Show: The Kudlow Report
Larry Kudlow: So is the Fed up to the task and is it time for a policy audit? My next guest says “yes sire”. Here now is former Republican presidential candidate and Texas Congressman Ron Paul. Congressman, thank you ever so much for coming back on.
Ron Paul: Thank you Larry, go to be with you.
Larry Kudlow: You know, I thought it was a kind of whitewash today with Bernanke and that’s why I was especially keen to get your somewhat critical views. First up: Ben Bernanke says that he and the Fed averted a global and US financial collapse. What do you say to that?
Ron Paul: Well, I would say that the mess we have today is nothing to brag about. We’ve gone through a lot of pain and suffering and we haven’t even paid for this. We’ve created all this new money; we’ve run up this deficit, our national debt is going up to $2 trillion.
So if he thinks he’s averted a crisis, I think he’s just made the crisis that much bigger. And it’s going to be that much worse. I mean, people now are starting to talk correctly about the problem in commercial properties. So when that shoe falls what’s he going to do? Quadruple the money supply? Then you should be concerned about the value of the dollar.
Larry Kudlow: Alright, before I get to your GAO audit bill, Mr. Bernanke says in the Wall Street Journal and again in the hearing that you attended today, that he has the tools and the wisdom to develop an exit strategy to prevent inflation. But he also says that it’s not going to happen soon. There is nothing imminent and he has no plans, and as far as the eye can see we’re going to stay with this easy-money policy. Your thought on all that? Does he have the tools? Does he have the wisdom, or is he going to overstay his easy-money welcome?
Ron Paul: Well, he has the tools because he has the ability to turn off the money machine and that would stop the inflation. Whether or not he has the wisdom… it isn’t he that lacks wisdom but every individual who might run the Federal Reserve does not have the wisdom because they are central economic planners through monetary policy, and it’s not achievable. You want the markets to set rates. In capitalism you don’t have a central planner telling you what the price of money is. And the cost of money is very, very important, just as important as supply and demand is in the rest of the market place. And they’re interfering with it.
He can’t be smart enough to know that, but even if you get somebody new they’re not going to be smart enough to do it either. So it’s a very deeply flawed system. And from my view it’s deeply flawed because it encourages the Congress to spend. You know, they talk about a little bit about deficits, but there’s no real concern expressed here in the Congress about spending. They talk glibly about another million dollar medical program which could cost 2 or 3 million dollars, and they don’t have the money; revenues are crashing right now. That’s why the deficit is exploding.
Larry Kudlow: Does that overspending and binging and borrowing… I mean President Obama is going to be the greatest bond salesman in the history of America. Does that force the fed to monetize the debt? A lot of criticism on that. Bernanke always denies it, although the liquidity surge says maybe there’s some to it.
Ron Paul: Well, did you see in his statement in the Wall Street Journal that he absolutely would not monetize the deficit? And yet he recognized and he admitted to me that they have this $300 billion program of buying treasury bills and bonds. Well, what is that if that is not monetizing the debt? And he claims he has the tools and the wisdom to turn the money machine off and to have an exit strategy. But what if we have rising prices? I know when I first got to know you in the 1970s, Larry, we had rising prices and a weak economy. What if that would come back? Would he have the wisdom to know when to raise interest rates and have an exit strategy when the economy is still weak, and that’s a possibility. We don’t know exactly how this will transpire, but I think that’s a very real possibility.
Larry Kudlow: Well, you’ve got 274 co-sponsors, I gather, for your idea to have a GAO audit, government accounting audit, of the Fed including the Fed’s policy. Can you just tell us briefly about that? Mr. Bernanke, of course, opposes it.
Ron Paul: He strongly opposes it. You know, he talks about transparency, he’s for transparency except for certain things that he doesn’t want to be transparent about. There are just a few things that are sacred and that is what he does with the discount window and the monetary policy, and what he does with international agreements.
You know, there is one example given recently where the Federal Reserve, not under Bernanke, but the Federal Reserve chairman went to the IMF and insisted the IMF pay off some loans to the bank and pay the interest. So it’s that kind of mischief that goes on. They can have agreements with other governments, other central banks, international banking, financial organizations, and dealing in trillions of dollars and the American people don’t know what’s going on. And Congress up until recently really didn’t care. But during this crisis now, fortunately, for what I’ve been trying to do, we’re getting a lot more attention because I think people are recognizing how important it is.
Larry Kudlow: Well, isn’t it really Congress though, with the old Humphrey-Hawkins Act which was passed back in 1978, created a dual mandate that said, “get inflation down and keep prices stable on the one hand, but keep the unemployment low on the other hand”. Are those conflicting and in terms of an audit, don’t you need to repeal Humphrey-Hawkins and give the Fed a clear mandate to stabilize the currency, the value of money and prevent inflation?
Ron Paul: You know, I don’t think that would be a bad idea. I think the audit could lead to something like that. But first we want to know what they’ve been doing. But those are impossible mandates. Full employment, they sure haven’t done very well there. They want stable prices, stable prices of money? Back in the 1970s we had interest rates of 21%, now they’re less than 1%. I mean it’s a total failure. They give us the inflations, they give us the recessions, they give us financial crisis, they’ve given us a depression and nobody says, “Hey, what’s going on here?” and this is the first time the American people have woken up.
I just spoke to a bunch of high school kids and they’re ecstatic about the issue of the Federal Reserve, I just can’t believe it. Young people, especially, and a lot of others, are waking up to the fact. Yet the establishment, when it comes to, you know, a few at the Wall Street Journal and a few other financial institutions, they come down real hard saying, “Hey no, we don’t want any transparency about this. This might raise interest rates if they knew what we’re doing.”
Larry Kudlow: So that’s the argument. Bernanke says you’re going to stop their independence. And you’re saying the public has a right to know. Is that how you’re framing this?
Ron Paul: That’s right. Independence to them is secrecy, and besides, my bill doesn’t do anything to take over monetary policy. I don’t want Congress to manage monetary policy, I’m looking for something different than that. But, you know, in the clip that you just played Bernanke said, “Oh yeah, the Fed does one thing one day, and the next day the Congress orders the GAO to get an audit.”
(Bernanke said: If we were to raise interest rates at a meeting and someone in the Congress didn’t like that and said, “I want the GAO to audit that decision”, wouldn’t that be viewed as an interference or at least in that expose…)
That’s not the way the GAO works. And you could easily put a provision in there and say, “We can’t review some of these decisions for a year,” or something like that. But we do deserve to know. If they give Goldman Sachs $10 billion for some reason down the road or through the discount window, we have a right and a moral obligation to figure out what he is doing and when and why.
Larry Kudlow: If you go down the road a year or two, isn’t the real problem going to be, like it was in the early 2000s, that Bernanke and the Fed, even the institutional Fed, they’re targeting the unemployment rate, and they’re not going to tighten interest rates to stop inflation. The Congress doesn’t want them to stop inflation. The Unions, the business establishment, even the banks. I mean isn’t that what he’s up against, isn’t he just going to target the unemployment and overstays easy money?
Ron Paul: Oh, I think you’re absolutely right. As a matter of fact, I’ve accused him of a policy deliberately wanting to inflate, because the real deficit goes down when you inflate. If you devalue your currency by 10% just think a $10 trillion national debt goes down to $9 trillion in real value. So they have to get rid of the debt. You have to get rid of debt when you get bogged down like this. And we’re not going to pay it off, so it has to be liquidated. Governments liquidate it by creating bad money and paying it off with bad money.
Larry Kudlow: Is your going to pass, sir?
Ron Paul: Not easily, because the establishment is very, very determined. Something will pass. We will get something, but I’m not predicting that we’ll get everything we need to monitor what the Fed is doing.
Larry Kudlow: Alright, Congressman Ron Paul, we appreciate your time. Thank you very much.
Ron Paul: Thank you.