Sunday, January 8, 2012

Simon Johnson: Ron Paul Must Be Taken Seriously

MIT economist and former IMF chief-economist, Simon Johnson, has some very supportive comments to make about Ron Paul (see below).

However, there are two points that I would like to make first. Johnson writes that Ron Paul's book, End the Fed, "would also be more convincing if it relied a little less exclusively on sources produced by a single publisher, the Ludwig von Mises Institute."

It should, of course, be pointed out that the logic of an argument laid out rather than the number of publishers referenced should be the key to judging a work. However, even that is not a "problem" with End the Fed. Many of the books referenced by Congressman Paul are simply republished by the Mises Institute and not originally published by MI. It is heroic that MI has republished these books so that copies are available for new generations. But, it does not mean that the books referenced by Dr. Paul were not passed by the critical eye of many publishers. For example, America's Great Depression was first published by Van Norstrand, The Mystery of Banking was first published by Richardson & Snyder and The Theory of Money and Credit was first published in the Unites States (from a German version) by Yale University Press.

Second, Johnson concludes in his comment that Dr. Paul does not take into consideration the problem of banks Too Big To Fail and that they would exist even if the Fed were ended. But this is clearly not the case. Dr. Paul makes clear in End the Fed that the creation of moral hazard, where banks are assumed to be protected by the governments, creates the TBTF banks and that this wouldn't occur under a free market because people would be much more careful of where they put their money, if people understood that the government did not protect any banks. As Dr. Paul put it:
And yet someone is getting the money. Mostly it is powerful players in the market, institutions that are regarded as essential to the national well-being, such as Goldman Sachs and AIG insurance. In fact these companies could have been allowed to go bankrupt, just like Lehman Brothers was allowed to die. Yes, there would be pain, but at least temporary.The current path is prolonging and extending the pain—while causing a slow death dressed up in fancy clothes.

Here's Johnson on Dr. Paul:
We should take Ron Paul seriously. The Texas Congressman had an impressive showing in the Iowa caucuses on Tuesday and his poll numbers elsewhere are resilient – he is running a strong third nationally, but looks like to come in second in New Hampshire. He may well become the Republican politician with populist momentum and energy in the weeks ahead.

Mr. Paul also has a clearly articulated view on the American banking system, laid out forcefully in his 2009 book, End the Fed. This book and its bottom line recommendation that we should return to the gold standard – and abolish the Federal Reserve system – tends to be dismissed out of hand by many. That’s a mistake, because Mr. Paul makes many sensible and well-informed points.

But there is a curious disconnect between his diagnosis and his proposed cure. This disconnect tells us a great deal about why this version of populism from the right is unlikely to make much progress in its current form.

There is much that is thoughtful in Mr. Paul’s book, including statements like this (p. 18):

“Just so that we are clear: the modern system of money and banking is not a free-market system. It is a system that is half socialized – propped up by the government – and one that could never be sustained as it is in a clean market environment.”

Mr. Paul is also broadly correct that the Federal Reserve has become, in part, a key mechanism through which large banks are rescued from their own folly – so that their management gets the upside when things go well and the realization of any downside risks gets shoved onto other people.

If you don’t like this characterization of the American system, turn your attention to Europe and the eurozone – where the European Central Bank is busy propping up banks with “liquidity” (in the form of three year loans), in part hoping these financial institutions can in turn support the government bond market.

There are no Ron Paul-type populists in Europe – at least I have never come across a mainstream politician there wanting to abolish any central bank. But I would predict that related views will pick up European adherents in the months ahead, for example as people in Germany increasingly worry about the actions of the European Central Bank – and want to go back to some version of their own Bundesbank, which was very careful about not creating inflation.

Mr. Paul represents an important strand of American libertarian thinking, seeing the root of all financial evil in the role of the government – and tracing this back to what he sees as deviations from the U.S. Constitution, made possible by the Supreme Court (beginning with McCulloch v. Maryland in 1819; I recommend Aggressive Nationalism: McCulloch v. Maryland and the Foundation of Federal Authority in the Young Republic, by Richard E. Ellis, if you’d like to read more on that key episode).

Mr. Paul’s argument goes too far in this direction, however, including with statements like “The Supreme Court has never been a friend of sound money and has rarely been a protector of the Constitution,” (p.168). His book would also be more convincing if it relied a little less exclusively on sources produced by a single publisher, the Ludwig von Mises Institute.

The gold standard to Mr. Paul is a panacea, because it would restrict the role of the government and what a central bank could do. In fact, in his version of the gold standard – which is not the one that generally prevailed – there is no role for a central bank whatsoever.



  1. If you are going to critize via the link, could everyone just stop copying and pasting from Rob's blog entry. Thank you.

  2. I like his comment about Ron Paul's monetary ideas spreading to Europe...That would be some serious poetic justice since the disastrous idea of starting the Fed came from European bankers.

    We're well aware of the resistance to Ron Paul here in the U.S., but the elitist bankers around the world would not welcome his presidency either.

  3. @RW: Thanks for the hat tip.

    @Chris Rossini: Simon Johnson used to be an "elitist banker". So if he is changing his mind about central banks, then maybe other bankers are too. That's a good sign!

    It's kind of like being on the Titanic. The system is broke and folks (including some bankers) are trying to survive.

  4. Rich bankers and spendthrift politicians printing money for themselves is immoral. The whole intellectual debate is a cover for this simple fact. They're a bunch of crooks.

  5. @Iris Mack

    I hope you're right...Any individual can change. As a whole though, I'd be extremely surprised if central bankers all got together and disbanded themselves.

    So if Simon Johnson is a convert (and from the above statements, it's too hard to tell), that would be a good thing for the world.

    One thing that I find troubling though is the constant linking of Ron Paul to the gold standard. Ron Paul, himself, has said numerous times that the market should choose the money. It most likely will be gold, but we don't need a gold standard *run by the government & central bankers*.

    And this, I believe, will be the bankers' angle when the fiat system totally collapses. Another "gold standard" controlled by the state & central banks. While, for sure, it would be better than the current system, the opening wedge will be there for future abuse.

  6. @Chris Rossini:

    I hear ya. I don't know Simon Johnson personally, never met the man. Only thing we seem to have in common is MIT as a place of employment (mine back in the 1990's).

    However, he is acknowledging Ron Paul and giving him more credit than most bankers and economicsts. Given that Simon is currently employed by MIT Sloan School (which receives funding from banks, etc.) I am surprised he is saying as much as he is.

    I guess that mean "academic freedom" isn't totally dead. LOL!

  7. It's kinda funny that Johnson complains about using the Mises Institute as a "single source publisher".

    Someone remind me, how many aggragators of Austrian economic thinking are there?


  8. You know, the Apostle Paul would be taken more seriously if he quoted from sources other than the Old Testament. Just sayin'.....

  9. One thing that gets ignored in the discussion about bank "bigness" is how they got there. The role of fractional reserve banking in contributing to bank size has to be addressed: Removing these laws would prevent banks from expanding as much.