Ron Paul Speaks on The Price of Money : Consequences of the Federal Reserve's Zero Interest Rate Policy (9/21/2012)Submitted by Cyril on Sat, 12/15/2012 - 01:36
The Price of Money : Consequences of the Federal Reserve's Zero Interest Rate Policy
By Congressman Ron Paul
September 21, 2012
"One of the most enduring myths in the United States is that this country has a free market, when in fact nothing could be further from the truth. In reality, government has pervaded so many aspects of the market that what we see as a free market is merely the structural shell of formerly free institutions, while government pulls the strings behind the scenes. No better illustration of this can be found than in the Federal Reserve's manipulation of interest rates.
The Fed has interfered with the proper functioning of interest rates for decades, but perhaps never as boldly as it has in the past few years through its policies of quantitative easing. In Chairman Bernanke's most recent press conference he stated that the Fed wishes not only to drive down rates on Treasury debt, but also rates on mortgages, corporate bonds, and other important interest rates. Markets greeted this statement enthusiastically, as they realize that this means trillions more newly-created dollars flowing directly to Wall Street.
What almost no one realizes, however, is that interest rates are a price, the price of money.
Like any other price, interest rates perform both a signaling and a coordination function.
Interest rates coordinate the actions of savers and borrowers: higher interest rates attract savers, lower interest rates attract borrowers, and the market interest rate provides an equilibrium between saving and borrowing.
The interest rate also signals the availability of funds: lower interest rates signal an abundance of loanable funds, while high interest rates signal a paucity of funds. As interest rates rise, more people save and fewer people borrow; as interest rates fall, fewer people save and more people borrow. Lower interest rates also tend to favor longer-term, more capital-intensive projects. Projects which might not be profitable at eight percent interest rate may suddenly become profitable if the interest rate drops to three percent.
We live today not in a free market economic system but in a "mixed economy", marked by an uneasy mixture of corporatism; vestiges of free market capitalism; and outright central planning in some sectors. The folly of central planning that should have been learned after the fall of the Soviet Union never took hold in Washington.
Each infusion of credit by the Fed distorts the structure of the economy, damages the important role that interest rates play in the market, and erodes the purchasing power of the dollar. Markets see the interest rate and assume that the price is functioning as it should, when in fact it is being manipulated by a select few bureaucrats in Washington.
Fed policymakers view themselves as wise gurus managing the economy, yet every action they take results in economic distortion and devastation.
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Video : Congressman Ron Paul's Hearing on the Price of Money - September 21, 2012