Ron Paul: Buying bad debt is the wrong solution

(CNN) -- Two days after the House rejected the $700 billion bailout bill, the Senate is set to vote on the rescue plan for financial institutions.

Rep. Ron Paul said he believes the $700 bailout bill will not solve the financial crisis.

The vote is scheduled for after sundown Wednesday.

Republican presidential nominee Sen. John McCain, Democratic nominee Sen. Barack Obama, and Obama's running mate, Sen. Joe Biden, all said they would be present for the vote.

Speaking to CNN's John Roberts on Wednesday, House Financial Services Committee member and former Republican presidential candidate Rep. Ron Paul discussed why he thinks the bailout bill is the wrong solution to the economic problem and what he would do to secure financial security.

John Roberts: Congressman, great to see you. I was browsing around on your Web site, Campaign for Liberty. And right there on the very front page, you are appealing to your supporters -- and there are tens of thousands of them -- to get in touch with key senators to tell them to vote this bill down when it comes to a vote in the Senate at sundown tonight.

Why do you want them to vote it down?

Rep. Ron Paul: I think it's a bad bill. I think it's bad for the taxpayers. I think it's doing more of the same thing. The same policy that we're following now with this bill is exactly how we got into that trouble.

And you know, I really don't have that much clout in Washington, D.C. And I recognize it. But there are a couple people outside of Washington that care about what I'm thinking and care about free market ... economics. And they will respond. And I think we did help generate a little bit of mail to the House members.

So you go where you can have the influence. And I think that people -- the grassroots -- understand this a lot better than members of Congress give them credit for.

Roberts: So, instead of the bills that are currently before the Senate, the one that may be before the House as early as Thursday, what would you do?

Paul: Well, we need to do a lot, but a lot differently. We have to recognize how we got into this problem. We have too much debt. We have too much malinvestment.

Roberts: OK, OK. So we recognize all of the things that got us here. But, right now, today, what would you do, if not this bill?

Paul: You have to liquidate those mistakes. Those mistakes were made due to monetary policy. So you have to allow the market to adjust prices downward. And that's what we're not allowing to do.

If there are too many houses and the prices are too high, the sooner we get the prices down to the market level, as soon as we quit trying to encourage more housing -- this is what we're doing. They're trying to stimulate houses and keep prices high. It's exactly opposite of what we should do.

So, we should get out of the way and not buy up bad debt. There's illiquid assets, but most of those are probably worthless. They're mostly derivatives. And we're sticking those with the taxpayer. So we have to recognize that the liquidation of debt is crucial. And if we did that, we would have tough times, there's no doubt about it, for a year. But if we keep propping a system up that's not viable, we're going to have a problem for decades, just like we did in the Depression. That's what we're on the verge of doing.

Roberts: Congressman Paul, what do you think of this idea that's being floated -- this process called mark to market, which would, they would modify the rules so that the, right now, paper that a lot of these institutions are holding, which is worth nothing, they would actually be able to assign some sort of value to it.

Some people are saying that that would just hide the problem. Other people are wondering if maybe that might create some sort of voodoo accounting that would allow widespread abuse in the system.

What do you think?

Paul: It demonstrates the problem. You know, when they prevented them from marking them down, this was an SEC [Securities and Exchange Commission] regulation. Shows how regulations backfire.

If you had a market economy and then if you had a market-adjusted FDIC, where insurance was based on the strength of the bank, this would have happened on a daily basis. But instead, we insure everybody, no matter what the bank is doing, and we do it, either we overkill -- we give you too much credit on bad investments -- and then we make changes all of a sudden, and they're drastic, to what they have done.

So, it's impossible. It's either too little or too much. And what you need is insurance of, FDIC type of insurance, has to be driven by the marketplace to measure the viability of a bank.

Roberts: So what do you think?

Paul: This adds to all the moral hazard that we have in the system.

Roberts: So what do you then think of this idea of raising the limit on [FDIC] insurance to $250,000, from its current cap of $100,000?

Paul: Well, on the short run it will calm the markets. People will feel better. I might even personally feel better for a week or two.

But I know that long term, it's the wrong thing to do. I opposed this in the early '80s when they went from 30 [thousand dollars] to 100 [thousand dollars], saying it would lead to more problems like this with malinvestment. It would cover over the mistakes. And the same thing will happen.

But if we raise it to 250 [thousand dollars], people are going to feel better, then it will keep the bubble going for a little while longer and putting more pressure on the dollar. If the dollar lasts longer, then finally the world will give up on the dollar -- and then we will have a big problem that nobody has even really begun to think about.

Roberts: A lot of people might hope that you're wrong with your projection.

Paul: I do too. I hope I'm wrong.

Roberts: You tend to be right on these things on occasion, though. Dr. Paul, it's good to talk to you. Appreciate it.

Paul: Thank you.

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