Malinvestment: Florida Real Estate

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Ron Paul on the Fed

What the Federal Reserve still fails to realize is that intervention in the economy is always harmful. Unlike the late French economist, Frederic Bastiat, the Fed only sees what is seen, the superficial results of its policies, and not what is unseen, the effects of its monetary intervention throughout the economy. Monetary inflation leads to malinvestment and causes the boom phase of the business cycle. Once the malinvestment is realized the bust phase occurs, and these malinvested resources need to be liquidated in order for the economy to recover. But the Fed actively works to prevent this liquidation and does everything in its power to continue inflating in order to prolong the boom. The first act of intervention begets the second and subsequent interventions, each bigger than the first, as each economic bust gets larger and more severe.

The idea that a handful of brilliant minds can somehow steer the economy is fatal to economic growth and stability. The Soviet Union's economy failed because of its central planning, and the United States economy will suffer the same fate if we continue down the path toward more centralized control. We need to return to sound money, bring back free markets, and rein in the Fed.

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The Next Recession or Crash

The environment has now been established for the next stock market crash. Everything we do know about the economy is unsettling. Then there are the things that we don't know about, like the bailouts and stimulus plan. Finally, there are plenty of things that we have never even considered, like how does all this government intervention impact the people who currently want to buy "toxic" assets from banks or automobile factories in Detroit.

All this uncertainty and ignorance have left investors and entrepreneurs — the only people who can get us out of this mess — unhinged from the normal parameters with which they operate. The result is inaction and fear, conditions that make the stock market ripe for a crash....

The path to recovery is clear: cut taxes permanently, eliminate government programs, balance the budget, eliminate regulation, free the entrepreneur, establish free trade, eliminate the Federal Reserve, and return to the gold standard. The economy would recover before Congress could finish reciting those 28 words....

I'm not predicting the market will crash this week and I don't even completely discount a very strong bear-market rally, given that the market has lost 45% from its high in 2007. What I am saying is that markets don't normally crash and they only crash under certain conditions. Big government reforms, bailouts, stimulus, and "change" in general create negative expectations of the future along with a great deal of uncertainty. This leads to inaction and fear — the preconditions for a crash in the stock market. All it needs now is the appropriate trigger.

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My thoughts: We could be witnessing the shortest period of recovery/prosperity in the post WWII period. The leading indicators are points to an official end to the recession about May 2009. However, the tinkering with the economy will continue until at least 2011, creating uncertainty and malinvestments that will make the current downturn look minor.