Show: Jason Lewis Show
Jason Lewis: As we suffer through the post housing bubble bursting, I guess the bursting of the housing bubble that has given us this economic malaise, this malinvestment that’s been worked off, let it be known that this is probably the third bubble in a row created by monetary policy. We remember the tech stocks of the 1990s, then we had the housing bubble – actually that was the second – and now we’re in the midst of a commodity bubble, that critics of the Federal Reserve say is all due to a massive increase in easy money. Well, perhaps the nation’s leading critic of the Fed is the congressman and author Ron Paul. His latest book is called “End the Fed” talking about the Federal Reserve. And he joins us now. Congressman Paul, welcome to the Jason Lewis Show.
Ron Paul: Thank you, good to be with you.
Jason Lewis: Yeah, same to you. Now this is something that’s near and dear to your heart. And there is no question that a number of critics of the Fed would point to easy money, at least I would and I think you would, as one of the culprits of the housing bubble. The question is, what system should replace it? And that’s what you address in your book.
Ron Paul: Well, what we should replace it with is essentially nothing. When it comes to central banking, you don’t need a central bank. What you replace it with is sound money. And we allow the markets to set interest rates. We don’t believe that we should have interest rates fixed; it’s sort of price fixing. And the Fed is always giving bad information. Interest rates are very, very important in a market. If the people save, interest rates go down and then the producers and the investors know that there are low interest rates and there is capital there.
But for the last 20 or 30 years we’ve essentially not been savers, we’ve been spenders. But lo and behold, interest rates are low and the only way that could happen is if the Federal Reserve was creating money out of thin air. So they send all this false information that there was a lot of savings, a lot of capital available and then they overinvested, they made mistakes. In a way they’re responding in a logical fashion, but illogically, because they’re not taking into considerations the fact that the Fed has created artificially low interest rates. That’s a very serious mistake.
Jason Lewis: That’s effectively the von Mises view, the Austrian school view, that when you create these sorts of easy money policies, which we certainly have had with the federal funds rate hovering near 0% now for a year, and before that throughout the first part of this decade, creating the bust and boom cycles, that people see these artificially low interest rates and that’s an excuse for more loans and in many cases bad loans, and an excuse for malinvestment. But in addition to monetary policy, if we take a look at housing policy, we had some crucial fiscal and regulatory issues that drove the housing bubble as well. Fannie and Freddie, you had the Community Reinvestment Act, you had the housing quotas at HUD. Without those, some people say, the housing bubble wouldn’t have been as bad either.
Ron Paul: I think that’s true. I think that made it worse. I think it was the combination of low interest rates and artificially created credit, along with the pressure by the Congress to make bad loans. They literally would penalize banks if they did what they called redlining, saying, “Oh no, you have to give loans to people who don’t qualify”. It was absolutely bizarre what they were doing. You know, when the prices were going up and there is a boom part of the cycle, everybody feels pretty good about it and they don’t worry about the consequences. It is sort of like when you’re out on a drinking party and figure “I’m not going to worry about my headache the next morning”. Now we have our headache which came because we were overdoing it with excessives and it is very painful.
Jason Lewis: Well, it is a classic malinvestment, to use an Austrian phrase. It is when you have these misguided signals. When it comes to interest rates, you want interest rates to be determined by supply and demand, not by any artificial lever. And when you had all the fiscal and regulatory incentives, the moral hazard, we made bad investments. Bad investments are those that don’t return a profit that allows you to service the debt. And it has been my view for quite some time that had we not bailed out Bear Sterns, had we not tried to re-inflate with money – it is even easier now, as you well know, congressman – the Fed’s balance sheet has doubled. Had we not done that, we would have had a very sharp correction, but we’d probably be out of it by now.
Ron Paul: That’s right. We’ve done exactly the wrong thing. What we should have done is allowed the markets to liquidate bad debt and get rid of the malinvestment. But instead, our policies now in Washington are to try to keep the prices of houses up to stimulate the building of houses. There are a million and a half houses sitting out there, the prices need to go down. That needs to be clear to people who have some money; prices have to get down to the price range where they can buy. But instead, we’re propping up the prices and we’re doing the same thing. So you can’t solve the addiction to easy credit with more easy credit.
But on the next bubble, I know the commodity prices are high and I think of that as less of the bubble and maybe a more normal reaction. I think the bubble where the artificial prices are, are the bonds; the bonds are so high because the Federal Reserve keeps the interest rates low, which means the price of the bonds go up. So one of these days these interest rates are going to turn around, there will be loss of confidence in the dollar and then maybe if there is a run from the dollar there will be a run from buying our debts.
Ron Paul: We’re already seeing a weakening of the dollar.
Ron Paul: That’s the major problem we face.
Jason Lewis: A run from the dollar will be catastrophic and we’re seeing a weakening of the dollar. Plus the Fed has set up a system where it’s easier for bankers to say, “I’m going to borrow at the federal funds rate of 0%, buy a 2 or 3 year treasury bond, give it right back to the government and I’ll make money on the spread. Who needs to lend to private business?”
Ron Paul: Yeah, why take the risk. That’s what are they doing. They’re reporting record profits, and we’re supposed to all feel good about it. And it is all insider trading, they put people who do insider trading on the private business, but this is all insider stuff, you know. The Federal Reserve, the big banks and easy credit to them. And people who might be able to use this credit are not getting these loans, the confidence is not there. There is a lot of reasons why they’re not getting the loans, but there are still people who are making a lot money. I mean the real crime is when you see huge banks and big companies like Goldman Sachs making not hundreds of millions, but literally billions of dollars. I mean, Goldman Sachs has something like 21 billion dollars which at the end of this year will be passed out in bonuses, and it’s not like they produce goods and services.
Jason Lewis: Well, let me tell you something. You think that’s money, wait till Al Gore’s carbon credit exchange is implemented. And you’ve got these same bond traders now trading carbon credits, which will go up in value every year as the allowable emissions go down every year.
Ron Paul: Yeah. It’s the same people, too. They make money when the bubble inflates and then they’re first in line for the bailouts.
Jason Lewis: What, though, would give you confidence that going to a more private banking system backed by gold would be any less volatile? For instance, if you take a look at where the price of gold has gone in the last couple of years, it has doubled. I think it was $500 not long ago. If you’re on a traditional gold standard, then people would start turning in their dollars for gold and you would have rampant deflation in the middle of a downturn. Isn’t that why William Jennings Bryan was bemoaning the fact that we were crucifying the economy in a cross of gold?
Ron Paul: Well, yeah but I didn’t accept his arguments. Back then he actually wanted to inflate with silver. Can you imagine that? He wanted more silver, and today all we want is computers. We don’t even print the money, we don’t even waste time printing the money; we create the money with computers. So it isn’t the gold that’s unstable, it’s the paper in relation to gold. But you will see a lot of ups and downs, especially when most people are still thinking in terms of the dollar. But gold, in the long term is very, very stable and maintains its purchasing power and it is the dollar that is unstable.
Jason Lewis: Your book does a great job, especially in the beginning about fundamentally laying down the functions of a bank; a store, a warehouse, as well as a venture capital outfit. And when you combine the two, especially when the government backs it, you’re asking for trouble. Which is why I think the banks ought to have to buy private insurance, if you don’t get back to some other system, instead of federal insurance. That’s a huge problem. But I actually think the monetary policy in general, Congressman Paul – and I am sympathetic to your argument, obviously – but I think it’s a lack of political will, it’s kind of like a manifestation of a nation that has lost a lot of self-reliance and a lot of intellectual and personal fortitude. By that I mean one of the reasons the politicians wanted to go off the gold standard was because it was easy. It was easy to inflate, it was easy to fund government programs, as you point out in the book. But the same is true for a monetary policy; if you adopted John Taylor’s rule or go back to Freedman and a hard monetary rule, where velocity would be the only swaying thing, which wouldn’t be a whole lot different than fluctuations in the price of gold, if you can get the political authorities to be firm and disciplined on that, that would work too, it seems to me.
Ron Paul: Yeah, but you know you can’t trust the politicians, they’ve never been trustworthy, and that’s why we’re in this mess. Milton Freedman and I used to debate this issue, and he always conceded that an honest to God gold standard would be okay, the kind of gold standard that I believed in, because you can’t trust the government because they will do what they did do.
Jason Lewis: Right.
Ron Paul: But the important thing that Murray Rothbard talked about was making sure it was a gold coin standard; that if you have paper, you always can vote immediately by walking into a bank, and you want to see if you got your gold coins. So it can’t be a gold bullion standard, it has to be in coinage. And I don’t know why these ETFs now are getting so huge. If some people are skeptical and ask, “Do they always have the gold there?” But what if we do have some ETFs and they started issuing certificates against them and they were willing to have the public audits and they did have the gold and they would always send you the gold every time you turn it in… All of a sudden you would have certificates that would be maintained…
Jason Lewis: How many currencies are you talk about? You’re talking about 100% private banking. How many currencies do you want?
Ron Paul: Of course, that’s the ideal. In the Constitution we still have the responsibility and authority to issue the gold and silver coins as legal tender, and no authority to have a central bank and print money. But you still could have private banking. But they’re fraudulent, they always cause the same problem.
Jason Lewis: I’m up against the clock. When we come back I want to talk a little bit about your book “End the Fed” and some other topics as well with Congressman Paul. And you’re absolutely right, of course, about Freedman, he used to say you can have a floating rate or you can have a hard fixed rate, as you describe it. But you could never have a pegged rate with an act of the central bank, which is why we have these currency runs and these reserve raids and all of this nonsense. You’re right about that. But, let me see if I can get you to concede real quick here before we break the first time – if you had a hard-and-fast rule, that Freedman espoused, or now John Taylor espouses, that said the monetary authorities will not grow the money supply more than 2 or 3%… whatever the rule would be… would it work?
Ron Paul: It probably would work better than what we have, but Mises still argues that even if you have 1% you’re going to have distortions that will build up over time and then have to require corrections. You want a free market balance of supply and demand. So it wouldn’t be as bad. He always said the bubbles would less huge by doing this. But it goes back to human nature. If they’re allowed to print at 3% and you have a crisis come and then there is the incentive and then they give up, and then the hard-and-fast rule is no longer hard-and-fast.
Jason Lewis: No, no, you’re right. The first thing we should do is repeal Humphrey Hawkins and then pass your bill to audit the Fed. I’m all for those two provisions; those would be good starts anyway. Hold that thought. Representative Ron Paul is our guest. We’ll come back and talk about a few other things as well with the congressman from the great state of Texas on the Jason Lewis show.
The book is called “End the Fed” by Congressman Ron Paul. There are a number of people who have endorsed the book and not the least of which Arlo Guthrie. Rarely has a single book not only challenged, but decisively changed, my mind. The congressman is coming off his presidential campaign of 2008 with this book. I think it is timely and not to mention some constitutional issues about all of this, such as health reform which in addition to being horrible economics is patently unconstitutional, unless you believe in an ever expanding, elastic, inter-state commerce laws. We really do have a crisis in the country and at this time, Congressman Paul, it all seems to me that you need a credible opposition party. Is there one?
Ron Paul: Well, there is one, I believe, but it is not well enough known to be a viable party to really compete. And I don’t think that another party, a third or fourth or a fifth party can compete under the rules today. I think the people are demanding it. But when the time comes to vote, they don’t hear about the other ones, the third party system means they can’t get on the ballots, they don’t get into the debates. It’s a very, very undemocratic process that we have. We go and die to spread democracy around the world and democracy does not thrive here. Especially when you come to the conclusion that the policies really aren’t any different between the Republican and Democrats, where can the independent go or where does the third party person go? You can’t even get on the ballots. I mean it is rather sad and it is why people are resorting to anger right now rather than resolution and saying, “I can solve the problem”.
Jason Lewis: There doesn’t seem to be any thinking within the party. I hate to be so blunt… you can’t be this blunt given the rules of being a gentleman on the House floor and elsewhere… but the Democrats are just socialist. I mean they really are and there is very, very little doubt in my mind about that. But the Republicans are not only not much better, but they’re growing increasingly intolerant of any sort of divergence in their views. Ronald Reagan in an interview in 1975 in Reason Magazine said, “The heart and soul of conservatism is libertarianism”. But you can’t be a libertarian in the Republican Party. You got kicked out of the party, for all practical means and purposes, for defying the orthodoxy on Iraq.
Ron Paul: That’s right. They’re very open to a liberal moderate. You can really lean left and they’ll go out of their way to support you. They’ll say, “Oh well, we have to have an open door for a broad-based party.” But if you are libertarian and if you are a constitutionalist and you point out the infractions of the Republican Party, then you’ve overstepped your bounds. And I think the reason is the more libertarian constitutional approach is saying what the Republican Party claims they are. You know they say, “We’re for personal liberty, we’re for balanced budgets, we’re for minding our own business” and if you ask them, “Why don’t you vote that way?” then they don’t want to hear that and then they resent it.
Jason Lewis: Yeah. I mean we could have just dismantled Fannie and Freddie with the majority President and the majority party. They could have done that long, they did not.
Ron Paul: Early in this decade I introduced legislation just to remove the line of credit to the Fed; legislation that said if you keep doing this you’re going to have a major housing crisis. But they wouldn’t consider that for one minute. What happened after ENRON? We passed Sarbanes Oxley. Dozens and dozens of businesses overseas by more regulations. And that’s why there really isn’t any difference. Monetary policy and foreign policy and domestic welfare policy really remains the same. I mean we didn’t slow up, we passes the proscription drugs program, we doubled the size of the Department of Education. That’s not what Ronald Reagan talked about. He wanted to get rid of the Department of Education, but we don’t even talk about that anymore.
Jason Lewis: That’s why there is a crisis right now. I mean, there is no fundamental opposition. There is angst against the Democrats but there is no credible opposition right now and boy I’ll tell you, it’s hard to see a vision down the road where someone really stands up. Now, a lot of people are still talking about Ron Paul running again. Would you entertain a run as a third-party ticket in 2012, although it doesn’t sound like it?
Ron Paul: No, that seems like a long way off and I think it depends on a lot of things. I’m up for re-election next year and I don’t know what’s going to happen for a year or two. You could have a slight reprieve on this, or you could have a dollar crisis starting next month. If we’re in the midst of a dollar crisis no matter where we are, I’m going to want to speak out on it.
Jason Lewis: Alright, Congressman Ron Paul, keep us posted and good luck on the book.
Ron Paul: Thanks a lot, thanks for having me.
Jason Lewis: You bet, glad to have you. Very interesting guy; don’t have to agree with everything, but he’s got something important to say. Ron Paul on the Jason Lewis Show.