Friday, August 3, 2012

Ron Paul's End the Fed 5: Credit

In my latest reading of Ron Paul's End the Fed, Ron Paul argues that the Federal Reserve's easy credit encouraged recklessness and thus contributed to the financial crisis.  This may overlap with Paul's point that artificially stimulating economic investment when people have not been saving is a disastrous policy, for how will people buy things when they do not have the money?  And, regarding credit, there comes a time when people have to pay their creditors.  What happens when they are unable to do so?  An example: Those who bought houses that they could not afford.

Ron Paul argues that one way that the Federal Reserve encouraged recklessness was by increasing the money supply in an attempt to reduce interest rates.  So is Ron Paul for high interest rates?  My impression is that he is not.  Granted, he's against reckless loans being made out to people who may not have the ability to pay the money back, but he seems to believe that it's better for interest rates to come down after people invest the money that they have saved.  For Paul, investment is good, but people should invest money that they have saved.  Then, interest rates can come down.

I think that Ron Paul's discussion sensitizes me to how difficult it is to stimulate the economy.  We want for people to spend, for that's what creates jobs.  But, when people are saving, they're not spending right now, and so economic growth is delayed.  But we want economic growth right now, and thus there's the push for credit, for people to spend money that they don't have.  That's fine for right now, but what happens when the debtors have to pay back their creditors and don't have the money?

I think that there's often a hope that the person borrowing will be able to pay the creditors back.  I'm not talking so much about people who use their credit cards at the mall, but rather people who borrow money to start businesses, or who had hope that they would be able to pay back their sub-prime mortgages because the housing market was good and they'd make a lot of money on their homes.  But there are obvious risks: What if the business does not do well? What if the housing market takes a nosedive (which is what happened)?

I'm not sure if Ron Paul is against credit altogether.  I can't see a credit-less society really working, at least not in twenty-first century America.  If people can only invest money that they saved up, I doubt that many people will be investing, for how many have saved up enough money to start a business?  Credit does open up opportunities for more people.  That can help the economy, but it also has the potential to harm it.

(UPDATE: On page 203, Paul says that he's not against credit but wants for it to be "rooted in money saved, not money created."  I don't know what exactly he means by that.  Perhaps he means that, when people save money, there is more money in the bank for loans to be made out.)  

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