controls! besides preventing the price level from adjusting in such a manner as to eliminate general gluts or general shortages of goods, they also distort the structure of relative prices, thereby undermining efficiency and productivity.

What's strange to me is not that the depression happened (given policies that were resorted to,) but that such destructive policies secured wide support despite their often readily-predictable, adverse consequences.

These and more caused the Great Depression, not hands off Federal policy (which didnt exist much in 1929)

Unfortunately, you persist in trying to blame the Great Depression on things that happened after the Great Depression.

Now, I do remember being told back in High School that yes, the stock market crash was the event which started the depression. (And my now-expanded knowledge of the subject, which consists of reading several paragraphs of Wiki, including this chart:

sure does seem to indicate that GDP went down in '29. So, while that doesn't necessarily prove that the crash caused GDP to drop, they certainly appear to have occurred at the same time.

And I seem to recall being told (and my vast research repeats the claim) that the main reason why the crash was so devastating was leverage. (As in, "there was too much leverage going on".)

(Insert observation that there seems to be that element in common with our current market crisis.)

Now, I suppose you can argue as to what exactly it was that caused that bubble to burst. But I think you'll agree that that bubble formed during the years prior to Hoover taking office. Does that sound reasonable?

And I observe that Wiki's entry on Cooledge, every time it discusses his economic policy, makes the statement that Coolege is often criticized for his laissez-faire policies. Including this interesting tidbit:

Many later criticized Coolidge as part of a general criticism of laissez-faire government. His reputation underwent a renaissance during the Ronald Reagan Administration, . . .

[GibbsFactor]

Now, I do remember being told back in High School that yes, the stock market crash was the event which started the depression. (And my now-expanded knowledge of the subject, which consists of reading several paragraphs of Wiki,

:laugh:

The Internet rocks!

[Larry]

There's nothing to set you straight about. You're right, and you've had a very similar experience to my own. When I first heard about Paul, about two years ago, I hadn't thrown myself into economics yet. I quickly found out about his stance on the Fed, and while I liked a lot of his policies, I thought that one just seemed absurd.

Fast forward two years. About a third of the stuff I put up on my site is way-too-nerdy analysis of things like credit default swaps, hyperinflationary pressures, and fraudulent accounting at the big banks. And one conclusion I've come to is that Paul is right; the Fed is part of the problem, not part of the solution. For example, you have to really dig into the numbers and be able to understand them to see that, while the housing bubble already existed in 2001, between then and now is when it turned into an absolute monster, and it's largely because of the Fed. The tech bubble popped, and the Fed, wanting to avoid what could have been as bad as a late 70's/early 80's recession, slashed interest rates ridiculously low so as to allow cheap credit to flow abundantly. Most of it wound up flowing into the housing market, because stocks were on shaky ground. Housing was safe. Housing was easy. Prices always go up, right?

If we go into a hypothetical world for a moment in which we can simply poof the Fed out of existence in 2001 and don't spend paragraphs going over the nitty-gritty details about Congress managing the currency and various interest rate laws and so forth - just keeping it simple - then 2001 would have sucked, yes. But it wouldn't have been this.

I don't think I disagree in any way with any of your facts, but I think I may disagree with your conclusion.

Yeah, easy credit to home buyers resulted in too much money chasing limited Real Estate assets, resulting in inflated prices.

But is that really where the problem is in our current situation?

Seems to me, all that situation leads to is that when home prices inevitably fall, a lot of people are going to owe more than their house is worth.

Which isn't all that uncommon an occurrence. I've met people who were "negative" on their houses, by good margins, 20 years ago, so I know that it can happen, at least occasionally. But, the people I met were all still making their payments, and waiting (not necessarily waiting happily) for the price of their home to rise back up enough to meet their slowly declining loan balance. (They observed that, when your house is worth noticeably less than the amount of your loan balance, that the bank tends to be very understanding and forgiving if you have trouble with the payments. )

Is our current crisis due to home buyers buying real estate it inflated prices?

Or is the problem the fact that everybody owns a cut of these mortgages, and virtually every one of these investors were massively leveraged in their investments?

Is the problem that Fred and Fannie Farkle, in Des Moines, paid too much for their house? Or is it that, if 1% of the mortgages in California default, then the Illinois State Teachers Retirement Fund will lose their entire investment?

[Hubbs]

Larry, you're misrepresenting the problem with that 1% figure (plus, the foreclosure rate in California is way above 1%). If prices only dipped 1% in response, that would be fine. They've dipped something like 30% across the country, and will keep going down. Why? This graph:

Take a looky-loo at when the explosion starts.

By the way, you might wanna go back and read my expanded post, I edited it to inclue more info.

[Larry]

:laugh:

The Internet rocks!

It's not just for porn, any more!

[GibbsFactor]

It's not just for porn, any more!

The information age.

[Larry]

Larry, you're misrepresenting the problem with that 1% figure (plus, the foreclosure rate in California is way above 1%). If prices only dipped 1% in response, that would be fine. They've dipped something like 30% across the country, and will keep going down. Why? This graph:

But my observation was about the foreclosure rate, not about the amount of price drop.

I repeat (maybe more clearly): Is the problem that housing prices fell? Or is the problem that we created a system in which if a very small number of mortgages default (and, I point out, even when a mortgage defaults, the lender only loses a portion of his investment) that could lead to the utter collapse of the entire investment market?

The impression I get is that if 10% of the mortgages default, causing the lenders to lose, say, 20% of the amount they invested in those 10% of their mortgages, then it will cause the collapse of the entire US banking system.

To me, the only way that can happen is if the investers were outrageously over-leveraged in their investments.

So to make an analogy, would you invest in a mutual fund where, if 10% of the stocks owned by the fund, fall by 20%, then the fund loses it's entire capital?

Yet I'm being told that if 10% of mortgages (and, realistically, we're only talking about 10% foreclosures in the most over-inflated markets, not 10% of the nation) lose 20% of their investment, then every mutual fund in the world will collapse.

I'm remembering a joke I'd read, back when I was a programmer:

If carpenters built buildings the way programmers wrote programs, the first woodpecker that came along would destroy civilization.

But it seems like that is the way we built the "financial house", of the entire country.

And if so, then the problem isn't the woodpecker.

By the way, you might wanna go back and read my expanded post, I edited it to inclue more info.

Yep. Read it.

[Hubbs]

Larry, you do realize that you're arguing against a fiat currency system, right? Even without leverage deregulation, the old rules that usually pegged maximum leverage at 12:1 would still make our current situation a disaster (and in fact, since the rules were only changed for a few banks, all of the banks that have actually been allowed to fail - already, there have been more failures in 2009 than in all of 2008 - were leveraging via the old rules).

[Hubbs]

Also, you're still dramatically underestimating the losses that the housing bubble pop has created. There are still several trillion in losses that the banks have been allowed to ignore because the Treasury/Fed continue to peddle the laughable notion that the housing price drop is temporary. This isn't 10% of 20%. This is literally as much as a third of the entire value of the American economy.

[Larry]

Larry, you do realize that you're arguing against a fiat currency system, right?

Uh, I don't see how.

Even without leverage deregulation, the old rules that usually pegged maximum leverage at 12:1 would still make our current situation a disaster (and in fact, since the rules were only changed for a few banks, all of the banks that have actually been allowed to fail - already, there have been more failures in 2009 than in all of 2008 - were leveraging via the old rules).

And I have to admit that I don't understand that, either.

If the doomsday scenario which I cannot survive is that 10% of my investments lose 20% of their value? Correct me if I'm wrong, but isn't that what most folks call a net 2% loss?

[Hubbs]

Uh, I don't see how.

And I have to admit that I don't understand that, either.

If the doomsday scenario which I cannot survive is that 10% of my investments lose 20% of their value? Correct me if I'm wrong, but isn't that what most folks call a net 2% loss?

(See my second post - I'm doing a bad job of having coherent thoughts today.)

[Larry]

Also, you're still dramatically underestimating the losses that the housing bubble pop has created. There are still several trillion in losses that the banks have been allowed to ignore because the Treasury/Fed continue to peddle the laughable notion that the housing price drop is temporary. This isn't 10% of 20%. This is literally as much as a third of the entire value of the American economy.

Again, I'm having a lot of trouble believing that.

I can't believe that if the price of all Real Estate in the entire US went to zero, that it would represent 1/3 of the US economy.

What percentage of mortgages in the US, are in imminent danger of default?

(Actually, I suppose a better question is "What percentage of the dollar amount of . . . " , since a relatively small number of really big mortgages would have a disproportionate effect.)

[GibbsFactor]

Again, I'm having a lot of trouble believing that.

I can't believe that if the price of all Real Estate in the entire US went to zero, that it would represent 1/3 of the US economy.

What percentage of mortgages in the US, are in imminent danger of default?

(Actually, I suppose a better question is "What percentage of the dollar amount of . . . " , since a relatively small number of really big mortgages would have a disproportionate effect.)

http://www.ritholtz.com/blog/2009/03/bear-market-losses-11-trillion-dollars/

Here is a mind blowing stat: Stocks have lost $11 trillion in market value since the October 2007 peak, according to Marke****ch.

This is based on the Dow Jones Wilshire 5000 index, which includes nearly every U.S.-listed stock. Losses since the start of 2009 are $2.6 trillion. Nearly half of all stocks in the index are now trading at less than $5, and 37% are under $3.

Nearly 50% of all stocks in the Wilshire 5000, the broadest index of U.S. equities, are trading for less than $5 per share, and 37% are under $3.

>

Wilshire 5000 October 2007 to March 2009

And this doesn't include the domino effect as a result of those that have lost their home, are upside down, lost their jobs, lost their children's education fund, their retirement, the businesses that have gone belly up.

The US GDP is 14.6 trillion.

[Passepartout]

No wonder that Obama needs to have Ron Paul.

In his cabinet over the economy.

As Paul would do a great job!

[The Robert Griffin Experience]

To understand what caused the Depression, one must understand the Austrian Theory of the Business Cycle (the same one Ron Paul derives his core beliefs from), and the role central banking and governmental control over interest rates and the money supply has in creating booms, then subsequent busts.

First, it must be understood that the boom is not a positive occurrence. The "boom" is essentially an overvaluation of an asset - whether it is dot-com startups, or houses, beyond what the market naturally desires. Furthermore, it is the undertaking of projects for which there is no real demand, i.e. homes. Where does this demand come from? From a sudden influx of money, via the Federal Reserve.

Federal Reserve policy, following the short depression of 1920, was essentially to create an environment of easy credit and rampant speculation by flooding money into the economy and lowering credit standards. This led to large-scale malinvestment - investment in projects that will not be profitable in the long-term, but seem profitable in the short-term because of the false economic signals and distortions in the economy. However, this "boom" is not founded on production and savings, which are later invested to create new opportunities, but on debt, which must eventually be repaid.

At a certain point, it becomes apparent that the credit illusion is just that - an illusion. Businesses and entrepreneurs must quickly liquidate their projects and change direction, as they realize that their current path will be unprofitable. Workers employed in unprofitable enterprises must move to profitable ones. Capital invested in shaky firms must be diverted to new ones.

This is the "bust". As stated above, the boom phase is a negative occurence; the bust phase is the positive occurence. The bust is simply where all the bad assets, poor investments, and misallocated resources must be reallocated to productive ends. This will generally be a period of recession, as current projects must be stopped, and capital recouped in order to commence new projects that will better serve consumer demand.

Unfortunately, resources are often human, which means workers will get fired, or their wages will decrease. However, the market will naturally respond to this by lowering prices, not only in anticipation of reduced demand, but in the process of liquidation and restructuring.

However, if the economy is allowed to self-correct (as it was allowed to in 1920...but NOT in 1929) then this process will proceed fairly quickly - the 1920 recession (where government spending was slashed, ironically by the person who contributed to it's initial occurence) lasted months.

Ultimately, the boom phase of the 1920s (granted, unlike our boom phase, that boom phase was a productivity boom with the greater availability of electricity and automobiles) mirrors the boom phase of the 2000s, and will unfold in much the same way, particularly if Obama seems determined to be another FDR whose government interventions will stall the recovery process, while creating further inflation.

The best we can hope for under the circumstances is another asset bubble, which will produce illusory prosperty and carry Obama to a 2nd term, just like how the Bush bubble carried W to his 2nd term. Of course, the worst may well be a cataclysimic inflationary depression, where prices continue to rise, while production continues to fall. Think the Carter years with the stuff Barry Bonds used to jam in hiis backside.

Of course, an economic policy based on the insights of the Austrian school could prevent this. But what are the chances of that happening?

[Madison Redskin]

Do any of the proponents of laissez-faire theory believe the FDIC is ungodly and must be cast asunder?

[Hubbs]

Again, I'm having a lot of trouble believing that.

I can't believe that if the price of all Real Estate in the entire US went to zero, that it would represent 1/3 of the US economy.

What percentage of mortgages in the US, are in imminent danger of default?

(Actually, I suppose a better question is "What percentage of the dollar amount of . . . " , since a relatively small number of really big mortgages would have a disproportionate effect.)

Well, before I get into it, let me say that if you don't want to believe me, you might want to at least believe the IMF, which estimates that the US faces $2.7 trillion in losses from this crisis. That, by the way, is being very generous, in my (admittedly unprofessional) opinion.

It's not that real estate represents such a big proportion of American production. It's that the value of all real estate in America became very, very over-inflated in relation to other economic indicators, like, say, median income. You're still using foreclosure percentage, rather than price change.

Believe me, I understand the notion that real estate can't possibly cause that much in losses. Really, I do. Even six months ago, I was right there with you. I'm not at all posting this because I think that you're somehow dumb or uninformed - you're obviously one of the top "smart guys" that posts in the Tailgate, and I mean that with no sarcasm or disrespect. I lurked around here for years before actually signing up for an account, and I'm used to expecting solid, rational posts from you when it comes to political issues.

The most straightforward way I can put it to you is that the numbers don't lie. Period. I can provide you with all sorts of said numbers beyond the IMF, but ultimately, part of what needs to happen is your own acceptance of the possibility that, yes, it was possible for a bubble to become so over-inflated that it could cause what we're seeing today. I'm not at all saying that you have to agree with that suggestion right away, but you said that you simply can't believe it, and I'm telling you that, even with the most optimistic of estimates coming from our own government and from our own banks, it's true, and they're just stalling for time in the hopes that it will turn around.

Just tell me that you think it's possible, and I'll share some more numbers with you.

[Hubbs]

Do any of the proponents of laissez-faire theory believe the FDIC is ungodly and must be cast asunder?

For the record, Madison, there are many of us who believe that even a laissez-faire/Austrian/whatever you want to call it approach has plenty of room for certain government programs to provide a basic "safety net."

Anyway, under a true sound money system, the FDIC would be unnecessary, because it insures leverage. But if we're to be on a fiat currency system until God knows when, then I actually find it to be perfectly necessary, because I'm a very strange creature called a "demand-side libertarian."

[SnyderShrugged]

For the record, Madison, there are many of us who believe that even a laissez-faire/Austrian/whatever you want to call it approach has plenty of room for certain government programs to provide a basic "safety net."

Anyway, under a true sound money system, the FDIC would be unnecessary, because it insures leverage. But if we're to be on a fiat currency system until God knows when, then I actually find it to be perfectly necessary, because I'm a very strange creature called a "demand-side libertarian."

That's pretty much where I stand on things too. I am not a purist of Laissez-faire nor am I even close to an anti-government anarchist.

There is a role that the government should play and that role, to me, is that of the protection of the individual. There is room in proper government size and scope for those protections, but we often see that role expanded in the theme of "general welfare".

[SnyderShrugged]

Unfortunately, you persist in trying to blame the Great Depression on things that happened after the Great Depression.

Not at all! In fact, if you reread that post, you will see that I am referring to the post WW1 era as somewhat of a starting point (though, I could really point at 1913 as a more root cause too)

I think WW1 ended in 1918 (I'll have to check on the precise year), which is well before the GD.

I think you may be confusing my take on the causes of prolonging the GD with my take on the causes leading up to it.

[Larry]

Well, before I get into it, let me say that if you don't want to believe me, you might want to at least believe the IMF, which estimates that the US faces $2.7 trillion in losses from this crisis. That, by the way, is being very generous, in my (admittedly unprofessional) opinion.

It's not that real estate represents such a big proportion of American production. It's that the value of all real estate in America became very, very over-inflated in relation to other economic indicators, like, say, median income. You're still using foreclosure percentage, rather than price change.

But, as people keep pointing out to me when it comes to the stock market, if the value of my home goes down, but I don't sell the home, and I keep making the payments, then nobody loses any money. (Including me. All I've lost is some "net worth" on paper.)

And also, I was talking about what I'm being told is a "real estate price bubble" phenomenon. But you folks are throwing "the stock market has gone down by" numbers at me.

You're making my point for me.

Is the problem, here, that Real Estate prices went down by, say, 20%?

Or is the problem that, when Real Estate prices go down by 20%, the stock market goes down by more than half?