End the Fed
Page 9
Here is a telling exchange from July 18, 2007, in which I attempt to warn him that the current policy is not sustainable, that a crisis is coming.
RON PAUL: I find it rather ironic that the Federal Reserve has complete control over the money supply but yet it is the Treasury that is supposed to protect the value of the dollar. It seems like you have a little bit of responsibility for the value of the dollar as well.
I have a question about the GDP. In the first quarter, our GDP didn’t do so well. It was less than 1 percent [annualized]. Our population growth average is about 1.5 percent. So, if we have total wealth divided by the population, we actually have negative growth. Could this not be part of the explanation on why some people feel inequality; that they’re not doing as well in the economy? Wouldn’t this explain some of the concerns that we have?
BEN BERNANKE: Congressman, that was of course a single quarter and there were a number of temporary factors that held down GDP growth in the first quarter including liquidation of the inventory overhang (which I mentioned before), a swing in our trade balance (a temporary swing), and a temporary decline in federal defense spending. All of those things have been reversing now, and so I think we will be seeing in the second quarter something closer to 3 percent growth. Between the first half of the year, overall, it will show a more healthy rate of growth.
RON PAUL: We have a savings rate which is negative. If we had true capitalism, this would be very, very serious because we’d have no savings and no capital to invest. Today, with our monetary system, we resort to other means. We can create credit and money out of thin air and it acts as capital by stealing value from the existing currency. We’ve been doing that for a long time, so the process can continue but it literally is the inflation.
Also, we can resort to borrowing overseas and we are permitted because we have the reserve currency of the world to export our inflation and that seems to be a free ride for us as well. But, how long can we fool the world? How long can we continue with a current account deficit of 6 percent if our productive jobs are going overseas? And, like the gentleman mentioned before about more jobs going overseas, eventually, this is going to catch up with us. Is it conceivable that we could live on capital formation by creation of money and credit out of thin air? If that’s the case, we wouldn’t ever have to go to work again if that’s true. It seems like we really have to go to work; we really have to save; we really have to invest; and we really have to get these jobs back.
But I really see so many of our problems as a consequence of a monetary system that discourages savings, encourages a free ride for us because there is still a lot of trust for the dollar (although that trust is going down every day), and I think we have to face up to the consequences of what this might mean to us.
BEN BERNANKE: First, our national saving includes corporate saving as well as household saving. If you put those together, you get a positive number, so there is some net saving going on in the United States. But, Congressman, you’re absolutely right that we’re also relying pretty heavily on borrowing from abroad which is our current account deficit. I think that’s sustainable for a while because foreigners seem quite interested in acquiring U.S. assets. We have very deep and liquid financial markets.
However, I also agree with you that that’s not a long-term, sustainable situation by any means and we need to be working to try to bring that current account deficit down over time. In the answer to a previous question I talked a bit about the importance of structural change: increase the savings here in the United States, increasing attention to domestic demand with our trading partners.
RON PAUL: You did say in your talk that the predominant policy concern was inflation, which is encouraging that there is a concern. Of course, once again, inflation is a monetary phenomenon and we have to deal with it.
War, sometimes, is not healthy for a currency or for keeping prices down, at least inflation. It’s hard to find, in all of history, when war didn’t create price inflation because, even in ancient times, countries resorted to clipping coins and diluting values or whatever. They inflated the currency because people generally don’t like to pay for the war. And yet, in the seventies, we had consequences of guns and butter. Now, we’re having guns and butter again (we’re having consequences) and it just looks like we may well come to a ’79–’80. Do you anticipate that there is a possibility that we’ll face a crisis of the dollar such as we had in ’79 and 1980?
BEN BERNANKE: The Federal Reserve is committed to maintaining low and stable inflation and I’m very confident that we’ll be able to do that.
RON PAUL: You’re not answering whether or not you anticipate a problem.
BEN BERNANKE: I’m not anticipating a problem like ’79–’80.
RON PAUL: With your fingers crossed, I guess. Okay. Thank you.
Apparently, the finger crossing didn’t work. Several times in the above exchange, Bernanke says that he expects a bright future of a growing economy with no apparent problems on the way. Keep in mind that this was two weeks before the collapse of the Bear Stearns hedge funds, and one year ahead of the wholesale crumbling of the American financial system. All problems, he says, will be cured about our liquid financial markets. Why anyone takes his view seriously today is a mystery. Finally, he confesses his belief that government spending is a source of economic growth, a superstition of the old-line Keynesians that you can rob some people and give to other people and somehow magically create prosperity.
Later that year, November 8, 2007, we had another confrontation. This time I specifically questioned him on the housing bubble.
RON PAUL: The best way I could describe the problems that we face here in this country, as well as the problem that the Federal Reserve faces, is that we’re indeed between the rock and the hard place, because we have a serious problem. We don’t talk much about how we got here; we talk about how we’re going to patch it up.
The bubble has been burst. We saw what happened after the NASDAQ bubble burst. We don’t ask how it was created.
And then we have a housing bubble, and it’s deflating and then spreading. And yet nobody says, where does it come from?
And what is the advice that you generally get, and that is, inflate the currency. They don’t say inflate the currency, they don’t say debase the currency, they don’t say devalue the currency, they don’t say cheat the people. They say lower the interest rates.
But they never ask you, and I don’t hear you say too often, the only way I can lower interest rates is I have to create more money. I have to lower the discount rate, I have to make it generous, I have to increase reserves, I have to lower the interest rates and fix the interest rates—overnight rates.
And the only way you can do this is by increasing the money supply. And I see this as the problem that we don’t want to talk about.
Currently, of course, we can’t follow the money supply with M3 but we can follow one of your statistics, which is the MZM—the ready cash available—and we see that inflation is alive and well. That money supply figure is going up about 20 percent, annualized.
And this just means that the dollar gets weaker. And everybody says, well, the dollar is [weaker]—that’s great. Dollar weaker, we’re going to have exports. And that is a fallacy—maybe for a month or two, but it just invites inflation.
And unless we get down to the bottom of it and define what inflation is and not look at only prices—this was talked about by the free-market economists all through the twentieth century. They said, Beware: they will increase their money supply, but they will make you concentrate on prices. And they will give you CPIs and PPIs and, you know, fudge those figures and they’ll talk about wage and price controls to solve our problems.
And we ignored the fundamental flaw, and that is that not only have we had a subprime market in housing; the whole economic system is subprime, in that we have artificially low interest rates. And it wasn’t under your tenure in office; it’s been going on for ten years and longer a
nd now we’re bearing the fruits of that policy.
I mean, a 1 percent interest rate, overnight rates and that’s not a distortion? Instead of looking at these—the consumer prices, which nobody in this country really believes, we need to talk about the distortion, the malinvestment, the misdirection, the bad information that is gotten from artificially low interest rates.
In many ways, some people refer to you as a price fixer, you know, because you fix interest rates.
The market is powerful, and usually overwhelms and does come into play, but when the Fed fixes an interest rate at 1 percent, that is price-fixing.
At the end of your testimony, you suggested that we should address this housing crisis, and we should have rules that would address deceptive lending practices. And I just think that is not the answer at all.
The real deception is when we distort the value of money, when we create money out of thin air. We have no savings. Yet there’s so-called capital. There’s money available. But it comes from what you have to do and the pressures put on you. So I think we have to get back to the very fundamentals of where this problem comes from. And the bubbles occur when we have this malinvestment and the creation of new money.
So my question boils down to this. How in the world can we expect to solve the problems of inflation, that is, the increase in the supply of money, with more inflation?
BEN BERNANKE: Well, Congressman, first, just a small technical point. On the growth in money, money growth has been pretty moderate over the last few years. The increase in MZM is probably related to the financial turmoil. People have been taking their savings out of, you know, risky assets, putting them into the bank, and that makes the money data show faster growth.
So I’m not sure that’s indicative of policy, necessarily.
What we’re trying to do is follow the mandate that Congress gave us. And the mandate that Congress gave us is to look at employment and inflation as measured by domestic price growth.
And as I talked about today, and I think you would agree that we do see risks to inflation and we are taking those into account and we want to make sure that prices remain as stable as possible in the United States.
RON PAUL: How can you do this and pursue this—the policy that you have—without further weakening the dollar? There’s a dollar crisis out there and people’s money is being stolen; people who have saved, they’re being robbed. I mean, if you have a devaluation of the dollar at 10 percent, people have been robbed of 10 percent. But how can you pursue this policy without addressing the subject that somebody’s losing their wealth because of a weaker dollar? And it’s going to lead to higher interest rates and a weaker economy.
BEN BERNANKE: If somebody has their wealth in dollars and they’re going to buy consumer goods in dollars—it’s a typical American—then the decline in the dollar, the only effect it has on their buying powers, it makes imported goods more expensive.
RON PAUL: Yes, but not if you’re retired and elderly and you have CDs and their cost of living is going up no matter what your CPI says. Their cost of living is going up and they are hurting. And that’s why the people in this country are very upset.
Now, that was the last time we had an exchange before the meltdown. Bernanke was more evasive than ever before. He didn’t address any of the specifics. Moreover, he displayed not the slightest concern about an impending problem. I suspect that I could have questioned him all day and received only more bromides in response. What he knew in his heart is another matter. That day he was in full propaganda mode.
An exchange on March 24, 2009, long after the crisis began, ran as follows.
RON PAUL: Do you operate with the idea that capitalism failed and they need us more than ever before to solve these problems? Or do you say, “No, there is some truth to this. As a matter of fact, a lot of truth to it is that we brought this upon ourselves, that we had too much government, too much interference in interest rates, too much risk, moral risk, built into the system.”
Because if you come from the viewpoint that says that the market does not work, I can understand everything you do. But if I see that you totally rejected the market, and that we have to do something about it, I can understand why we in the Congress, and you in Treasury, and you in the Fed continue to do this.
So where do you put the blame, on the market or on crony capitalism that we’ve been living with probably for three decades?
BEN BERNANKE: Congressman, I certainly do not reject capitalism. I don’t think this is a failure of capitalism per se, and I also think that free markets should be the primary mechanism for allocating capital. They’ve shown over many decades that they can allocate money to new enterprises, to new technologies very effectively, and so we want to maintain that free capital market structure.
It is nevertheless the case that we’ve seen over the decades, in the centuries, that financial systems can be prone to panics, runs, booms, busts, and, for better or worse, we have developed mechanisms like deposit insurance and lender of last resort to avert those things. Those protections in turn require some oversight to avoid the buildup of risks.
RON PAUL: May I interrupt, please?
BEN BERNANKE: Certainly.
RON PAUL: Isn’t that what creates the moral hazard, though? Isn’t that the problem rather than the solution?
BEN BERNANKE: Well, we had the reason the Fed was created in 1913 was because in 1907 and in 1914, there were big financial panics and there was no regulation there and people thought that was a big problem, back in the nineteenth century as well.
There is something fishy about the head of the world’s most powerful government bureaucracy, one that is involved in a full-time counterfeiting operation to sustain monopolistic financial cartels, and the world’s most powerful central planner who sets the price of money worldwide, proclaiming the glories of capitalism. Even when faced with the dreadful consequences of the hazards created by his own institution, he refused to face reality, or at least refused to admit it.
I recall seeing Bernanke with a bit of a smile on his face when I suggested my solution would not be listened to since that would make all the important players involved in spending trillions of dollars irrelevant. That is one thing they are not interested in: irrelevancy. Politicians must justify their existence in managing the affairs of state. They first create the problems and then they are delighted with all the activity in expanding government and solving the very problems they created.
What none of them will admit is that the market is more powerful than the central banks and all the economic planners put together. Although it may take time, the market always wins. Sometimes the market is forced to go underground to achieve the activity needed for human survival. That day may be fast approaching.
Some people have been surprised by Bernanke’s irresponsible conduct of monetary policy. There was no reason to be surprised. He was on record promising unlimited amounts of inflation should the need arise. If Greenspan was cocky about the genius of central bankers, Bernanke is even more so.
His comment to Milton Friedman at a dinner honoring Professor Friedman’s ninetieth birthday on November 8, 2002, reveals it all. He apologized to Professor Friedman and said Friedman was absolutely right—the Depression was the fault of the Federal Reserve. It wasn’t the fault of the central bank managing a fiat currency or participating in credit expansion or debt monetization; the problem lay only with the Federal Reserve’s inability or unwillingness to inflate the currency early and massively starting in 1929.
Bernanke closed his remarks by directly addressing Friedman: “You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”
The fault indeed does lie with the Federal Reserve—but obviously for opposite reasons. It was the credit expansion of the 1920s causing the stock market bubble that was the real cause of the crash. The crash was then compounded by the necessary corrections being interfered with by both Hoover and FDR and the concurrent Congresses.
Bernanke may be serious and believe he can prevent the consequences of the Fed’s mistakes of the past several decades. But he is wrong. He may dampen the market’s enthusiasm for deflation, but the pain and suffering from the “unlimited expansion of credit” that a much younger Greenspan warned us about will still come. Emphatically, Greenspan said there was “no way” to protect savings from confiscation through inflation.
So even if Bernanke can head off actual deflation, which he sees as our only threat, the stability of the financial system cannot be restored by massive expansion of money and credit under the fiat dollar reserve financial system.
Here lies the crux of the problem. If Bernanke and his friends argue that the Fed was at fault, and all the Austrian school economists agree as well that the Fed was the cause of the Depression, to solve the crisis it must be resolved as to exactly how it happened. Was it too much credit expansion or not enough? That is the question.
Those who place their faith in paper say “pour it on”; the dangers can be avoided and the problems solved. Those who use reason can quickly understand that noninflationary commodity money is the only answer possible to the endless boom-bust cycles.
Even dropping money from helicopters, as Bernanke once advised, if it ever became necessary, will guarantee that the dollar will be destroyed as so many other currencies throughout history have been. Just remember, dropping paper money from helicopters will just result in the money being blown away.