Congressman Ron Paul recently gave a speech on the House floor covering the topic of health care. In it he brought up the Flexner Report, an item few individuals have even heard about that is worthy of much more attention than it currently receives.

“A lot of problems were created in 20th century as a consequence the Flexner Report (1910), which was financed by the Carnegie Foundation and strongly supported by the AMA. Many medical schools were closed and the number of doctors was drastically reduced.” — Ron Paul; September 24, 2009

The seeds of the Flexner Report were planted in 1908 when the Carnegie Foundation for the Advancement of Teaching commissioned Abraham Flexner, a high school principle, to research and report on medical schools in the U.S. Flexner himself was not involved in the medical industry, but after being asked to take on the report he researched and grew fond of the medical systems in England, France, and Germany.

In the report, which was officially published in 1910, Flexner called homeopathic schools “a striking demonstration of the incompatibility of science and dogma.” What’s curious is that Flexner points out between 1900 and 1909 homeopathic schools decreased from 22 to 15 and students within the schools decreased from 1,909 to 1,009. Flexner uses these figures to conclude that “the rise of legal standard must inevitably affect homeopathic practitioners.” In short, even with the marketplace whittling out the unproductive and unsustainable homeopathic colleges (or any colleges, for that matter) that Flexner clearly did not appreciate, he still advocated increased government intervention to further clear out homeopathic schools.
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Yesterday Barack Obama unveiled his new financial regulatory proposals. These include greatly expanding the scope of the Federal Reserve’s regulatory duties, creating a government agency to “protect consumers” from the financial industry, and increase government control over many investment and financial outlets.

The first problem with this proposal is that it completely disregards how this bubble and bust came about. “Lack of regulation” did not cause the bubble or the pain we feel today. In fact, it was the federal government and Federal Reserve who were actually encouraging banks and lenders to lower their lending standards to riskier customers. The government was pushing lower lending standards in the name of equality and the right for lower income families to own a home.

In Obama’s plan banks would be forced to hold the mortgage-backed securities they create and sell to investors, with the belief that they will be more conservative with their loans if their own money is on the line. The problem with this is that it ignores how mortgage-backed securities, or the secondary mortgage market, came about. For those who don’t know, the secondary mortgage market is where a bank sells a loan it made with a customer to another business, relieving the bank of the responsibility to maintain that loan. The business buying those loans from banks may hold them in its portfolio or group them into mortgage-backed securities and sell them to investors.

This market started with Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs) created in 1937. Fannie and Freddie have enjoyed special privileges and treatment since their creation. They created the secondary mortgage market to give banks the opportunity to give more loans (and thereby sell them to Fannie and Freddie) and therefore give more people the chance to borrow money to buy a house.

In the 1990s, the Clinton administration continually pressured Fannie and Freddie to buy riskier mortgages from banks. This would encourage banks to sell mortgages to lower income individuals regardless of the increased risk of foreclosure involved. In 1999, after pressure from the federal government, Fannie Mae lowered some of its previous standards so it could buy riskier mortgages from the banks.

We often hear today that it was greed, deception, and lack of regulation that pushed subprime mortgages onto the market, when in reality these risky loans were being openly encouraged by the federal government. The mortgage bubble would not have been possible had it not been for Fannie and Freddie and the special government treatment they have received since their creation. Any government agency involved in the housing market (in both the Clinton and Bush administrations) was pressured to lower mortgage standards, allow lower income individuals and families to get loans, and ignore the extra risks and consequences.

The very reason why many politicians didn’t want equal treatment and oversight for Fannie and Freddie was because they thought it would take away the GSEs’ ability to “commit” to riskier customers. The government was pushing “affordable housing” by lowering mortgage standards in any way possible, rejecting the market’s natural rates of risk, and ignoring the risks involved with increased loans to people who clearly couldn’t afford them.

No one in government pushing these practices believed they were adding to an unsustainable and deadly bubble, and no amount of government regulators would have had the nerve to ignore what Congress, the President, and the Federal Reserve were all pressing for. The push for decreased mortgage standards for lower-income people gradually spread into decreased standards for the mortgage industry as a whole. Subprime mortgages were not the only portion of the mortgage market that crashed, many “prime” mortgages faced high foreclosure rates because of the spillover of decreased lending standards.

Obama’s plan assumes that forcing businesses in the secondary mortgage market (mainly Fannie and Freddie) to own part of their own mortgage-backed securities will solve the problem. If the government suddenly has to jump into the secondary mortgage market to ease and control the industry, why are we not simply allowing Freddie and Fannie to compete on the free market, suffer the consequences of unreasonable practices, and go bankrupt if necessary? Instead of allowing Freddie and Fannie to fail because of their poor practices, the government nationalized the two corporations last year. The secondary mortgage market would not have been possible had it not been for the government’s unending support for Fannie and Freddie. Rather than look at the root cause of the problem, Obama is taking an issue that the government essentially created and sustained and using it as an excuse to increase government regulatory power.

People rarely ask how banks suddenly got the money and ability to loan to people who obviously should not have gotten loans. In response to the bursting tech bubble and weak economy, then-Federal Reserve Chairman Alan Greenspan lowered the Fed’s interest rate to 1% for a full year starting in 2003. Greenspan kept rates artificially low for one purpose: lower rates mean banks can borrow more money, which they can loan out to more people (who otherwise couldn’t have gotten those loans) who will go out and spend those dollars. Lower interest rates encourage spending, borrowing, and discourage saving; if they are held at artificially low levels that money will drift to areas that it never would have gone before. By keeping rates at unsustainable and artificially low levels, the Fed gave banks the money and opportunity to loan cash to people who otherwise never could have gotten it (i.e. subprime mortgages).

The Federal Reserve’s easy money and cheap credit policy played a huge part in giving banks the chance to take advantage of their lowered lending standards. Lower lending standards coupled with the artificial credit from the Federal Reserve put the subprime mortgage market in full gear. Without the Fed, the banks could not have gotten that cash in the free market. It is frightening that the practices employed at the Fed, which were so instrumental in causing today’s mess, are now being looked upon as the solution. The leaders of the Fed are the very people who ignored the bubble forming from their own policies.

In 2005 Ben Bernanke said that rapidly rising housing prices “largely reflect strong economic fundamentals.” At the same time Greenspan said the housing market was merely experiencing “froth,” not a bubble, and would only correct in local markets. Why in the world would we want to give more power to the Fed and the people who manage it when they continually ignore the consequences of their easy money policies and denied for years that the housing bubble was unsustainable and irrational? Why are we listening to the people who helped create the problem, ignored the problem for as long as possible, and suddenly feel they have all the answers that will lead to massive economic damages if not put into place?

The fact that they see the same policies that brought us into this mess as the perfect solution should caution everyone about their judgment. Artificially low interest rates and cheap credit may boost the economy in the short-term – even for a few years as it did after the tech bubble burst until 2007 – but they will guarantee another bubble of this magnitude and a more disastrous bust several years down the road.

Because of the policies endlessly pursued by the Fed and the government over the past year (artificially low interest rates, bailouts, increased intervention) do not be surprised to see excessive malinvestment in the years ahead, a period of artificial wealth (just as the tech and house bubble “wealth” proved to be nonexistent after their respective bubbles popped), and a painful collapse.

Obama’s new regulatory plan is nothing more than a continuation and massive expansion of the exact policies that brought us to this point. More government and central control will not solve problems that they themselves were strongly supporting when the economy seemed to be in great shape. Obama’s plan simply hands buckets of gasoline to the arsonist watching the fire he started.

One of the greatest misunderstandings we have with government today is its true and proper role. We have seen government continually grow through Republican and Democrat administrations and both parties, come election time, spout the same drivel that they think people will gobble right up.

You will notice that at every election the talk is always about how government will improve or stimulate the economy. Government is seen as the answer from both parties to build the economy to their liking. As government has worked itself into the economic affairs of people it is increasingly looked upon as the ideal way to stimulate the economy or “save and create” jobs.

The most crucial thing that we cannot ignore is the Constitution. The document that is supposed to restrain government gives absolutely no mention that its purpose is to create or maintain jobs, “strengthen” the economy, or get involved in any economic planning whatsoever. The Founders originally recognized that the federal government was to have very little control over the economy, in order to secure the freedoms and liberties of the people to make and control their own decisions.

Gradually over the past century, those in government have ignored the essential economic freedoms that were strongly protected in the Constitution. The passage of the 16th Amendment in 1913 and the ability of the government to tax citizens marked a beginning of the government’s economic entrenchment. How does giving the government the power to control how much of your own labor is actually yours even come close to fitting in with economic freedom? The ludicrous idea that we work several months every year for the government tramples the laws of freedom. It is central planning in one of its worst forms.

The expression (included in the Constitution) “regulation of commerce” was suddenly taken as an excuse to regulate the production, manufacturing, distribution, and sale of any product or item that the government felt it needed to. In the Founders time, regulation simply meant “to make regular.” Today government uses the word to influence or control next to anything it likes. This includes absurd regulations such as how much water a toilet bowl can hold and the size of holes in Swiss Cheese. The Constitution does not give the federal government near the authority to get this involved in affairs that would easily be solved by the people, market, and if necessary, the states.

Government has gradually shoved itself into the economy and individual affairs of the people. The Constitution’s protection of these basic rights seems irrelevant to the bureaucrats who can’t find anything that they won’t tax, regulate, or control in some manner. As the government takes more control from the people and adds to its own unconstitutional power, people become more reliant on the services of government. Individual initiative and responsibility slowly go out the door.

I cringe when I hear that the government needs to stimulate the economy or create jobs. Many people are so ignorant to believe that if we give government just a little bit more power, a little more control, that things will improve. It is a dangerous trend when people trust government more than their own judgment and choice.

Economic sustainability cannot come from government. It is impossible for government bureaucrats, regulators, and planners to calculate rewards and corresponding risks than the people who are actually putting their time, money, and labor on the line. As we have seen largely in the past decade, these public officials have absolutely no connection to fiscal sanity and the concepts of living within your means and suffering the consequences of reckless behavior.

Many politicians won’t stop preaching that the free market brought us into this economic mess. They say that capitalism and freedom breed greed and corruption. We can be sure that these statements are full of hot air when you consider that we haven’t had a “free market” for quite some time. Government has gotten itself so entrenched in individual lives, businesses, industries, and the whole economy that it isn’t humanely possible for us to have or have had a “free market” in recent history. The effects we are seeing today are the direct results of central planning, a government with little regard for the rule of law, and the consequential disregard for individual responsibility, personal freedom, and local governance.

I would hope that people can see the failures of central planning just by looking at the events of the past couple years. It is grossly unconstitutional, intrudes on the most basic traits of human nature, and does nothing but transfer the power of the people to the government. It is not sustainable, efficient, or productive. On another level it is not moral, sensible, or legal.

In short, government is not here to create, save, or guarantee jobs. Government is not here to stimulate the economy. Government’s primary purpose, as the Founders and the Constitution recognize, is to protect and defend individual liberty and freedom (including economic liberty). Government in its best role, which the Founders tirelessly pursued and fought for, is one that stays out of the affairs of the people, allows them to make their own decisions and choices, so long as they don’t intrude on the freedom or liberty of another individual.

Liberty is one and the same; it is not meant to be separated by government into groups, economic liberties, or civil liberties. Constitutionally (and I would think morally) the government does not have the authority to decide which liberties we can and cannot manage on our own, whether it be financial liberties, economic liberties, or civil liberties. One natural liberty without another is like a tree without its roots or branches. All-inclusive individual liberty is the only true liberty.

I often refer to the Federal Reserve as a secretive and dangerous agency, but many people don’t understand what I’m specifically talking about. Publicly, the Fed participates in hearings in Congress, and it generally seems accountable to the President and Congress. Few understand there is information that Congress and the American people are prohibited to know. Let’s start from the beginning.

Different agencies and groups have been given the task to audit and investigate the Fed since it was created in 1913. The Treasury Department took on the job for the Fed’s first eight years of existence. In 1921, the General Accounting Office (GAO, now the Government Accountability Office) was established with the Budget and Accounting Act of 1921. The GAO is an “independent, nonpartisan agency that works for Congress.” It’s duties consist of performing audits, evaluations, and investigations. In general, it is called the “watchdog” of Congress.

Congress gave the GAO the auditing responsibility over the Federal Reserve until 1933, when Congress decided to give other agencies and firms the responsibility. For more than forty years after 1933, the GAO’s duties did not involve auditing the Federal Reserve. This changed on July 21, 1978, when President Jimmy Carter signed The Federal Banking Agency Audit Act into law. The Act had several major flaws. It returned auditing power over the Fed back to the GAO, except for four different areas that the GAO was prohibited to audit:

(1) transactions conducted on behalf of or with foreign central banks, foreign governments, and nonprivate international financing organizations;

(2) deliberations, decisions, and actions on monetary policy matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, and open market operations;

(3) transactions made under the direction of the Federal Open Market Committee including transactions of the Federal Reserve System Open Market Account; and

(4) those portions of oral, written, telegraphic, or telephonic discussions and communications among or between Members of the Board of Governors, and officers and employees of the Federal Reserve System which deal with topics listed in this Act.

Yes, it is actually prohibited to audit these areas of the Federal Reserve, and they are not any small items. Perhaps most alarming is the fact that the GAO can’t investigate the Fed’s foreign dealings. Letting their foreign operations go unnoticed is a rather disturbing prohibition, and brings up questions of sovereignty, loyalty, and what’s in the best interests of the country. We are talking about an organization that has monopoly control over money and credit; if anything, they should be one of the most heavily investigated areas of government.

The argument against allowing Congress and the American people to investigate these four items is that it allows the Fed to operate more efficiently and productively without excessive public or private scrutiny. No kidding. I don’t think anyone would argue that being protected against any investigation into four key areas of your operation would hurt efficiency.

This statement from John F. Kennedy serves as a good reminder of what we should expect and tirelessly demand from government:

“We are not afraid to entrust the American people with unpleasant facts, foreign ideas, alien philosophies, and competitive values. For a nation that is afraid to let its people judge the truth and falsehood in an open market is a nation that is afraid of its people.”

Money is one of the primary areas where Congress has neglected and ignored its Constitutional responsibility. We have given unimaginable power to a central bank, and prohibited important aspects of that central bank from being audited. This is dangerous in any circumstance, but that danger increases quickly when you add in the fact that we have a fiat monetary system, essentially an inflationary time bomb of monetary destruction waiting to go off.

The most basic question to ask is if this monetary system resembles that of a free society, economy, and people. Huge power over monetary policy is in the hands of the seven unelected members who make up the Board of Governors, which oversees the Fed.

The Fed is not here to create stability for the American people, it is here to ensure stability for government. It is time to reverse the trend and belief that the American people can’t control monetary decisions. Money is power, and that power should not be in the hands of a select few central bankers serving the interests of themselves and the government. That power belongs solely to the individual citizens of a nation, otherwise in the long run it will be abused, expanded, and used as an engine of tyranny.

The Fed deserves no special treatment. Let them be audited, investigated, and open to to public and private scrutiny. Congress and the American people have given them incredible power; a power that, especially if protected and kept secretive behind closed doors, will be destined to bring the country into a time of massive inflation, worthless currency, and great economic and social unrest.

Auditing the Fed is the first necessary step to stripping the outrageous power of an unconstitutional central bank and currency. Can you imagine what the founding men of our nation would say about secrecy in places of such importance and power? Secrecy in government leads to suppression of truth and the birth of tyranny. It is imperative that we once again realize the dangers of mixing secrecy and power.

“History records that the money changers have used every form of abuse, intrigue, deceit and violent means possible, to maintain their control over governments, by controlling money and its issuance.” — James Madison

“Let me issue and control a nation’s money, and I care not who writes its laws.” — Amschel Rothschild

“Those who seek absolute power, even though they seek it to do what they regard as good, are simply demanding the right to enforce their own version of heaven on earth. And let me remind you, they are the very ones who always create the most hellish tyrannies. Absolute power does corrupt, and those who seek it must be suspect and must be opposed.” — Barry Goldwater

Today, for the first time since May 1, 1997, the Dow closed below 7,000, down 4.24% to 6763.29. It has been nearly twelve years since the market has seen these levels, and that was when the tech boom was going full throttle, well before the 2000 correction.

Did we even have a complete correction in 2000? With a central bank making the calls of monetary policy, I’ve realized that we cannot know whether the correction was actually sufficient enough to clear out all the malinvestment and bad management decisions. Think about it: interest rates were sharply lowered, credit was injected into the economy, and before too long the economy was back on its feet again (thanks in part to the new housing bubble). Just because the recession may have been weakened by the Federal Reserve’s intervention, it doesn’t mean that it wouldn’t have negative consequences later on. In a true free market where the market would control money and credit, this would be much easier to analyze. We do not have that convenience though, because we have to live with and analyze the actions of the select, unelected few who call the shots.

I bring this up because we obviously do still have market forces at work. Despite regulation, intervention, and manipulation on the part of the government and Federal Reserve, the underlying powers of the market do not disappear for good. Today the stock market has been sent to levels prior to the correction of 2000, and I can’t help but speculate that part of this is because investors are starting to understand more deeply the consequences of credit manipulation from the Fed, as well as an inflationary monetary system.

Over time, we as a nation have subscribed to the Keynesian belief in economics that you must spend and inflate your way out of economic hardships. This is the root of our largest problems today. Some of the key principles of capitalism are saving and investment, but over the past century we have gotten the mindset that it is the government’s responsibility to manage and influence the economy. It is this belief in inflation and debt financing that has caused us to get so overwhelmed by a correction that is beyond the hands of government and central planners.

What if, by lowering interest rates to artificial lows in 2000, Greenspan prevented, or rather delayed, areas of the market that didn’t fully correct? What if providing such cheap money was one of the primary reasons for the largest and most irresponsible bubbles this nation has ever seen? A small group of central planners, if they worked 24/7, could not get close to controlling the marketplace in a more efficient and responsible manner than a capitalist free market. With the key influence of money and credit out of the hands of the consumers and investors, I find it very hard to believe when people blame our problems today on the “free market”.

No matter what political, economic, or social systems are in place, the forces of the free market are always at work. This is why every nation that has tried its way with a fiat monetary system has not lived to see its lasting success. No piece of paper guaranteed by a government and central bank can take the place of gold and silver, the only items consistently and universally accepted as currency in all of human history.

Every attempt at government and central planning is an effort to go against human nature. Capitalism is not about “greed” as many have made it out to be. Capitalism is the only economic system that supports, rather than discourages, the profit motive. Capitalism is a consumer driven economy, which leads to lower prices and higher quality products. In a true free market capitalist society the regulation of the market, not the government, is unleashed in full force. The ability of free choice and individual responsibility will outweigh any government bureaucracy’s ability to regulate.

The government and Federal Reserve do their best to limit individual responsibility and ability. Over the past year we have been forced to bailout massive corporations and essentially the whole government-managed banking industry. If these were such pressing matters, why not leave it up to the people to decide whether or not these corporations were “too important to fail” and deserved money of which they had earned not one penny? If it was such a pressing matter, there was nothing stopping people from sitting down and writing a check for the Treasury to distribute to its banking buddies.

We have lost the ability to make our own decisions with our money. Talk about taxation without representation: over the past year, the Treasury Secretary and Federal Reserve Chairman (formerly Hank Paulson, now Tim Geithner and Ben Bernanke), two unelected officials, have handed out trillions of taxpayer dollars.  This past December, former president George W. Bush ordered an “emergency” bailout of the auto industry. Rather than let these mismanaged auto businesses fail, reorganize, and come back as a stronger entities, the taxpayers are being forced to pay the bill for stupid mistakes made by the businesses. In other words, if we decide to not buy their crappy vehicles, we’re forced to bail them out with our taxpayer dollars.

The regulatory abilities of the free market are starting to rev their engines. The monetary dictatorship of the Federal Reserve cannot manipulate credit and destroy the value of the currency without serious repercussions. Bailing out failed and irresponsible business decisions won’t eliminate the problems of mismanagement and malinvestment. Nationalizing industries will not lessen the pain felt by the consumer during this economic crisis, nor will increased regulations.

Countless times our officials have gone with short-term solutions that ignore the laws and history of economics. They go for the route of more government intervention and involvement in the economy. Many people today can’t comprehend a system where the government wasn’t responsible for getting the economy out of a recession. Somehow people fail to see that this is not a problem caused by lack of spending, but lack of saving. It’s pretty simple: Congress encouraged businesses to hand out irresponsible mortgages that they knew people couldn’t afford, people took these irresponsible mortgages they knew they couldn’t afford, and both sides of the party went deeply into debt. But rather than take the signals of the recession that we need to cut back on spending and increase our savings, the government has gone on a spending rampage in the past year, the likes of which the world has never seen. Not to mention that this is money we do not have, which only means it will come through more borrowing and inflation of the dollar.

The free market has been put off and suppressed for a good amount of time now. However, like I said, its forces can and will never completely disappear. Human nature, common sense, and the yearning for individual responsibility will eventually outwit and overpower all regulatory and deceitful agencies keen on destroying those very principles and natural laws. History shows there are no exceptions.