Iím sure every one of my readers (both of you) will be at least somewhat familiar with the current financial crisis. Iíll surmise anyway. Due to massive speculation in the price of real estate, many major lending corporations made many poor investments in mortgages. Their reasoning was that the price of the house will be worth more than the mortgage was, and even if the owner defaults on the loan, the company would take control of the house and still be able to turn a profit. These companies would then issue securities to other investors, based on the idea that they would turn a large profit. (Investors bought many as, through 2006, they gave large returns on investment). Certain companies (ones youíve seen in the news lately) issued many more securities than they could really afford to, so once the housing bubble burst, they lost, and lost big. Furthermore, all those investors that bought those securities? Theyíre losing money too. In short, there was a lot of money tied up in housing markets.
So what does Ron Paul have to do with all this? Well, he recently wrote an article regarding his opinion on the current situation. In the article, he points out that by bailing out the industry, weíre merely enabling risky financial ventures in the future. Heís right in that regard. However, he also mentions his firm belief that the crisis was caused by too much government interference into the economy. For anyone who wants further detail into why, Iíll let you read the article.
Ron Paulís statement amounts to stubbornness to an unprecedented degree. He believes that in the absence of government intervention, price speculation will cease to exist. Things will only be priced at what their worth. Unfortunately, I have to point out one inalienable fact which Mr. Paul ignores: people are greedy. People continually speculate that certain things will only go up in price, and it makes a lot of people rich. However, the bubble always bursts, and it makes a lot of people lose money. Itís the idea behind, oh, every single stock market crash in the history of humanity. As long as people are greedy, price speculation will be a fact of life. In a completely unregulated market, speculation would simply be much worse.
As to the rampant spurious loan practices, Mr. Paul also blames government intervention. It (according to him) is the only reason banks would give out loans to undeserving recipients. Once again, Mr. Paul overlooks the simple fact that people are greedy. It was speculation that housing prices would increase which drove the practice of giving out bad mortgages. After all, if the price of the house were only going to increase, someone would be getting a great deal by securing a mortgage at a set price. Everybody wins!
Whatís so incredibly galling about his assertion is that he does so in the face of overwhelming evidence to the contrary. He finds tiny, completely irrelevant facts that support his theory, and uses them to promote his agenda. Itís this kind of thinking which got us into trouble in Iraq.
But what bothers me most of all is the timing. People will read Ron Paulís opinion on the proposed bailout and believe every word of it, merely because they can identify with his ďscrew politicsĒ mentality. Whatís going on right now is a severe problem, judging by the exorbitantly large amount of mortgage-based securities that exist. If we donít do something soon, many more of them will be deemed worthless. As a result, many, many more companies will fall to the waste side. We need to act quickly. And complete deregulation of the economy would only bring total chaos.