Ron Paul: US Should Declare Bankruptcy

Presidential candidate Ron Paul believes the answer to the U.S. financial crisis is simple – the country should just walk away from its debt and declare itself bankrupt.

And if the Obama administration is unwilling to take that drastic step, it should disband the Federal Reserve, so it doesn’t have to pay back $1.6 trillion it owes it, The Republican presidential hopeful said.

Paul made the comments during a radio interview in Des Moines, Iowa on Monday, the day Obama met GOP and Democratic Senate leaders in a bid to find common ground on the ceiling.

Paul told WHO radio’s Jan Mickelson that bankruptcy would be the ideal answer to the debt crisis facing Greece.

Mickelson followed up by asking the Texan Representative "Are you predicting, in essence, if bankruptcy is the cure for Greece, is it also the cure for the United States?”

"Absolutely," Paul responded.

Paul said he didn’t dread the thought of the United States defaulting on its debts, one consequence of a refusal to lift the $14.3 trillion debt ceiling which will be reached on August 2, as, he said, the country is constantly defaulting due to inflation.

But he said one quick way to reduce the national debt would be to abolish the Fed. "We owe $1.6 trillion because the Federal Reserve bought that debt, so we have to work hard to pay that interest to the Federal Reserve.

“They're nobody; why do we have to pay them off? Why don't we just take that away from them and reduce the debt?”

Economist Dean Baker tells Newsmax that Paul’s idea of bankruptcy would cause chaos, but he said he believes not paying the Fed is a good idea. “I’ve been advocating something similar myself,” he said, but admitted, “I’m just not sure of the legality of it.”

Baker said the Treasury pays interest to the Fed which refunds it, so wiping out that debt would be “costless” and would automatically reduce the debt, meaning that a vote on raising the ceiling would not be necessary.

But on the question of bankruptcy, Baker, co-director of the Center for Economic and Policy Research, said, “Why would you do that? It would create a huge financial crisis and put Wall Street out of business. It would be a risky, dangerous, costly step to deal with a non-problem.”

While Paul was making his case for bankruptcy, talks on finding a way to raise the debt limit while keeping both Republicans and Democrats happy seemed to be stalling. Obama called for a $600 billion to be raised through a series of tax hikes on corporations and wealthy individuals, while GOP leaders continued to insist the only way out is by cutting spending.

Meanwhile Lawrence Lindsey, a former Federal Reserve governor and economic policy assistant to President George W. Bush said higher interest rates, lower-than-predicted economic growth and Obamacare are likely to add trillions to the debt.

Writing in The Wall Street Journal, Lindsey noted that the Treasury is currently borrowing at a rate of 2.5 percent while the average for the last 20 years was 5.7 percent. Should rates go up to that average, annual interest rates alone would add $420 billion to the debt in 2014 and $700 billion a year by 2020.

“The 10-year rise in interest expense would be $4.9 trillion higher under ‘normalized’ rates than under the current cost of borrowing,” wrote Lindsey. “Compare that to the $2 trillion estimate of what the current talks about long-term deficit reduction may produce, and it becomes obvious that the gains from the current deficit-reduction efforts could be wiped out by normalization in the bond market.”

He said the administration’s projected growth rates of 4 percent in 2012, 4.5 percent in 2013 and 4.2 percent in 2014 are too high and if, as he believes, they are proven wrong, they would lead to an additional $4 trillion in debt.

Estimates for the cost of Obamacare are also on the low side, Lindsey wrote because employers will have an incentive to end private coverage and put their workers on the public system. That would raise costs by a further $74 billion due to the system’s subsidies, he claimed.

“Only serious long-term spending reduction in the entitlement area can begin to address the nation's deficit and debt problems,” wrote Lindsey, now president and CEO of the Lindsey Group. “It should no longer be credible for our elected officials to hide the need for entitlement reforms behind rosy economic and budgetary assumptions,” he concluded.