Fed Creates Boom & Bust Cycles and Should Be Abolished

In Tuesday’s interview on Bloomberg TV, Ron Paul says that the free market, not the Federal Reserve, should determine interest rates. There is no need for a Chief Central Economic Planner that creates money out of thin air, causes financial bubbles and leads us into crises like the one we’re having right now.

Channel: Bloomberg TV
Date: 3/17/2009


TV Anchor: Congressman Ron Paul, a Republican from Texas and a member of the House Financial Services Committee. Congressman, thanks for being with us.

Ron Paul: Thank you.

TV Anchor: So, why do you think we don’t need the Fed anymore?

Ron Paul: Well, look at the mess they have caused. They haven’t done anything right in their entire existence. They inherited the dollar in 1913, and now it’s worth 3 cents, and they’ve created a lot of recessions and a lot of depressions and they finance big government. So I see no purpose for the Federal Reserve other than the mischief they charge.

And it’s impossible for them to do what they think they’re supposed to do. They’re supposed to set the interest rates. Well, how do they know what the interest rates should be? And that’s why we have problems. So I would say that the people in the Congress have given them a job that is totally impossible. But instead of even limiting what they want to do, they expand their role. The Fed wants to be the chief central economic planner. It used to be said…. go ahead.

TV Anchor: What I was going to say is, you know, Representative Paul, what’s the alternative? What’s another proposal?

Ron Paul: Well, the alternative would be free markets and saving money rather than printing money, because capital comes from savings, it doesn’t come from the printing press. There was a time in history when you didn’t have central banks, but for central banks to create money out of thin air and not protect the value of the currency is completely absurd. It creates financial bubbles and it creates the crises of the type we are having right now.

TV Anchor: Well, would you say that there are a lot of folks responsible for the crisis, including a lot of folks down on Wall Street, a lot of regulators? There are a lot of people who had their hands in that pot.

Ron Paul: Well, yes. That’s what they usually want to do. [The government] wants the Federal Reserve to do all these things and they say, “Well, if we don’t have regulations then we will compensate for all the mistakes the Fed makes”. But that’s impossible. It’s not the lack of regulation of the government, it’s the lack of the regulation that comes about in a free market. If a company gets out of whack and does things wrong, they’re supposed to go bankrupt. But, instead, our companies can do so many atrocious things and the Fed comes in and says, “Well, we have to bail everybody out”.

So it does the opposite of what the market demands. The market demands liquidation of debt, getting rid of the mal-investment, get back the prices to normal levels and get the people saving money once again.

TV Anchor: But, Representative Paul, if we get rid of the Fed, who is going to manage monitory policy?

Ron Paul: Well, the market. I mean, what happened before 1913, you didn’t have to have a Fed. The government was too involved even before then, but you don’t have to have a manager. Why should you accept a notion that monetary policies have to be managed? That means you manage one-half of every transaction. That’s half way to socialism right there. Now they’re taking another step forward by nationalizing the industry that have got into so much trouble because of the Federal Reserve. And if you believe in freedom and sound money, then you don’t endorse the idea of central planning through central banks.

TV Anchor: Alright, the president says that only the government can help the economy get back on track in a crisis of this magnitude. I’m assuming you don’t think that’s right then. That we should just let capitalism play out here.

Ron Paul: Well, you want to do something. You can’t just let it continue the way it’s being done. So what you want to do is to cut spending because too much spending, too much borrowing, too much inflation got us into this trouble. So, you want the government to lower taxes, lower spending and let the prices get back to normal. You don’t want to stimulate housing when the prices of houses are too high and you have 19 million empty houses. So we’re still down here in Washington stimulating housing. That doesn’t make any sense.

TV Anchor: Congressman Paul, I know you need to get to a vote. Just quickly about those AIG bonuses… do you think the government should pursue legal action to get this money back… and just quickly.

Ron Paul: Well, the legal action should be against these people who vote for this. Why should we ever give this money away? I mean this is absurd. They said, “We’re protecting contracts”, but I’m trying to protect the contract with the taxpayers. You can’t assume this is a legitimate contract when they pay out these bonuses, because the money was stolen from the American people. That’s what we have to stop.

TV Anchor: So if it needs legal action you said we should do it? Just quickly.

Ron Paul: Well, what we should do is get every penny back as soon as possible, so yes, if it takes legal action to get money back from these companies that blew it, then yes they should.

But the biggest problem was this philosophy that said we should have given it to them in the first place. It’s practically impossible to get the money back now, I mean, the money is blown and it’s hidden, it will never happen, but we have to wake up the American people and say “This type of intervention should not come about. We shouldn’t be involved in this kind of stuff”.

TV Anchor: Alright, we know you need to get off to vote, so we’ll let you off. Congressman Ron Paul, great to get some time with you.

Ron Paul: Thank you.

TV Anchor: Thank you.

  • John

    End fiat money, fractional money and the reserve. Read “The Creature from Jekyll Island” – tells the true story about the fed.

  • jay

    andrew jackson had it right the government is the only one that can print money. the fed is not the government. that’s the first contracting out job that needs to be restored to the government. once the government has control of the ability to print money again then we can tell the yahoo’s in washington you will now be held acountable.

  • Danmcl


    You might want to have a little skepticism on the Wikepedia article. The period they view as the long depression is more a recogition of the period of general deflation. This is a quote from “Recent Economic Changes” By David Wells, published in 1900, ragarding the economic conditions of the prior quarter century:

    “As an immediate consequence the world has never seen anything comparable to the results of the recent system of transportation by land and water; never experienced in so short a time such an expansion of all that pertains to what is called “business”; and has never before been able to accomplish so much in the way of production with a given amount of labor in a given time.”

    That does not sound like a 23 year depression to me. It sounds like they need to go back to the drawing board to find a better system of determining the real significance of economic events. Their definitions are wrong.

    • observer

      Ok, who cares about the whole 23 years, my point is not to split hairs. My point is to say that boom and bust cycles are not a Federal Reserve creation.

      How about about the panic of 1873 which ***occurred while the US was on the gold standard*** by the way. Does any of this sounds familiar? Please let me know your thoughts:

      “In Vienna and Berlin, Paris and London, St. Petersburg and New York, the business cycle had run its course. The failure of the Jay Cooke bank, followed quickly by that of Henry Clews, set off a chain reaction of bank failures and temporarily closed the New York stock market. Factories began to lay off workers as the United States slipped into depression. The effects of the panic were quickly felt in New York, more slowly in Chicago, Virginia City and San Francisco.[15][16][17]

      The New York Stock Exchange closed for ten days starting September 20. Of the country’s 364 railroads, 89 went bankrupt. A total of 18,000 businesses failed between 1873 and 1875. Unemployment reached 14% by 1876, during a time which became known as the Long Depression. Construction work lagged, wages were cut, real estate values fell and corporate profits vanished.[18][17]

      Recovery from the crash was much quicker in Europe than in America.[19][20] Moreover, German businesses managed to avoid the sort of deep wage cuts that embittered American labor relations at the time.[20] There was a racial component to the economic recovery in Germany and Austria as small investors irrationally blamed the Jews for their losses in the crash”


    • observer

      And while I was avoiding getting into the definition of a ‘depression’, ‘recession’, or ‘panic’ as that is separate of whether or not business cycles occur in a free market system, I found this interesting….

      If we have 14% unemployment, wages being cut, construction disappears, real estate values fell and corporate profits vanish, people will romanticize this central-government led era?

      Maybe so, as this is the burgeoning era of the internet and cloud computing. Who knows what will happen in the next 20 years, even if there is widespread unemployment and deflation. For example, substitute ‘internet’ with ‘transportation’ in your 110 year old paragraph:

      “As an immediate consequence the world has never seen anything comparable to the results of the recent (development of a worldwide interconnected computing system); never experienced in so short a time such an expansion of all that pertains to what is called “business”; and has never before been able to accomplish so much in the way of production with a given amount of labor in a given time.”

      Interesting thought huh?

  • John

    Sorry,a little off topic — on AIG

    What’s bad about this is that Congress and the bankers seem to be playing the “good cop, bad cop game,” for whatever reason (perhaps campaign contributions, perhaps lots more we don’t know about). Because until Cuomo blew the whistle it was business as usual – our Congressmen got “outraged” and “dismayed,” and then…gave more bailout money without ANY oversight. They didn’t even bother to READ the full document. Imagine them doing this with their own money? But this was taxpayers’ money, more than a trillion and counting, so they couldn’t care less. Now they are “outraged” again – at the CEOs, I’m not – it’s the CEO job to legally take for the company as much as they can. I’m outraged at the Congressmen and the President who failed to watch over the CEOs. They were fooled? Come on, how naive would you have to be to believe that private companies will think of the benefit of others that they don’t have to think about? If you really are this naive or stupid, you don’t belong in Congress. But I suspect it’s not the naivite, but the Congressmen’s own greed, which is even worse. And, by the way, they were also part of the problem,but continue to have handsome government salaries/benefits and even fly on those jets that the CEOs can’t have. The president, the speaker, and the rest of this circus should also share in the nation’s sacrifice.

    Finally, AG Cuomo is a bright spot in all this. And, not to mean anything bad, I’m really happy he wasn’t appointed senator – someone needs to take care of this mess, and he’s the man for the job.

  • Franz Glaus

    It’s amazing how ingrained the Fed has become to our way of thinking. People who should know better, see the Fed as a necessary part of our economic system. This will require a national effort of education. Congressman Paul is really today’s Paul Revere, riding coast to coast to deliver the urgent warning about the imminent takeover of the United States by powerful, private interests.

    • observer

      I find it amazing at times how people think the implication that the fed is the sole producer of boom/bust cycles… Wouldn’t a free market system (a pre-Fed era) do the same thing?

      Look at the depth and duration of recessions in the US, be sure to compare pre-fed with post-fed:


      • Nate Y

        No. A free market system with sound money and full reserve banking would not do the same thing as the current centrally planned stystem with fiat money and fractional reserve banking.

        • Pras

          Full reserve banking is impractical. Although other two issues like central planning and fiat money we need to get away with.

          • Nate Y

            We’d just have to see. I’m confident the free market would eventually do away with fractional reserve banking.

        • observer

          To be clear, you are saying there would NOT be boom/bust business cycles if we adopted a gold-based monetary system?

          • Nate Y

            Nope. That is not what I’m saying.

          • observer

            So if the free market also creates Boom and Bust cycles, we should abolish that too?

            I mean, isn’t that what this headline is implying?
            “Fed Creates Boom & Bust Cycles and Should Be Abolished”

          • Nate Y

            Saying “booms and busts can happen under a gold standard” is quite distinct from saying “the free market creates boom and bust cycles”. While a gold standard would demand a more disciplined economy, it is not an absolute guarantee from booms and busts. Happily, no one is claiming a gold standard as a solution to all our ills.

            If you want to speak in general terms, the claim is free market economies are much more efficient at allocating resources than centrally planned economies.