Bear Stearns. Freddie Mac. Fannie Mae. AIG. What next? I’ve already had my rant on the federal bailouts of these financial giants. But there’s one thing that bugs me even more than the bailouts, and it’s the crazy monetary policy surrounding them. Following the collapse of these institutions, Wall Street entered a state of despondency. The solution by the Federal Reserve, and other central banks around the world, was to pump hundreds of billions of dollars more cash into the system. Unfortunately this is not something that is without precedent. Indeed, it seems that whenever the markets take a dive the immediate response of the Fed is to inject more cash. I have two objections to this. First, easy money was surely a contributing factor to the financial problems we are seeing today. Consumers, and homeowners in particular, are living beyond their means because money is easy to come by. This in turn has led to excessive debt to income ratios, which fueled the impact of the sub-prime problems. So, how is pumping more money into the system helping this problem? It’s not. It’s just prolonging the pain. It’s akin to taking out a new loan to pay off an old one – you’re not actually any better off, you’ve just delayed the inevitable, and allowed it to grow in the meantime. Second, when the Fed pumps more money into the financial markets, this is money that is coming from nowhere – it’s just printed. This in turn devalues the dollar. Let there be no mistake, this is a direct form of taxation – an inflation tax. It is a tax paid by every person who holds dollars in order to subsidize Wall Street. This is wealth redistribution in its most perverse form – money is being taken from every citizen, including every member of the middle and lower classes, and redistributed to a large extent to the upper end of town to cover them for mistakes made during the course of their own greed.
Not only does the US government have a lot to answer for by engaging in the socialistic policy of repeatedly bailing out some of the biggest institutions in the country, but the Federal Reserve has a lot to answer for with its solution to the problem of simply printing more money. This approach in unsustainable. You simply cannot go on forever printing money to cover your losses. Eventually you devalue the currency. Indeed this is exactly what has happened. The US dollar is today worth almost half as much as a few years ago compared to many other major currencies.
If you don’t believe me, ask Ron Paul… (I apologize for citing a Fox News story. It won’t happen again)
As a bonus, here’s a personal message from Ron Paul about the current situation