Ron Paul: The Federal Reserve Fails To See The Big Picture

Statement of Congressman Ron Paul
United States House of Representatives
Statement for the Record

March 25, 2010

Mr. Chairman, today the Federal Reserve finds itself in an unprecedented and unenviable position. It has boosted the monetary base by nearly $1.5 trillion since September of 2008. Excess bank reserves remain at historically high levels, and the Fed’s balance sheet has ballooned to over $2 trillion. If the Fed pulls this excess liquidity out of the system, it risks collapsing banks who rely on this newly created money to boost their balance sheets. However if the Fed fails to pull this excess liquidity out of the system we risk hyperinflation.

The Federal Reserve has never had such an inflated balance sheet, nor has it ever pumped up the monetary base by such a large amount. During the belt-tightening years of the late 1970s and early 1980s, both the balance sheet and the monetary base continued to expand during a severe recession. We have to look back to the 1920s and 1930s before we see the Fed lowering the monetary base, and even then the Fed lowered the base only by 16%. What we are talking about now is a 60% lowering of the monetary base in order to return to pre-crisis levels. That is a major decrease in the monetary base and, if it is undertaken once these excess reserves have begun to enter the system, it could undermine the viability of banks and lead to the collapse of the financial system that the Fed sought to avoid.

What the Federal Reserve still fails to realize is that intervention in the economy is always harmful. Unlike the late French economist, Frederic Bastiat, the Fed only sees what is seen, the superficial results of its policies, and not what is unseen, the effects of its monetary intervention throughout the economy. Monetary inflation leads to malinvestment and causes the boom phase of the business cycle. Once the malinvestment is realized the bust phase occurs, and these malinvested resources need to be liquidated in order for the economy to recover. But the Fed actively works to prevent this liquidation and does everything in its power to continue inflating in order to prolong the boom. The first act of intervention begets the second and subsequent interventions, each bigger than the first, as each economic bust gets larger and more severe.

The idea that a handful of brilliant minds can somehow steer the economy is fatal to economic growth and stability. The Soviet Union’s economy failed because of its central planning, and the United States economy will suffer the same fate if we continue down the path toward more centralized control. We need to return to sound money, bring back free markets, and rein in the Fed.


  • The bottomline is that inflation is bad for both small business and the American people. We are not in a recession we’re in a “Depression” and many businesses are are having a tough time hiring people.

    • Forest

      “many businesses are are having a tough time hiring people.”

      I would think there are plenty of people to hire out there. Sounds like you are saying there is a lack of skilled workers amongst the unemployed in the American workforce.

    • Forest

      “The bottomline is that inflation is bad for both small business and the American people.”

      That isn’t a ‘Bottomline’, rather that is a bald-faced… ‘opinion’ at best. Instead you are choosing to masquerade rhetoric as a fact. It is a fact that a nominal amount of inflation is in itself intrinsically neither good nor bad, in addition, if you have ever owned a small business you KNOW that you have to build in a nominal amount of inflation expectations.

      Hell, if you have ever managed a Fantasy Baseball team with keeper players you know you have to compensate for inherent inflation simply because players increase in value over time, and yet Fantasy Baseball teams seem to manage just fine decade after decade. How is it that something as simple as a Fantasy Baseball league can figure it out and you are saying small businesses cannot? Oh wait, businesses can, and do, thrive in that type of environment, yours (which must just sit and bury cans of money in their backyard) must not.

      So if inflation is bad, and instead in the past year we have had THE OPPOSITE which is deflation, and yet you say small businesses “are having a tough time hiring people” what does that say?

      The sooner you stop spewing oversimplistic rhetoric as fact, and accept you are not an expert about what you profess to be, the sooner y’all Ronbots might be taken seriously one day.

      • SS

        Whoaaaa, what a bunch of chatter to say nothing.

        All of those words to say someone else was wrong without giving us your wisdom about the actual problem. No wonder they laugh at you here.

        • Forest

          Thanks SS, you clearly have a mastery of… Typing with one hand maybe? Copying/Pasting Youtube links?

          Since you asked, here is one of the more interesting recent papers comparing the effects of inflation against inflation expectations:

          One would often argue that, as humans are imperfect, their ability to calculate inflation going-forwards is also imperfect – even as a market. In addition, what metrics specifically would one use to even attempt to gauge short/medium/long term inflation expectations.

          While I have some disagreements, I have used much of this information in determining how to hedge some of the inflation-sensitive aspects of my business. But hey, that is just me – I would greatly appreciate your feedback.

          Finally, as a Paulbot you are probably perfectly comfortable to let people like me make those decisions right – I mean ‘the market’ is composed of people like me trying to put the work into understanding the shortcomings of market forces.

          • Libertarian777

            Forest, you hit the nail on the head.

            The CHOICES YOU make as an individual, are limited in its effect. Eventually as more individuals make an individual choice, the “market’s” demand is realised (through pricing).

            As you’ve mentioned, humans are imperfect.

            This is exactly why central planning doesn’t work. How can a central bank, or central government possibly know what the ‘best’ price (interest rates or otherwise) is for the individual at large?

          • SS

            “Thanks SS, you clearly have a mastery of… Typing with one hand maybe? Copying/Pasting Youtube links?”

            Darn, couldn’t make it past your opening line. Thanks for the chuckle but I prefer six-fingered typing, two handed. Maybe your next response won’t be filled with invectives.
            Hey, it could happen. lmao

          • Forest


            If what you say is true ‘Eventually as more individuals make an individual choice, the “market’s” demand is realised’ then why do we have 700 years of financial follies across the world before the advent of central banks?

            Right, as a generalization people have choices, always do. By the same token, NOTHING operates in a vacuum and to assume that the Federal Reserve does NOT pay high attention to various free market indicators as inputs would be categorically false and/or ignorant. I am arguing that my input as a small business owner/investor is ALSO provided into the feedback loop that is our economy. Look up a TED spread for one of the simplest examples of trying to discern free-market breakdown.

            As even the one-time Ayn Rand disciple Alan Greenspan realized, Free Markets also implode cataclysmically and CLEARLY is not an advent of Central Banks (Read This Time Is Different: Eight Centuries of Financial Folly).

            However, he is still respectful of the free markets, as evidenced by recent comments which incorporate both Free Market expectations and Government activities:

            “Yields on 10-year notes, the benchmark for everything from mortgages to corporate bonds, climbed as high as 3.92 percent last week from a low of 3.53 percent in February. The 18 primary dealers of U.S. debt forecast the rate will reach 4.2 percent this year, the highest since October 2008, according to the median estimate in a survey by Bloomberg News.

            Higher yields are the “canary in the mine,” Greenspan said in a March 26 interview… ”


          • SS

            Respectful of free markets and head of a central bank?
            An oxymoron that deserves much laughter.

          • Forest

            SS Says: “Darn, couldn’t make it past your opening line.”

            Well then, glad to see that you can actually read more than one line in a sitting, maybe there is hope for you to contribute something to a conversation besides homely rhetoric and snarky laughter?

            Your last three posts ended with:

            SS: “No wonder they laugh at you here.”
            SS: “Hey, it could happen. lmao”
            SS: “An oxymoron that deserves much laughter.”

            At least your snarkiness is consistent, if not helpful.

            I heard there is a great deal on Tulips!!


          • SS

            Please tell me that you did not whip out the tired and broken tulip argument.

            You’ve lifted my spirits for the 18 holes I’m about to play. That leaves you three hours to contemplate your thrashing, or to find the crack in your own argument. See you this evening.


          • Forest

            “Please tell me that you did not whip out the tired and broken tulip argument.”

            If applicable and an accurate example of how a bubble forms in an environment ABSENT A CENTRAL BANK, why is it “tired and broken”? Seems more like it is because you can’t use your rote ‘Federal Reserve Causes Asset Bubbles And Free Markets Are Always Right! LMAO’ argument… Keep those blinders on SS.

            That being said, that is just one example among hundreds? Why not look at SEVEN CENTURIES of free markets when they broke down all over the world before the advent of central banking:


            Or another tome for your perusal on how such an unthinkable thing could happen – free markets *gasp* behaving irrationally:


          • Fred the Protectionist

            Pssst, inflation originates from imports because the petro-dollar/international-reserve-currency (Dah dollah or whatever you want to call it) has lost value inter-nationally.

          • Gander


            I have also read the article by rogoff and reinhardt. what you claimed is not at all supported by the paper.

            “700 years of financial follies across the world before the advent of central banks?”

            do you know when the first central bank was founded? 1668, which is more than a hundred years ago by the way.

            you also rant about how free markets are to blame and not necessarily the central banks. In the paper that you refer to the authors list all the reasons for economic crises. on that list appear “international debt and banking crises, inflation, currency crashes and debasements.” ALL of these reasons are the fault of government, not the free market.

            read the article again, you missed the point. the authors were saying that there is nothing new. I agree. people today blame the fed because it is just a newer outlet for government mismanagement.

          • Fred the Protectionist

            Higher yields are the “canary in the mine,” Greenspan said in a March 26 interview… ”

            Wow, he sho shmart, he should earn more money.

          • Forest

            “ALL of these reasons are the fault of government, not the free market.”

            Really? A banking crisis is the result of government? What about when deflation and panics occur as the result of free-markets finding more gold? What about if reckless lending occurs as a result of banking speculation? Or do you want it both ways and are saying the government should have regulated when there was a panic and not regulated when there isn’t?

            More to your point, how many countries that has a free market economy and DOES NOT have a government? The two are inextricably linked – and with reason. As the book demonstrates, a financial crisis that erupts in free markets is PROVEN to hurt the larger economy and thus government (which then can lead to the effects you mention) – did you miss that point?

            I am not saying how free markets ONLY are to blame, I am simply trying to introduce the concept that free markets ALSO has severe limitations – they aren’t some magical unicorn that we just need to free and it will spread sunshine and rainbows everywhere.

          • longshotlouie

            MattForest sticks his foot in his mouth, again.

            The Truth About Tulipmania

            Try both feet next time.


          • Libertarian777

            Forest, I actually respect your well reasoned arguments. I think we are saying the same thing just different ways.

            I’m not saying ALL government is bad, just BIG government. The problem is ALL government departments may start with ultruistic or limited mandates and these then expand beyond their original scope.

            One of the reasons I’m against the CENTRAL bank, is the irony of it. In the 1960s,70s and 80’s the west was always fighting the ‘communists’ and ‘socialists’. The socialist/communist system is predicated on centralised control of everything (e.g. Soviet union use to have massive car factories in one location). Now however the west is moving towards a centrally planned economy, whereas the communist states are moving away from central planning (e.g. vietnam, China).

            We already know that no man, or board of 10 men for that matter, can discern the future with any accuracy. So the question is why do we think that 10 men (federal reserve board) know what the interest rate should be? By defining interest rates, they are establishing a price control (the price of money). Not to mention the politics that come in to play in electing a new federal reserve chairman. Remember Alan Greenspan himself created the term “irrational exuberance”, in 1996 or 1998 I think, and then proceeded to discount it in future years as the bubble was building (if Greenspan increased interest rates faster, and increased margin requirements for banks earlier it would have slowed the ascent of the stock market in those days).

            I’m not discounting the fact that free-market ‘bubbles’ can and do occur, but markets typically correct and remove the players who speculated on such risks.
            Currently however, the ‘too big to fail’ institutions are even BIGGER now. Citibank, Wells Fargo, Bank of America are much larger than pre-crises, which has now increased systemic risk beyond the pre-crises levels.

            I believe government’s role should be to enforce contracts, and ensure a level playing field for all actors. However the latter is, I will agree, hard to do, since, for example, larger companies have lawyers who can help them find loopholes that the man in the street can’t.

            The Feds low interest rates are discouraging people from saving (since when is debt preferable to savings?). Additionally the government is now going to tax unearned investment income to pay for the health insurance bill (again, discourages savings).

            To me it all comes down to personal responsibility end of the day. If the government taxed me less, gave me back my 6% social security and 1.5% odd medicare tax, I will save and invest those funds myself to provide for my retirement.

            Currently the Fed doesn’t want that, since me ‘saving’ funds slows the velocity of money.

          • longshotlouie

            It’s all about maintaining that daisychain of debt.

          • Forest

            Louie copy/pastes without reading:

            The Truth About Tulipmania

            So, after reviewing, the article states:

            “But what made this episode unique was that the government policy did not expand the supply of money through fractional reserve banking which is the modern tool. Actually, it was quite the opposite.”

            So, let me get this straight. There was no central bank setting interest rates, the money base was ‘sound’ (backed by gold), the malinvestment was concentrated within only one commodity (tulips) in a well developed financial market. In ABCT, malinvestment takes place in capital-intensive industries (which tulip farming was not), and the sole reason for this is because the Bank of Holland had its metal stock increase – causing the price of tulips – OVER A FOUR MONTH TIMEFRAME TO INCREASE 20-fold and then crash within a matter of weeks? All of this while the money supply continued to grow at unpredictable amounts? Really? Here is rate of the crash:


            Here is the money supply:

            Year Total Balances Metal Stock
            1636 3,992,338 3,486,306
            1637 5,680,522 5,315,576
            1638 5,593,750 5,256,606
            1639 5,802,729 5,446,002
            1640 8,075,358 7,823,964
            1641 8,056,232 8,356,437

            After about 4 months the malinvestment was reversed because… the money supply was gone? Nope the gold was still there. Wouldn’t the money-supply driven inflation remained if it really was the initial cause for a singular four-month increase and reversal?

            So, literally, malinvestment occurred within a four-month window from 1936 to 1937 when the money supply went from 3.9M to 5.7M (we don’t know monthly timing) – but an equivalent mania DIDN’T happen when it went from…. Say 5.8M to 8.1M?

          • longshotlouie

            You really did not understand what you read, huh Mattie?
            Either that or you did not read it at all. You really have trouble when you can’t refer to your script.


  • Fred the Protectionist

    “Monetary inflation leads to malinvestment and causes the boom phase of the business cycle. Once the malinvestment is realized the bust phase occurs, and these malinvested resources need to be liquidated in order for the economy to recover.”

    Monetary inflation doesn’t cause booms and busts where ‘recources are malinvested’, all monetary inflation does is destroy savings whether in money or assets. SA-VINGS.

    And if there is monetary inflation then where is the wage inflation? They go hand in hand.

    • Lost Knowledge

      Looks like your getting commodity inflation instead of wage inflation.

    • gander

      inflation is a result of increased money supply. when banks and individuals have more money they are less discerning about how they spend it. thus, malinvestment happens more often. and people’s savings become more worthless. inflation is a result like the malinvestment, not the cause. ron knows this and he mispoke. big deal.

      • Fred the Protectionist

        No. Free Traders like Ron Paul deliberately leave out wage inflation when discussing the massive amount of money the FED printed because it doesn’t fit their preconceived notions.

        The massive influx of money (M1-M3) started at the exact moment the massive trade deficit began in 1995, but that money didn’t stay here in the United States, it went out into the world as the misnamed “petro dollar”. That is why there isn’t wage inflation, only goods and services inflation. (real) (cumulative)

        • SS

          …. and commodity inflation.

          Is your premise that there is no inflation?

          • Fred the Protectionist

            I guess I’ll have to wait till the misnamed petro-dollar to crash for you types to understand what’s really going on.

          • longshotlouie

            Keep shifting that blame, sean

    • Fred the Protectionist

      “Monetary inflation leads to malinvestment and causes the boom phase of the business cycle. Once the malinvestment is realized the bust phase occurs, and these malinvested resources need to be liquidated in order for the economy to recover.”

      Was there “Malinvestment” in the hyperinflated Wiermar Republic, or the southern states during the US Civil War where their great and wonderful anarco-capitalist government printed money instead of taxed (very Libertarian/neocon). No, just savings were ruined., and wages inflated along with the cost of goods and services.

      • Your mom’s man

        Did you decide to be a troll or were you born this way?

      • SS

        Freddie is confused again. Let’s give him a chance to reread his lastpost and tell us why he compared apples to oranges.

        • Fred the Protectionist

          At least I am comparing apples to oranges, you guys are comparing nutsacks to cigarette lighters.

          • longshotlouie

            The sound of an empty gun.