Show: Squawk Box
Joe Kernen: But Chris Dodd has a bill taking aim at the Fed. The overhaul bill that he proposes would reduce the role of the Federal Reserve. However, Congressman Ron Paul has been on that crusade for some time now, calling for more transparency at the central bank. He joins us this morning.
Congressman, great to see you. Hello.
Ron Paul: Thank you, nice to be with you this morning.
Joe Kernen: Let me start with… you remember Treasury Secretary Geithner and what he wanted to do. He wanted to vastly embolden the Fed in a lot of these areas and give them more power. What was your initial reaction to what he wanted to do?
Ron Paul: Well, it was terrible because I start with the idea that regulations won’t solve our problems. In Washington the only choice is whose going to be the big regulator. So it’s not much of a choice for me. I certainly don’t want to give the Federal Reserve more power, so I don’t like it when Geithner says, “Give the Fed more power”. So I’d much rather have somebody else do it even though I think that’s not going to solve the problem.
Joe Kernen: Really? So the Dodd Bill sets up a lot more different regulators, although there might be a single on, you don’t like that one much more?
Ron Paul: Oh no. See, the problem is that we have a flawed system. We have artificially low interest rates, we have the lender of last resort, we have this horrendous moral hazard in our system. Instead of correcting the problems and changing policy, what we do is we say “We can tinker with the symptoms with regulations” and that even further interferes with the market forces. We need the market to work and we have not allowed the market to work for many, many decades. Interest rates are always artificial, “too big to fail” was always there. There was always the lender of last resort. As long as you have that, regulations will not solve the problem. Take, for instance, after ENRON went down we immediately passed Sarbanes-Oxley saying “we didn’t have enough regulations.” It had nothing to do with it. Where did some of the companies go then? There were too many regulations so they had to leave this country.
So I would say that we’ve embarked on the wrong course and whether you put the regulations in the Fed or outside the Fed, it’s not a whole lot different. But we certainly don’t want to give the Fed more power. It’s much easier for the Congress to assume the responsibility of oversight if it’s outside the Fed. For some reason up until recently the Fed was sacred. You weren’t even allowed to ask questions, let alone get the answers. And now, of course, the momentum is in the direction of “even the Fed ought to be transparent” and I think that, of course, is very important.
Joe Kernen: What’s your bill? You got how many co-sponsors and do you still like your bill, because I saw somewhere that you said it’s already been gutted?
Ron Paul: Well, the intention is that one time they said they would put it into Barney Frank’s bill. It never actually got in there. So the plan now is to get an audit put in to the bill. But it will be a pseudo-audit, it won’t amount to much. We have 309 co-sponsors and we have all the Republicans on the bill as well as about a 130 Democrats. So it’s very, very bipartisan. There has been a national poll – which I’m surprised that there even would be polling on this subject, I would never have dreamt about it a couple of years ago. But 75% American people say, “Yeah, we should know what’s going on with the Fed”. So that 75% of the electorate saying that we should do our job and look at the Fed is the reason why there is well over 2/3rds of members of Congress supporting this bill. This bill would pass tomorrow if we brought it up under suspension, but the powers to be, the Fed, is working frantically, they’re editorializing, they’ve hired a lobbyist. They do not want us to know what they’re doing and they use all kinds of frivolous arguments why the Congress is not allowed to know what they’re up to.
News Anchor: What makes you so confident, Congressman, that the GAO is competent enough to audit the Fed reliably? And what do you make of those who say that Congress already has the right to ask a lot of questions to the Fed; they do it every time the chairman comes to the Hill?
Ron Paul: But they’re not allowed to ask the right questions. You’re not allowed to ask what kind of arrangements they make with a foreign bank or foreign central banks or foreign governments or international financial organizations or the details of the discount window, which companies got their benefits. So no, we’re not really allowed to. Now, the GAO may be far from perfect, but they probably have one of the best reputations in Washington if you’re going to look into something. It’s been bipartisan and somebody asked me once, “Who’s going to regulate the regulator,” you know, who’s going to regulate and check out the GAO. I think that’s a decent question, but under the circumstances there is not much else that we can do. They are the ones that we should look to to looking into the Fed.
News Anchor: Congressman, you said we’re on the wrong course. I wonder if you can tell for us what you feel is the right course. I mean, you’ve written a book called “End the Fed”. So you want to end the Fed, but my guess is when you talk about the market working you also want to end deposit insurance. Is that part of the problem also?
Ron Paul: Oh, sure. I think deposit insurance… immediately people say “Oh, my accounts won’t be insured”. No, they will be insured by private companies and each and every individual bank would be monitored instead of having massive bank failures and financial crises and each and every individual bank…
News Anchor: Can I just ask you this: You’ve seen the pictures of the 1930s when we had runs on banks. Is that something that’s acceptable to you that people should be afraid they would lose money in the event of a bank failure?
Ron Paul: Well, if you had private insurance there wouldn’t be. But the bank runs is a consequences of Fed policy. You know, the Fed has been around since 1913 but their first crisis came from the inflation through World War I and we had the depression of 1920-1921 and it lasted about a year. But back then they didn’t believe that you should bail out everybody and pump more credit in. They allowed the liquidation of the malinvestment, they allowed the debt to be eliminated and then go back to market interest rates and go back to work again.
But today, ever since the depression, Hoover and Roosevelt set the standard along with Keynes. Keynes is really the individual we follow and it’s not a market phenomenon. We don’t have market interest rates. We have guarantees that people are going to make mistakes; we have guarantees that we’re going to have too many houses. But what do we do now? We had a program where both Congress and the Fed encouraged the housing industry. Finally the bubble burst, which so many of us predicted would happen. So what are we trying to do in Congress right now? We’re trying to stimulate housing and to keep prices up. What we need to do is let the prices of houses drop and we don’t want to stimulate anything, we want the prices to adjust, we want these houses that were overly priced to get low enough so poor people can buy houses once again. And now we come up with cash for clunkers and all this silly stuff here. We have no confidence whatsoever in the market economy.
News Anchor: And just one more thing which is that when you talk about the right course, if I am not mistaken, you want to go back to the gold standard? Is that the right way to run monetary policy, in your opinion?
Ron Paul: No, but I’d like to go forward to a commodity standard. There were a lot of always in the old gold standard because there was bimetallism and fixed price between gold and silver. It’s still on the books that gold and silver is legal tender and we ignore it. If you use gold and silver as legal tender today, you go to jail. There is nothing in the law that says a Federal Reserve note equals a dollar. We can’t even define a dollar. No, we should have a definition of a dollar. How can you have a measuring rod which you can’t define? It’s totally foolish.
I really like the idea of allowing the market to determine what backs the currency, make sure there are no-fraud laws, and really look into the matter whether or not we should have fractional reserve banking. Yes, you have the Fed creating money out of this air, but then this is magnified by fractional reserve banking which is really fraudulent. And all it does is build financial bubbles guaranteeing the business cycle and the collapses, and as long as you patch it together, the longer you do that, the bigger the bubble. And now we’re in the midst of a big correction.
News Anchor: So just to be clear, no fractional reserve banking means a dollar loaned out equals a dollar on reserve, right? Or a dollar of capital? Is that what you would do?
Ron Paul: Yeah, if you put a hundred dollars in the bank today, the bank immediately has $190. No, if you put a $100 in today you have to say it has to stay there for 3 months and then you can loan it out for 3 months. But you don’t expand the money supply. The money supply, the Fed creates a trillion and in a few months it’s nine trillion. And that’s where the distortions come from and of course, everybody loves it when it’s going up because the prices of houses are going up and everything’s happening that seems to please a lot until the correction comes. Politicians love it. You can fight wars that you don’t have to pay for, you can run the welfare state that you don’t have to pay for. So if you believe in limited government, you have to look at monetary policy and decide that you just can’t create money out of thin air. That is the culprit and you can’t solve the problem by regulations.
News Anchor: Speaking of policy, Congressman Watt has this amendment that would audit the 13-3 powers of the Fed, the special stuff that allowed them to do so much of what happened over the past year. You’re saying that does not go far enough. Is that right?
Ron Paul: Oh, no, that’s just… the Fed has already agreed to that. The Fed’s position is, “Yeah, we’ll let you look at that. We’re going to wind those programs down anyway”, but the big stuff that is done behind the scenes, the Fed is part of the Plunge Protection Team and they can create the credit and they can make all the deals overseas. And that’s what we need to look at. But I would agree with that bill, because it is more than we’re getting now. This is what got the attention of a lot of people when members of Congress started asking about 13-3 and these extensions of loans and who’s getting the money. That’s very, very important. But that’s still only minor compared to what I’m talking about.
News Anchor: Ron, you’re a doctor too, right?
Ron Paul: Yes, that is correct.
News Anchor: So you got comments on health care, I bet. And how about the dollar, we’re orchestrating a pretty nice decline there, too, aren’t we? That’s interesting. But we’re out of time. Are you ever in this area?
Ron Paul: On occasion, and the dollar is the big issue.
News Anchor: Well, get in here.
Ron Paul: I’d like to come in and talk to you.
News Anchor: Come in here for two hours. We’ll let you just go off.
Ron Paul: I don’t know if I can stand you guys for 2 hours.
News Anchor: You can do the talking. We’ll just let you loose and we’re going to advertise it before we do. Thank you, Congressman. We appreciate it.
Ron Paul: Alright, thank you.