Ron Paul: The Federal Reserve Creates Money Out Of Thin Air!

On Monday night, Congressman Paul appeared on CNBC to debate former ITC chief economist Peter Morici over the Federal Reserve’s role in the economy and the need for greater transparency at the Fed.

Show: The Kudlow Report
Channel: CNBC
Date: 11/30/2009


Lawrence Kudlow: Ben Bernanke took to the Washington Post yesterday to defend Fed independence, as he sees it, from legislation like Ron Paul’s, that would audit the Fed and force it to be more transparent. Mr. Paul’s amendment passed the House Financial Services Committee last week and is attracting broad bipartisan support. But it’s not without its detractors, including Chairman Barney Frank. Joining us now is the aforementioned Texas Republican Congressman and former presidential candidate, Mr. Ron Paul, and our friend in university professor and former chief economist for the international trade commission, Peter Morici. Hello.

First of all, thank you for your time, sir. You know, let’s see if I get this right. Article 1, section 8 of the US Constitution gives an enumerated monetary power to Congress, and I read, “To coin money and regulate the value thereof”, Mr. Paul. I don’t think the Fed has done a very good job regulating the value thereof. Is that behind your thinking, sir?

Ron Paul: Yeah, it certainly is. But what about their mandate that they were giving in 1913; that was to have full employment and maintain stable prices? Look at the monster they have created. And certainly the financial crisis that we have today; we shouldn’t be looking to the Fed to give them more power, we should be looking to them for an apology for creating this monster. Not only does Bernanke need to apologize, but I would Greenspan ought to apologize as well.

Lawrence Kudlow: So Peter Morici, you know what Mr. Paul is after here, and you can see there is a real groundswell – I’m calling it a populous groundswell – now only to audit the Fed’s monetary decisions which many, and I think you might be included in this, were one of the principle reasons for this whole financial meltdown. First the housing bubble, then the financial meltdown. But also, Peter, the Fed is engaged in what one might call fiscal policy right? They are buying up government funds, mortgage backed bonds, they’re making deals in the open market that normally come under the purview of fiscal policy … way far field and no one knows exactly who’s getting the money and why, Peter.

Peter Morici: Well, hold on a second. In order to create money, you have to buy bonds that issue the dollars. So they’re always involved in fiscal policy. And as for this inflation and this financial crisis? Oh, I think congress had a lot to do with it. You know, they’ve had a hand in monetary policy or financial policy. For example, the Community Reinvestment Act which encouraged banks to make irresponsible loans, then meddling in the activities of Fannie Mae and Freddie Mac, getting them to make irresponsible loans. A 1.5 trillion dollar deficit. That creates bonds that investors hold internationally; it’s as good as dollars. Wait a minute. If anybody is going to apologize, then it has to be the people that are totally out of control on Capitol Hill.

Lawrence Kudlow: Mr. Paul, you don’t disagree with that part, do you?

Ron Paul: No. I think Congress is responsible for a lot. But then this points out the fallacy that they don’t want to politicize the Fed. But the point that he makes is that it’s already politicized. Goldman Sachs is political in the sense in that they have influence with the Fed. But the Congress is very political. The Congress runs up these debts, they get engaged in wars they shouldn’t be involved in, they run up the welfare state, and they don’t have to be responsible. So they do deliver these bills to the Federal Reserve. But this idea that the Fed doesn’t create money, only what they buy… no, they create money out of thin air. They can create a 100 billion dollars in a week. They can create a trillion dollars in a couple of months. So they create money out of thin air, and they do everything secretly and we don’t know what they’re doing.

Lawrence Kudlow: Peter Morici, it took a special report by the TARP inspector general to flush out and tell the rest of the world, the American taxpayer and everybody else, that the United States treasury paid i.e. the taxpayers’ money, paid off Goldman Sachs 100 cents on the dollar for the credit default swaps for AIG. We didn’t know that and it also turns out, uncovered by the TARP inspector general, Mr. Borowsky, it turns out that the treasury didn’t really think there was systemic risk to those credit default swaps. My question to you, Peter, is relative to Mr. Paul’s ‘let the sunlight shine in’ ideas, we don’t know who got this money from various sources. We don’t know what all the emergency programs are like. We see the final totals, we don’t know the specific cases. Even today they are handing out money left and right, Peter, and we don’t know. Why shouldn’t the taxpayers know?

Peter Morici: Well, I think it’s quite dangerous for banks to be revealed when they go to the discount window and borrow some money. You can have a run on the bank. Interest rate policy has to be set somewhat in privacy. You know, if you want to politicize it, what I’m really concerned about is the Democrats are controlling the congress and the White House at the same time, calling Ben Bernanke to task for not monetizing the debt fast enough when this whole thing comes down. That’s the kind of conduct we had in Latin American. We already have a Latin American presidency printing so many bonds. Do we really want to have a Latin American central bank and end up the way they did?

Lawrence Kudlow: Well, it’s the socialist road to serfdom. But Mr. Paul, let me give you the final word on this. In your bill you want the GAO to audit the Fed’s interest rates policy or monetary policy. But you’re not saying they’re going to realize that the day of the FOMC meeting, are you?

Ron Paul: No. It’s six months; it’s a 180 days and there is nothing wrong with that. I mean, why should they be doing this in secrecy? They bought 800 billion dollars worth of mortgage-backed securities and we don’t know what they paid and who got the money. Did they pay the market rate or whatever. To argue that this should be done in secrecy, I mean, it just blows the minds of the average American who’s stating to wake up on this. 75% of the American people now are saying an audit sounds like a pretty good idea.

Lawrence Kudlow: Let me ask you, why should Ben Bernanke face the press; the American media, crotchety as it may be, right after the FOMC meeting the way Jean Claude Trichet does in Europe? Why shouldn’t he hold a press conference right after the FOMC meeting and talk to the press, Mr. Paul?

Ron Paul: Well, I think it would fine. I don’t think that solves the problems because the whole system is deeply flawed. You can’t manage a financial system by fiat money, creating money and having price controls, fixing interest rates. That’s where the real problem is. So all the regulations in the world won’t solve that problem. But sure, he would smooth things over a little bit if he got out in front. But the truth is that not a whole lot of people will believe that they’re hearing the whole story, unless you have a true audit.

Lawrence Kudlow: He might be the Tiger Woods of monetary policy. Well, Peter Morici, regulating the value of the currency thereof is a constitutional prerogative. Why shouldn’t we link the dollar to gold? Just link it to gold. Not necessarily the gold standard, but link it to gold.

Peter Morici: Well, there is simply not enough gold in the world. If you want to have 1880s and 1890s deflation, that’s a great way to have it happen.

Lawrence Kudlow: I’m not saying the old fashioned gold standard. But why not use gold as a price indicator to tell the Fed when to extinguish or add money. Why not, Peter Morici.

Peter Morici: Because the price of gold will always be rising over time. While it gyrates around a trend, it will be rising and it will be very difficult to manage a currency that way.

Ron Paul: The price of gold does not go up; the value of the dollar goes down. You got to understand that point or you will never solve our problems.

Lawrence Kudlow: The producers are screaming at me, gentlemen. But I really appreciate the discussion. Congressman Ron Paul and Peter Morici.

  • Perception

    Do we need a gold standard if we have banking system that is only allowed to produce enough currency to equal pop growth and the increase in GDP? There have to be restrictions on the creation of money from nothing.If this is done,is gold really a necessity?

    Gold only has value because of it’s scarcity.It has limited uses in industry and is not a source of energy or useful raw materials.Common sense and logic is a real scarcity these days,perhaps this should underpin our currencies.

    What we need is a banking system in which those who work and produce share in the system of money creation instead of being made serfs by an evil system of currency depreciation.

    Destroy the dreams and aspirations of your population and you destroy the real economy.We are witnessing it’s demise right now and our so called leaders betraying the very essence of what made the USA great just to exist in a comfort zone of decadence and decay.

    Unless leaders of real substance and integrity now come to the fore,I see economic ruin and wars that could well see the end of civilisation as we know it.

    Presently we have MAD economics,(Mutual Assured Destruction) making overtures to MAD wars a solution to chaos.Nobody wins a nuclear war.The so called global elites of the NWO can no longer distinguish reality from fantacy,since their super egos won’t entertain the idea of defeat,even to the point of self annihilation.

    Sanity must prevail soon.

    • Nate Y

      Gold isn’t a necessity but some tangible commodity is. There does indeed have to be restrictions on the creation of money. Happily, commodity money naturally provides such a restriction.