The Bizarre Art of Central Banking




Ron Paul teaches Ben Bernanke a lesson on Austrian free-market economics, but the Chairman is not listening. Instead, he tries to defend his actions by asserting that “central banking is an art” that requires guesswork.

Location: House Financial Service Committee
Date: 03/17/2010

Transcript

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.

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56 Comments:

  1. Bernanke got schooled! Go Ron! I hope he does run in 2012. I’m sick of the government screwing everyone over. Ron Paul is one of the very, very few politicians that I actually trust to do the right thing.

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  2. The dilution of wealth via the fractional reserve banking system is the greatest travesty ever perpetrated on our humanity.It is theft by stealth.When the non productive systems in our economies take more than they give,we have decadence that suck the essence of creativity that once made the USA and the West a philosophy to be revered.

    Now we have bankster avarice that seeks total power,thus destroying the inspiration and creativity that made it all possible.

    The greedy Wall St war mongerers must now face their accusers .

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  3. Fred the Protectionist
  4. SS… I believe you’re on to “Fred the Prophylactic”.
    He’s a “seminar blogger”, a self appointed tool of the Progressive radical left. He never has a valid argument, or facts to back it up, just a continuous stream of incoherent rants to muddle the topic.

    He engages in a misdirection game of S.I.N.,

    Switch the subject at every opportunity, subterfuge is the best means of confusing the topic.

    Ignore the facts they just get in the way of the subterfuge.

    Name call… when Switching and Ignoring don’t work, apply a demeaning label to end the discussion.

    Watch him, he’s very predictable.

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    • Fred the Protectionist

      ‘He’s a “seminar blogger”’

      A seminar blogger? OMG. Actually I’m just a normal guy (normal as opposed to abnormal like libertarians), who has too much time on his hands. I don’t get out much.

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      Like or Dislike: Thumb up 0 Thumb down 8

    • And he still is unable to distinguish between gov trade and free trade.

      Maybe English is not his language.

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      • Fred the Protectionist

        NAFTA lowers trade barriers, are you denying this aspect? Isn’t that your goal? Zero trade barriers. If that is your goal then why do you disown one step towards your goal, unless you’re a nut.

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        • You continue to deflect. Let’s try again.

          Is NAFTA the same as the free trade that we describe here?
          It’s one question. You can answer yes or no.

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          • Fred the Protectionist

            NAFTA is a free trade treaty, why do you deny reality.

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          • I’ll take that as a yes.

            What you still cannot see is that it cannot be free trade if governments need to sign treaties that manipulate the market. Just because they want to call it free trade does not change the fact that it is quite the opposite.

            You and I both know that we are not speaking of the same things, but you continue to hang your hat on moot points. It is nothing more than obfuscation to avoid facing the reality that you rail against something that we are also against.

            What you are for is the flipside of what you are against. Your jacked up tariffs and isolationism will eventually do to the people what this so-called ‘Free Trade’ has done.
            The answer is and always has been, actual free, unadulterated by government fiats, trade.

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  5. TAXES–Everbody should pay the same % rate as everbody else. Can be done when you make a deposit at bank, send? say 10@ on the dollar and that’s it. Then gov. has to pay as you go. want to change % rate, Then take a real Vote.

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  6. Fred the Protectionist

    “Have interest rates been too low too long?” says Ron Paul implying that low interest rates are bad, or better yet says Ron, “Hey y’all lets get rid of the Federal Reserve.”

    The FED forces banks to have at least 10% reserves, and if a bank goes under that amount, than the rate the FED also sets is what banks use to borrow to get back to that reserve.

    NO FED = No reserve requirement. So Ron Paul’s solution would be effectively a zero interest rate, because during the times before the Big Bad FED, banks recklessly loaned out till they had NO reserves left; and people got screwed, and that’s bad.

    Is Ron Paul and his Ronulan acolytes suggesting we get rid of the FED? They constantly do. So why complain about low interest rates when your solution would be worse than low interest rates. That’s like complaining about NAFTA when your solution would be worse than NAFTA. HAHA, that’s insane.

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    • Most would also contend that the fractional reserve banking system needs to be changed as well. The main point however is without the fed, banks have to lend their own money and there is no lender of last resort.

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      • Fred the Protectionist

        Without the FED, there wouldn’t need to be a lender of last resort since banks could recklessly loan out everything they have and not be forced to have any reserves.

        Personally I think 10% reserve requirement is worse than the low interest rates, but you Ronulans would prefer to whine about the low interest rates the banks use to maintain that reserve.

        10%, I mean c’mon, should be more like 50%.

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        • when banks were first invented guess what the reserve limit was? there was none. if a bank had no reserves and a patron asked for 1 dollar then the bank would collapse. it is in the banks interests to keep healthy reserves except when they have a guarantee from the gov saying that uncle sam will take care of any problems. only then do they feel free to loan out as much as possible. this is called moral hazard. read an economics book.

          fred is so trained to trust the government that he thinks without their nanny hand guiding us we would collapse. reserve limits don’t work.

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  7. Well said Libertarian777.

    It’s a sad fact that too few citizens understand what the Federal Reserve really is.

    Back 97 years ago Americans were simple and ignorant of any banking principals so it was very easy to pull the wool over. But these days the ignorance displayed by “Fred the Prophylactic” and his ilk is simply inexcusable.

    It’s downright depressing knowing how many “Freds” are blithering like zombies out there, scary isn’t it!

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    Like or Dislike: Thumb up 7 Thumb down 1

  8. Fred is the proverbial whine and we should collectively refrain from casting our pearls!

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  9. Fred the Protectionist

    The largest bill in decades is goes through Congress right now, Health Care, and Ron Paul is focused on the Federal Reserve? Holey moley.

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  10. Why does everyone even give “Fraud the Pretenderist” the dignity of a response?Clearly, obviously, he is a propogandizing puppet and dedicated spamster. I don’t believe for a second that he even believes himself half the time.
    He is here every day. Why would someone that disagrees with a single politician on “every issue” spend his days at a website supporting said politician?
    He’s a troll! He’s not interested in discussion. He probably works for some neo-con candidate…. One that is very, very affraid of losing to a rational and principaled Conservative politician like Ron Paul.

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    Like or Dislike: Thumb up 8 Thumb down 1

    • The same reason a cat plays with a mouse, amusement.

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    • Fred the Protectionist

      Libertarians are liberals, not conservative.

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      • More non-sense. I am neither liberal nor conservative as a whole. I am fiscallly conservative and socially more liberal.

        Do you still work for Lindsey Graham?

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        • Fred the Protectionist

          Market “Liberalization”, open borders (bring in more “liberals”), pro-Abortion (liberal), put women in combat roles (liberal), legalize drugs (liberal), pro-Gambling (liberal), ignore Constitution or make stuff up like ‘separation of Church and State’ (liberal), instead of trying to cut EPA’s funding or restructure to punish them for trying to make policy you “liberals” would rather abolish them.

          You’re radicals (liberals).

          Liberal doesn’t mean LEFT, it means change, radical.

          Conservative doesn’t mean RIGHT, it means resistant to change.

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          • I agree that most of what you said are things I agree with. Whether they are “liberal” or “conservative” is inconsequential…. assuming you mean that those decisions are left up to each state to decide and not mandated on a Federal level.

            As for this:
            “ignore Constitution or make stuff up like ’separation of Church and State’ (liberal), instead of trying to cut EPA’s funding or restructure to punish them for trying to make policy you “liberals” would rather abolish them.

            You’re radicals (liberals).

            Liberal doesn’t mean LEFT, it means change, radical.

            Conservative doesn’t mean RIGHT, it means resistant to change.”

            … more nonsensical gibberish. I won’t waste my time.

            Also, for the record, I am proud to be radical.

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          • Fred the Protectionist

            Fine, just stop abusing words.

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          • Fred the Protectionist

            “But if thought corrupts language, language can also corrupt thought.” George Orwell

            http://www.mtholyoke.edu/acad/intrel/orwell46.htm

            George Orwell, “Politics and the English Language,” 1946

            Libertarians are corrupt to the bone.

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  11. Fred the Protectionist

    “There’s a spread over the treasury. If treasuries rates go up (e.g. from 0.25% to 5%) the other bonds would increase their yield by a similar proportion (treasuries + yield spread).”

    That’s right, no FED, zero baseline interest rate. So why complain about low interest rates when you’re solution is no interest rates?

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  12. Fred “the Protectionist”
    SAY WHAT? you cannot be serious!

    Without the FED interest rates would be around a natural rate of 5%-7% not the ridiculous 1% they are now. Fact is that the Banksters have lots of Fiat Federal Reserve Notes (cash) but also Boat Loads of mal-investment liabilities on the books in the form of hyper-inflated real estate.

    Mr. Paul’s point was… our politicians forced the banks, under threat of law suits, to make $5 Trillion in un-secured real estate loans, Fannie and Freddy guaranteed and packaged them like bales of cotton and sold them to China and Europe, and the FED (Magic Money Machine), pumped out the bogus inflated Reserve Notes at a record pace.

    How about “Protection” from the FED artificial manipulations and enforcing our Constitution to rein in the spend-thrift Politicians?

    First, enforce Article 8, and mint bullion silver Treasury coin and stop delegating that LEGAL responsibility to a Fraudulent Central Bank.

    Second, End fractional Reserve Banking on Demand Deposits!

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  13. So mere humans could not agree to a rate of interest?

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  14. Fred the Protectionist

    “Have interest rates been too low too long?”

    Does Ron Paul realize that if there were no Federal Reserve than there would be no interest rate, it would be ZERO. So why would you complain about low interest rates, then turn around and say your solution is ZERO interest rates?

    Does not compute.

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    • Price fixing is an art, says the Bernankster.

      This cannot be left to mere mortals

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    • There would be no interest rate without the Federal Reserve??

      This is the most ridiculous statement I have read at this site.

      Please educate yourself.

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      Like or Dislike: Thumb up 9 Thumb down 1

    • Fred the Protectionist : “Does Ron Paul realize that if there were no Federal Reserve than there would be no interest rate, it would be ZERO”

      Wow, where did you study finance and economics?

      LIBOR, junk bond rates, corporate bond yields etc. are not set by the Fed.

      There’s a spread over the treasury. If treasuries rates go up (e.g. from 0.25% to 5%) the other bonds would increase their yield by a similar proportion (treasuries + yield spread).

      If the Fed wasn’t purchasing Treasuries, Treasuries would have to compete with the higher yielding corporate, sovereign and other bonds.

      There are numerous studies including those by the CBO that shows at the current rate of growth the eventual amount of treasuries that have to be issued just to pay for the interest on the national debt will crowd out all other bonds (interest on teh current national debt runs over $300billion a year).

      Having interest rates this low does numerous things, 2 of which are really bad.
      1. it discourages saving (who want’s to invest in a CD earning 0.25%?)
      2. it encourages borrowing. Particularly by the government. Since the interest rate on treasuries are only 0.25% the government is getting money for nothing.
      The problem occurs when they try and roll over the obligations in the future.
      Eventually the national debt is so large, when the government wants to roll over its obligations it will be at a much higher rate, resulting in exponential growth in the national debt.

      It’s similar to what Lehman Brothers and Bear Sterns were doing, using short term funding for long term obligations (repos to fund MBS, CDOs etc).

      Repos allows you to leverage up a lot, very quickly. Where is Lehman Bros and Bear Sterns nowadays? Their repo funding dried up rapidly after the ‘full faith and credit’ of their name was trashed.

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      Highly rated. What do you think? Thumb up 11 Thumb down 1

    • Can Fred really be this dumb. It must be a ploy.

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      • Fred the Protectionist

        In the purest form of the word, Ronulans are pure ‘reactionary’.

        Say something that doesn’t fit into Ronulan ideology, it’s like using that little doctor’s hammer on a kneecap, an involuntary reaction takes place, they kick. No thinking takes place whatsoever.

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