Event: House Financial Services Committee Hearing
Barney Frank: The gentleman from Texas.
Ron Paul: Thank you, Mr. Chairman. When the chairman of the committee opened up the committee today, he suggested that we look backward as well as forward and that all of our problems didn’t come from January 20th on, and I agree with that.
As a matter of fact, just looking back at the last administration isn’t quite enough and in order to understand the problems that we face and understand the cause, we have to look back possibly even several decades.
The debate today is so much and the discussion has been on technical aspects, which I think is very important, but quite frankly I think it deals a lot with the symptoms rather than the basic cause and I’d like to deal more with the cause, so I have a question for the entire panel.
The question key surrounds us, this cause. Right now, I think, the Congress and the Treasury, as well as the Fed operates on the condition that the free market has failed and we didn’t have enough regulation.
Others will say that we got into this mess because we’ve been living with a condition of crony corporatism, inflationism, and interventionism. We have inbred into this system a lot of moral hazard, which encourage a lot of a risk and a lot of guarantees that we would have lender of last resort, and we really didn’t have to worry.
And it created, once again, a phenomenon that has been known throughout history. It’s called the madness of crowds and that’s certainly is nothing new, but there is certainly a lot of madness going into the economy, in the marketplace.
But the question really comes out, “who should allocate capital, is it the free market or should the government?” And I think we had a system where the free market wasn’t working. We didn’t have capitalism. The allocation of capital came from the direction of the Federal Reserve and a lot of rules and regulations by the Congress.
We had essentially no savings and capital is supposed to come from savings, and we have artificially low interest rates. So looking at all that and this means we’d have to look differently at what our solutions should be.
Everybody loves the boom and that was great. Nobody questions all this, but when the bust comes, everybody hates it, and then they quickly have to decide what to do.
Unfortunately, I don’t see that we’re addressing the real problems. What we’re dealing with is trying to find a victim. Who is going to soak up the derivatives, who’s going to soak up the debt, who is going to be penalized?
And right now, it looks like Wall Street is getting bailed out, that little guy and Main Street America are all going to pay the penalty, and I think we’re absolutely going the wrong direction, whether it’s AIG or the rest.
So we failed because we didn’t follow the marketplace, and then we do the same thing over and over again. We don’t seem to improve anything.
So my question is this, how do the three of you operate in your own mind? Do you operate with the idea that capitalism failed and they need us more than ever before to solve this 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 see 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 build up 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 19th century as well.
Ron Paul: But they usually lasted about a year and now we are determined to make our corrections last 10 and 15 years and that’s what we’re working on right now.
Any other answers please.
Barney Frank: Not on this ground because the time has expired.
Ron Paul: Well, Mr. Chairman, you’re the…
Barney Frank: Gentlemen, we’re holding over to the 5-minutes uniformly. The gentleman from Kansas.