Guilty until Proven Innocent

Event: Financial Regulation Hearing – House Financial Services Committee
Channel: C-SPAN3
Date: 3/26/2009


Barney Frank: The gentleman from Texas.

Ron Paul: Thank you, Mr. Chairman. The Chairman in his opening statement talked about the problem being excessive leverage and I certainly agree with that and others refer to that as pure emitting of debt, and then we ran into trouble and we come with the idea that regulations will solve this without asking the question, “Where did all this leveraging come from and how much of it was related to easy money from the Federal Reserve and artificially low interest rates.”

So I’m very skeptical of regulations per se because I don’t think that solves the problem, and of course, everybody knows I’m a proponent of the free market and this is certainly not free markets that had got us into trouble and this certainly won’t solve it.

But, you know, in other areas we never automatically resort to regulations. When it comes to the press, if we had regulations on the press, we would call it prior restraint and we would be outraged.

If we wanted to regulate personal behavior, we would be outraged and call this legislating morality. But when it comes to economics, it seems like we have been conditioned to say, “Oh, that is okay because that’s good economic policy.”

I accept it on the first two, but not in the third and therefore I challenge the whole system and it hasn’t been that way forever. It’s really been that way since the 1930s, about 75 years, that we in the Congress have deferred to the Executive Branch to write regulations, which are essentially laws. And yet the Constitution is very clear, all legislative power shall be vested in the Congress.

So we write laws and we transfer this power, so essentially we’ve done this for years. We have reneged on our responsibility. We have not met our prerogatives and therefore we participate in this.

But in your position, you’ve been trained throughout your life to be a regulator and that is something I know you can’t deal with, but there is one area that I think you might be able to shed some light on and work toward the rule of law.

Because, you know, traditionally, under common law, and our system has always assumed that we’re innocent until proven guilty, and yet when it comes to regulations, first we allow the Executive Branch to legislate as well as the court, but in the administrative courts, we’re assumed to be guilty until proven innocent.

You’re in charge of the IRS. The IRS does this. So this is some place where if there were a reasonable respect for the rule of law, then we can change that tone and assume that the taxpayer or the person that is on the receiving end of these regulations say, “Hey, at least, now is the burden of proof is on the government to prove that somebody broke these regulations”, and yet look at what we’re doing endlessly, and yet I see that as the real culprit in all this because we’re assuming the citizen is guilty.

Could you comment on that and tell me what might be able to do in changing the direction.

Tim Geithner: That was a very thoughtful set of questions. I would just want to correct one thing. I’ve never been a regulator, for better or worse. And I think you’re right to say that we have to be very skeptical that regulations can solve all of these problems.

We have postured our system, which are overwhelmed by regulations. Overwhelmed by regulations. It wasn’t the absence of regulations that was the problem, it was despite the presence of regulations, and you have huge risk built up.

But in banks, because banks by definition, take on leverage, transform short-term liability into long-term assets for the good of the system as a whole, they are vulnerable to runs. Because they’re vulnerable to runs, governments around the world have been put in place insurance protections to protect the inside risks.

Because of the existence of those protections, you have to impose standards on them on leverage to protect against the moral hazard created by the insurance. That is a good economic case for regulation —

Ron Paul: Excuse me. Excuse me. But I only have a couple of seconds left. But see if you can address the subject of giving more respect to that individual who is accused of a crime, can’t we assume that the government has the burden of proof?

Tim Geithner: You’re talking in a criminal context?

Ron Paul: Well, any way. I mean any time a regulator comes in and says that you’re guilty of something, why doesn’t the government have to prove he’s guilty, why can’t we assume —

Tim Geithner: Guilty of a criminal violation or of anything?

Ron Paul: Civil or criminal. Why not? I mean that’s a principal that has been around for more than a thousand years, at least 800 years.

Tim Geithner: I’m neither a regulator nor a lawyer, unfortunately. So I’m not sure I can give you adequate answers to that, but I’d be happy to think about it a little bit and get back to you with a view on —

Ron Paul: Well, I don’t think it’s complicated to think about the principle of innocent until proven guilty. How about the IRS? Can’t you advise the IRS and say, “don’t assume anything until you prove these guys did something wrong before we prosecute them and say that they owe $500,000.” I mean —

Tim Geithner: Well, Mr. Chairman, again, if this is about the IRS, I’d be happy to come talk to you about that and try to —

Barney Frank: The gentleman’s time has expired. The gentleman from Pennsylvania, the chairman of the sub-committee.