Location: House Financial Services Committee
Hearing: Unwinding Emergency Federal Reserve Liquidity Programs and Implications for Economic Recovery
Ron Paul: I have a comment for Professor Ball. First, because you made the statement that it would be a good thing to get a 4 percent inflation rate. That type of language happens to scare me a whole lot because I think it’s so detrimental and in many ways immoral because what you’re saying is, the purpose of the government is to depreciate the currency, depreciate the value of the money. And who suffers the most from that? Well, the poor people do because their prices go up. And the older people who are on retirements, they suffer a lot as well. The wealthy people seem to be able to handle inflationary problems a lot better than the average person and the characteristic of inflation is that you eventually wipe out the middle class. And quite frankly we do have a lot of inflation right now because there’s an inflationary factor in medical care. That’s the main complaint. Could you give me a brief answer on that if you like, because I want to ask Mr. Taylor a question as well.
Laurence Ball: Well there’s complicated issues. Briefly and very respectfully I disagree with what you’re saying. Research suggests that the effects of inflation are distributed fairly evenly across different income groups, whereas the effects of unemployment are very heavily concentrated on lower income people. And more generally I think just the costs to anybody of 3 or 4 percent inflation, there’s just been no documentation that they are important whereas it is pretty obvious how costly unemployment is.
Ron Paul: Thank you. For Professor Taylor, you have this exit rule. If the economy doesn’t get back to growth, matter of fact, stays where it is, or starts down again sharply like it might – some people suspect that the housing market is still in a major crisis – does your rule just not happen, does it not kick in? You don’t worry about reducing the balance sheet if the economy suddenly takes a downturn?
John Taylor: What I like about this proposal that I made is that it’s very similar to the decision about increasing or not increasing the interest rate. So if the economy languishes, the interest rate will not increase just as we discussed. If the economy picks up, then it will have increased the interest rate. My proposal on reserves, it’s very much like that. It’s tied into it. So that as the federal funds rate is increased if it is, reserves will come down at a similar pace. And the idea is by the time the Federal funds rate reaches 2 percent, then reserves will be roughly at the level where …
Ron Paul: Professor Myers suggested that there is not much left for the Fed to do. We can’t lower interest rates much lower so we get into trouble and the suggestion is we just need more fiscal stimulation and I think that’s correct. Well anyway, there’s a lot of desire for more fiscal stimulation, we’ve had a lot, and even today Chairman Bernanke said, “We are not in the business of monetizing debt.” Of course they just bought $300 billion worth of debt and if push comes to shove they do monetize debt. But wouldn’t it be safe to say that if a bank can get cheap money, 1 percent, 0 percent and take it because it’s available through the Federal Reserve system and they buy Treasury bills even though that might not go on the balance sheet, isn’t that indirectly monetizing debt?
John Taylor: I think the thing to look for in terms of monetizing the debt is how much the Fed actually purchases. Yeah, I think and it’s also it’s not an easy thing. Remember, we think about the monetization that occurred in the Great Inflation, it occurred gradually. In the late 1960s and 1970s, there was a lot of support for that inflation.
Ron Paul: Did Professor Meyer have a comment on that?
Larry Meyer: Well, I have a comment on a lot of things you said. Just with respect to fiscal policy, I don’t think that, I doubt anybody in Congress or there certainly would be a majority, who would want to have a significant fiscal stimulus today when there’s uncertainty about whether the economy needs it and when the budget is in such terrible shape going forward. With respect to a rule, yes, I use a rule to sort of follow what policy does. And the Fed is going to reduce reserves as it raises the funds rate, and that’s what Chairman Bernanke sort of emphasized. When as you raise the interest on reserves you could have manage the reserves very carefully, withdraw them to keep the funds rate close to the interest on reserves. So that’s inevitable and that’s really in the game plan.