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Catching a Falling Financial Knife

US Fed Responsible for the Credit Crisis

Politics / Central Banks Apr 15, 2008 - 12:33 AM GMT

By: Dr_Ron_Paul

Politics Best Financial Markets Analysis ArticleThere has been a lot of talk in the news recently about the Federal Reserve and the actions it has taken over the past few months. Many media pundits have been bending over backwards to praise the Fed for supposedly restoring stability to the market. This interpretation of the Fed's actions couldn't be further from the truth.


The current market crisis began because of Federal Reserve monetary policy during the early 2000s in which the Fed lowered the interest rate to a below-market rate. The artificially low rates led to over investment in housing and other malinvestments. When the first indications of market trouble began back in August of 2007, instead of holding back and allowing bad decision-makers to suffer the consequences of their actions, the Federal Reserve took aggressive, inflationary action to ensure that large Wall Street firms would not lose money. It began by lowering the discount rates, the rates of interest charged to banks who borrow directly from the Fed, and lengthening the terms of such loans. This eliminated much of the stigma from discount window borrowing and enabled troubled banks to come to the Fed directly for funding, pay only a slightly higher interest rate but also secure these loans for a period longer than just overnight.

After the massive increase in discount window lending proved to be ineffective, the Fed became more and more creative with its funding arrangements. It has since created the Term Auction Facility (TAF), the Primary Dealer Credit Facility (PDCF), and the Term Securities Lending Facility (TSLF). The upshot of all of these new programs is that through auctions of securities or through deposits of collateral, the Fed is pushing hundreds of billions of dollars of funding into the financial system in a misguided attempt to shore up the stability of the system.

The PDCF in particular is a departure from the established pattern of Fed intervention because it targets the primary dealers, the largest investment banks who purchase government securities directly from the New York Fed. These banks have never before been allowed to borrow from the Fed, but thanks to the Fed Board of Governors, these investment banks can now receive loans from the Fed in exchange for securities which will in all likelihood soon lose much of their value.

The net effect of all this new funding has been to pump hundreds of billions of dollars into the financial system and bail out banks whose poor decision making should have caused them to go out of business. Instead of being forced to learn their lesson, these poor-performing banks are being rewarded for their financial mismanagement, and the ultimate cost of this bailout will fall on the American taxpayers. Already this new money flowing into the system is spurring talk of the next speculative bubble, possibly this time in commodities.

Worst of all, the Treasury Department has recently proposed that the Federal Reserve, which was responsible for the housing bubble and subprime crisis in the first place, be rewarded for all its intervention by being turned into a super-regulator. The Treasury foresees the Fed as the guarantor of market stability, with oversight over any financial institution that could pose a threat to the financial system. Rewarding poor performing financial institutions is bad enough, but rewarding the institution that enabled the current economic crisis is unconscionable.

Dr. Ron Paul
Project Freedom

Congressman Ron Paul of Texas enjoys a national reputation as the premier advocate for liberty in politics today. Dr. Paul is the leading spokesman in Washington for limited constitutional government, low taxes, free markets, and a return to sound monetary policies based on commodity-backed currency. He is known among both his colleagues in Congress and his constituents for his consistent voting record in the House of Representatives: Dr. Paul never votes for legislation unless the proposed measure is expressly authorized by the Constitution. In the words of former Treasury Secretary William Simon, Dr. Paul is the "one exception to the Gang of 535" on Capitol Hill.

Dr. Ron Paul Archive

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Comments

jpurp3
16 Apr 08, 23:13
ron paul

how come ron paul is not in thje news like neveryone elese...


Mark
17 Apr 08, 18:48
Ron Paul is Great

Ron Paul is so great, how on top of the real problems he is. It's like we're being handed our savior on a silver platter, and people vote for John McCain because they are dumb. It's just a sad, sickening disgrace that my fellow Americans are so dumb.


Skipjack16
18 Apr 08, 03:47
Why Congressman Paul is not in the news

Congressman Paul is not in the news because the truth hurts and most Americans can't handle to truth. It's a terrible shame the country has it's head in the sand and will not face the grim reality that is in front of us. It would rather hear about "bitterness" than taste it. Well, if Congressman Pauls words do come to pass this entire Republic will still ask, "how did this happen?" while watching the latest news about Britney Spears or worse, American "Idle".

The economic crisis is the worst thing for the country but it's exactly what it deserves!


ryan
20 Apr 08, 12:13
Why isn't Ron Paul in the news like everyone else?

Are you kidding? Who runs and owns the media companies and everything else? Who is benefiting in the US? Not the people, not the companies, a select few others become billionaires then there is the international bankers who own and control the Federal Reserve the international bankers own everything and when things calm down, Ron Paul is going to get shot. Just like Lincoln and just like both Kennedys and the son for that matter. It's all planned, were just a bunch of pawns in the game.


Hans
20 Apr 08, 14:32
Economic crisis is all we need

The FED and income tax of the IRS are as fare I know ilegal.

Best thing can happen now is the economic crisis get deep enough. Then we have a change the government will create money and no longer private banks. When we combinate this with new tax system and few other thing I've in mind. We can solve the problem in the US and many other countries.

Can some one connect me with Dr. Ron Paul?


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Catching a Falling Financial Knife