Venue: House Financial Services Committee
Topic: Systemic Regulation, Prudential Matters, Resolution Authority and Securitization
Ron Paul: Mr. Secretary, more and more people today are looking critically at the Federal Reserve and wondering what’s going on. And, of course, the people are asking more questions and they want to know exactly what role the Federal Reserve has played in our financial crisis.
In the past, the Federal Reserve was held in very high esteem; they produced prosperity and full employment and stable prices. Today they are wondering somewhat differently, and many economists are joining in this. Today the Congress is by the number of 307 who are asking for more transparency of the Federal Reserve.
But also everybody agrees that we have a financial crisis and we’re working very hard on regulations and I think sometimes we get misdirected in this because if indeed the source of our problem is coming from the Federal Reserve, then you’re depending too much on regulations without looking at the real cause. We’re treating symptoms rather than the cause.
Just the idea that the Federal Reserve is the lender of last resort contributes horrendously to moral hazard, especially when we’re dealing with the reserve currency of the world. But if everybody knows that no matter what happens, the lender is going to be there to bail them out.
You had an interview this year and you were asked what you thought were the real causes of this crisis, and I was fascinated with your answer, because in a way it seems like you might have agreed a little bit with what I am saying. You listed as number one that the monetary policy was too loose for too long, and that created this just huge boom in asset prices, money chasing risks, people trying to get a higher return. That was just overwhelming powerful.
And I think that really makes my point and unless you deal with that and the suggestion is that what we do is move in with more regulations and hope and pray that it will work. But again, if this is true, that a monetary policy way too loose lasted too long, how can the solution be speeding it up? How can you say, “Well, this is the real problem so we’ll double the money supply, interest rates were too low at 1%, so let’s make them a 0.25%”. I mean, I can’t reconcile this. How can you reconcile this on just common sense?
Timothy Geithner: Congressman, there is one part of that quote you omitted which is that I said “monetary policy around the world was too loose for too long.” And I think you are right to say that this crisis was not just about the judgment individuals to borrow too much or banks to lend too much. It wasn’t just about failures in regulation and supervision. It was partly because you had a set of policies pursued around the world that created a large credit boom, asset-price boom. And I think you’re right to emphasize that getting those judgments better in the future is an important part of the solution.
Ron Paul: Okay, on the issue that it is worldwide and we don’t have the full responsibility – there is a big issue when you are running and managing the reserve currency of the world, and other countries are willing to take those dollars and use those as their assets and expand and monetize their own debt. So it would not lock in their economy, it’s a worldwide economy and it’s our dollar policy and our spending habits and our debts that really generated this worldwide crisis. That’s why it’s not a national crisis. It’s a worldwide crisis.
Timothy Geithner: Again, I am not sure I disagree, but I would say it slightly differently, which is that a bunch of countries around the world made the choice to tie their currencies to ours, and effectively adopt our monetary policy. And that made monetary policy too loose in their countries. But it also created this wave of investment and savings into US financial assets which pushed interest rates down here and pushed up asset prices up here. But you’re right to say you look at the global mix of policies, we have responsibilities to get that right. We can’t do that on our own. And that’s important to think about, not just about regulations.
Ron Paul: Well, I think we do have a responsibility of our own. If we’re managing the world reserve currency, we can deal with that, we can deal with our spending policies, our deficits, the pressure on the Fed to inflate. So I think if we do what’s right, it will benefit the entire world.
Timothy Geithner: I agree with that.
In your testimony you also talked about talking about a new international court, and that you’re working on internationalizing regulations, which literally scared me. I think we have too many regulations already, and they don’t solve the problem.
Ron Paul: But, in those negotiations, since this issue of a new reserve currency is being discussed in the ordinary media, you hear reports… just this morning I read the U.N. is planning a new reserve currency. In these reports, can you tell me every time this conversation comes up and what is being talked about and how you relate to what the Chinese are saying? Yes, they’d like to see a new reserve currency, they’d like to participate. It seems that would be some very important information for us.
Timothy Geithner: I will be happy to come and talk to you about that privately or in another context.
Mr. Speaker: The gentleman’s time has expired.