Location: House Financial Service Committee
Ron Paul: I have a question for Chairman Bernanke. During the early part of the decade, lot of the free market economist would keep saying, “Interest rates are too low for too long,” and there was a financial bubble and a housing bubble. There had to be a correction. Of course, we did in 2008. Since 2008, many of the mainstream economists have more or less agreed with that assessment. Because frequently we’ll hear them say that interest rates were held too low for too long. And I think even Secretary Geithner had made that statement. Where do you come down on that perception? Do you think interest rates are held too low for too long?
Ben Bernanke: Well, congressman, I’ve given a speech on this. And I think the bottom line is that nobody really knows for sure; the evidence is really quite mixed. And I would say that even if they were too low for too long, the magnitude of the error was not big enough to account for the huge crisis we had. I think what caused the crisis was the failures of regulation. And I would fault the Fed here, too, because some of those failures were ours, in the sense that we didn’t do enough – and I admitted this and acknowledged this many times – we didn’t do enough on mortgage regulation. So I think it was the weakness of the regulatory system, not monetary policy, that was most important out here.
Ron Paul: Of course, I don’t agree with that. But if you assume for a minute that it was too low for too long, and you had perfect regulations, what is the harm done by interest rates being too low for too long? Do you see any damage by interest rates being artificially low for a long period of time? Let’s just sort that away from regulations for a second.
Ben Bernanke: Well, certainly one possibility which my colleague at the left [Paul Volcker] knows a lot about, is if you keep rates too low for too long, you get inflation. And that every central banker wants to be sure that the price level remains stable. And that’s an important consideration.
Ron Paul: Do you think the investor, the businessman makes mistakes if interest rates are lower than, say, the market? Aren’t low interest rates an indication that there are savings and if there are no savings, but the interest rates are low because of newly created credit by the Fed, does that not send a false signal to some investors and some businesspeople?
Ben Bernanke: Well, if interest rates are below their normal levels, it’s because the economy is operating at a very low level. I mean, currently, we’re not in anything that an economist would call a Pareto optimal equilibrium or anything like that. We certainly are in a situation where a lot of people are out of work, and consumption is well below its normal levels, and low interest rates serve the function of increasing demand and putting people back to work.
Ron Paul: But you don’t think that if interest rates are 2% and 3% instead of 6%, without artificially low interest rates, there wouldn’t be a temptation for people to build too many house, or for people to try to capitalize on the fact that they are anticipating price inflation, and participate in the bubble?
Ron Paul: Well, congressman, interest rates are very low right now. And I don’t think building too many houses is really a problem.
Ron Paul: And that makes the very important point. During the boom part of this cycle, low interest rates caused people to do things that might not be proper and best for the economy. And then when the bust comes, we resort to the same policy of keeping interest rates extremely low for too long. What are the chances? Do you think there is any chance in a year or 2 or 3 from now that we’ll look back and say, “Well, not only were they too low for too long in the early part of the decade, but they were too low for too long in the latter part of the decade as well”. Because when the prices start to go up, I mean, it’s sort of, you know, a little bit too late, then you have the job of reining that all in.
Ben Bernanke: Well, it’s difficult; central banking is an art, and we need to balance our dual mandate. Our dual mandate is the maximum employment and price stability. And we need to try and find an appropriate policy that gets us as close as we can to both sides of that mandate.
Ron Paul: See, the free market people see that the dependency on regulation is just imaginary, because the fault is all these mistakes are being made because they have false information. Price fixing, nobody’s advocating wage and price controls because of all the false information. You can’t run an economy with price fixing. That’s why socialism fails. If you fix the price of interest rates, it’s one half of the economy, because you’re messing around with the monetary system. Then all of a sudden, instead of dealing with that, we say, “We just need more and smarter regulations, and we’re going to solve all these problems.” It doesn’t concern you at all?
Ben Bernanke: Well, we need some system to set the money supply. I guess you’re a gold standard supporter, I don’t know if that is correct?
Ron Paul: I’m for the Constitution.
Ben Bernanke: Every major country, though, currently in the world uses the central bank, which must make some decision about the money supply; whether it’s to keep it stable or to move it around. Nevertheless, it’s a choice that’s made.
Ron Paul: But then there is no good information for the investor, unfortunately.
Chairman: The gentleman’s time has expired.