How a Very Pessimistic Ron Paul Would Fix the Economy: Tech Ticker, Yahoo! Finance

Congressman Ron Paul is “very pessimistic” about the state of the economy, largely because – from his view – the Obama Administration “continues to do the things that created the problem in the first place.”Long a proponent of small government and a staunch opponent of the Federal Reserve system, Paul’s main point is that increased spending and higher deficits are not the solution to our problems, but their cause.”You can take care of people, but never with a deficit, never by expanding the spending,” the Texas Republican says in this exclusive video interview, taped in the Capitol Hill Rotunda in Washington D.C. “The more we do to interfere with the correction – the longer it lasts.”Had he been elected, Paul said he would be doing “a lot less” than President Obama and blames Keynesian economics – which advocates increased government borrowing and spending during times of duress — for our nation’s current ills.While admitting a transition to what he views an “ideal society” won’t be quick or simple, Paul’s economic prescription includes: * Allowing bankruptcies to occur vs. rewarding failure with bailouts. * Stop inflation by dismantling the Fed and returning to the gold standard. * Encourage savings and liquidate debt. * Deregulate. * Give tax credits to those who take care of themselves, or the doctors who provide their care. * Cut government spending, especially on international endeavors. “We spend hundreds of billions of maintaining our empire around the world. Let’s bring that money home,” he says.These recommendations will be familiar to anyone who followed (or supported) Paul’s run for the Presidency in 2008. Given all that’s transpired in the past year, one suspects he’d be getting a lot more votes if the campaign were happening today.

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Going for Broke – By ALAN ABELSON

MONDAY, SEPTEMBER 22, 2008
UP AND DOWN WALL STREET
Run and Hide

Run and Hide

Going for Broke

Uncle Sam plans to spend like there’s no tomorrow to cure what ails the credit markets and rev up investors. Will it work?

BABY, IT’S COLD OUT THERE. So let’s toss another billion on the fire.

What’s that make it? Well, let’s see: $29 billion for Bear Stearns, somewhere between $1 billion and $100 billion each for Fannie and Freddie (a nice narrow range), $85 billion for AIG, a couple of hundred billion to keep stray banks, brokers and their errant kin from asphyxiating themselves by swallowing toxic paper. And then there’s the proposed reincarnation of the Resolution Trust Corp., which all by itself may mean shelling out $800 billion, perhaps even as much as $1 trillion.

While we’re at it, we might as well include the $400 billion with which the Paulson-Bernanke grand plan envisages endowing the Federal Deposit Insurance Corp. so it can insure money-market funds.

But, please, understand those mind-boggling sums in no way, shape or form are to be construed as designed to aid and abet a bailout. Instead, they are merely the essential ingredients of an “intervention,” or, if you prefer, a “rescue” — just about anything, in other words, that’s semantically sweeter than bailout, with its ugly connotation of a sinking ship.

Besides, we have it on the best authority that none of this largess will cost the taxpayer a cent over the long run, which, if nothing else, speaks volumes about what constitutes the best authority these days. The reasoning is simple (or perhaps simple-minded is more accurate), namely that deep-pockets Uncle Sam can sell off the assets of the foundering companies on which he has bestowed that bounty and come out whole.

Surely, they jest. For a heap of those so-called assets might easily be confused with liabilities since even those that can be sold will likely fetch a feeble fraction of what their possessors now claim they’re worth.

This is not to say that until the powers-that-be pounded the panic button last week, the billions they had already thrown at the problem as well as taking a big step further and making the wretched companies soaking up those billion de facto vassals of the government were completely in vain. They undeniably had an instant impact. Unfortunately, an instant was about as long as the impact lasted, and it failed miserably to becalm the frantic credit markets or rekindle investor confidence.

The sad truth is that just about every one of Messrs. Paulson and Bernanke’s previous brainstorms — and they seemed to come with increasing frequency as Hank and Ben’s agitation mounted — touched off a brief spasm of exhilaration among investors, only to evaporate in very short order as the credit crisis resolutely morphed into a credit calamity. Or, to change the metaphor, what had been a slow-motion train wreck picked up demonic speed.

That little chart that adorns these gray columns offers an eloquent description of how bad things had gotten until the clouds parted and the sun finally came out as the week wore down. It depicts the yield on three-month Treasury bills going back to 1930. On last Wednesday, investors were so gripped with fear and desperate for a haven that they poured into the bills even though the yield was nonexistent. In effect, they were willing to pay the government for keeping their money safe. As a glance at the chart shows, that hasn’t happened since the Depression.

[chart]

Then, everything changed, at least for now. And the soaring rise in the stock market that began Thursday afternoon and extended through the final bell on Friday had Ben and Hank whooping with joy, exchanging high fives and just venting their pleasure with cat-that-swallowed-the-canary smiles, a welcome change from the funereal faces they had donned for the past few months.

While we’re in a generous mood, we might as well add Christopher Cox to the cheerful circle of celebrants. The SEC chief has been the target of a steady stream of slings and arrows directed his way by John McCain, which rather than nailing Cox’s inadequacies (and they’re bountiful) once again demonstrated that McCain and his advisers haven’t much of a clue how markets work.

Cox, in any case, deserves some of the credit for the smashing rally that boosted the Dow comfortably nearly 800 points in two sessions. For he proudly announced a ban on shorting 799 financial stocks and sparked talk of banning short selling entirely, and that scared the dickens out of the shorts who en masse rushed to cover. The resulting buying burst, we haven’t a scintilla of doubt, played a significant role in the great market lift-off.

Frankly, it seems to us, Cox, in taking out after the shorts — whom nobody loves except their immediate families (and we’re not even sure about them) — was more interested in covering his derrière than in protecting investors. As an early-warning sounder, keeping markets reasonably honest and offering a way to hedge against the inevitable mistakes or bad luck that investors are prey to — short selling serves a valuable function, and messing with it is apt to yield a lot more harm than good.

And we say that fully aware short selling has its quota of bad guys who do wicked things, but also aware that there are rules and regulations aplenty to curb untoward practices, if somebody would only enforce them.

But then, if regulators hadn’t been asleep, banks probably would have had real trouble finding ways to go belly-up, those innovative weapons of mass destruction called derivatives might have been defused long before they blew up, and those speculative bubbles, as in housing, might not have made the Guinness Book of Records for sheer size.

Just think of all the fun we’d have missed.

WILL THE GRAND PLAN WORK? Will piling on all those billions on billions atop a budget deficit that’s already a cinch to shoot up to over half a trillion next fiscal year allow the badly winded economy to start a sustainable recovery?

Ben, remember, vowed to use helicopters to drop money from the sky, but now he seems to be gearing up to use 747s. Can the Fed run its printing machine full-time to churn out all those billions without a substantial infusion from increasingly pinched taxpayers? And won’t priming the pump like mad drive the dollar back into the pits and force interest rates higher?

The plan, in all its extravagance, seems to have been thrown together on the fly, and once Congress gets a whack at it in the waning days before the lawmakers scurry off to the hustings, it may bear only passing resemblance, for better but probably for worse, to Paulson and Bernanke’s handiwork.

Obviously, the unknowns greatly outweigh the knowns, which make those and myriad other questions tough or downright impossible to answer.

We’re willing to concede that some forceful action was necessary, if only so the Fed can pay penance for its critical part in creating the incredible credit-cum-housing disaster.

As Merrill Lynch’s David Rosenberg observes, the fact that the government is suddenly so aggressive in coming to grips with an epic credit collapse is eloquent testimony to how the Fed and the Treasury “have consistently underestimated the severity of that collapse from the get-go.”

He reminds us, moreover, that the original Resolution Trust Corp. was strictly about buying bad mortgages. So he wonders whether the new incarnation will also undertake the purchase of Level 3 assets, whose value is extremely problematic and, in any case, more than a little difficult to gauge, and which are a sizable and not particularly desirable presence in many banks’ portfolios. And will the new RTC also buy credit-card debt, commercial real estate, leveraged loans “or the other mountains of bad debts out there?”

David cautions that the entire credit collapse to date has “reflected the unwind of the largest bubble of all time — residential real estate. Meanwhile, a consumer-led recession is taking hold this very quarter for the first time in 17 years, and every consumer recession in the past was followed by a negative credit cycle of its own.”

As to the euphoric market reaction, he thinks it’s a bit much. In their stampede to buy, investors seem to be ignoring the depressing fact that what prompted such drastic action was the sorry state of the financial system, which isn’t likely to change overnight no matter how vigorous the government exertion.

After the RTC was set up in 1989, he notes, it took two years for the economy to turn around, three years for housing to recover and a year for the stock market to bottom.

So what’s the rush?

RGE Monitor Current News Items

RGE Monitor

RGE Monitor

Current News tidbits from the RGE Monitor

  • Cost of Treasury Intervention in Financial Markets and Impact on Fiscal Deficit is Only Getting Bigger
  • Democrats Call for Capping Executive Pay: Time to Reform Financial Sector Compensation Packages?
  • Asian Central Banks Continue Liquidity Injection: Are Money Markets Responding?
  • Are Asian Economies Vulnerable to Another Crisis This Time?
  • N Korea: Nuke Defiance and Sanction Effects
  • Effects of the Financial Turmoil on European Banks: Will A Bail-Out Scheme Be Necessary?
  • Home Price Decline Continues in the UK
  • Effect of Short-Selling Ban on Hedge Funds
  • Slovenia Politics: Center-Left Opposition Wins Parliamentary Election
  • What Will Be the Economic Effects of South Africa’s Political Instability?
  • Taro Aso Set to Become Japan’s Next Prime Minister: Economic Impact?
  • Russia Macro Effects of Liquidity Squeeze Oil Exporters Fiscal Stance
  • Iran: Yet Another Central Bank Governor Replaced – Economic Policy and FX Reform?
  • Will Latin Central Banks Stop Hiking Rates?
  • Latin Equity Markets Responses
  • UN General Assembly 63rd Session Kicked Off: Russia-West Rift, Iran, Georgia, Kosovo and Reform Debate

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