“We’re trying to prop up bad debt,” said Paul of the now famous bailout bill, a version of which was rejected by the House of Representatives earlier this week, but which passed the Senate last night, and which is headed for a vote in the House again. Paul made his remarks in a brief telephone interview aired on Starting Bell, a morning program on the Bloomberg cable financial news network
The bailout bill was introduced in both houses of Congress to stave off what proponents claim is an unprecedented banking crisis caused by the drying up of credit. The government has spent hundreds of billions of dollars presiding over the rescuse or dissolution of of several major financial concerns in recent weeks, including brokerage and investment banker Bear Stearns; the two major players in the mortgage market; Fannie Mae and Freddy Mack; the giant insurer AIG; and, in what became the largest rescue of a commercial bank in U.S. history, Washington Mutual. In the meantime, there have been several corporate reorganizations in the financial sector involving billions of dollars in new investment, much of it from overseas or from private sources in the United States. All of this activity points to a major hazard facing the financial sector, reportedly triggered by a crumbling of the real estate investment sector over the past year.
The charge on behalf of the bailout bill is is being led by U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. It is designed to stave off financial collapse, proponents contend, by injecting upwards of $700 billion in liquidity into the banking sector through the purchase of poorly performing assets from banks' balance sheets, courtesy of the American taxpayer.
On a more ominous note, Paul warned of lean economic times ahead. “We will have our recession,” he said, warning that it could turn into a major "depression" if the bailout bill in its current form was signed into law. "We built this problem by...irresponsible spending," Paul said. He said the bailout bill would make the economy worse. "It's propping up bad debt with more spending," he said. "As long as you can create new money, you create more inflation" he said, making an oblique reference to the power of the Federal Reserve to introduce new money into the banking system.
Before the late 1960s, the Fed had to keep a percentage of gold on hand for every Federal Reserve note it issued. These constraints were removed by Congress in the mid to late 1960s during the administration of President Lyndon Johnson, thus giving the Fed a blank check on how much currency it could put into circulation. It forced Johnson's successor, President Richard Nixon, to remove the final restraint pegging the dollar to a fixed gold price. This created an inflationary spiral that was not quashed until the mid-1980s due to the restrained monetary policy of then-Fed Chairman Paul Volcker. Paul's remarks indicated that he believes the economy could be headed for a similar inflationary spiral.
But Paul had a few good things to say about the current version of the bailout bill. "I think there have been a few improvements," Paul said, citing tax breaks and cuts tacked on to the $700 billion in taxpayer-funded buyouts that could make the bill more appealing to legislators. "Maybe the markets will like that for a little while."
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