Location: House Financial Services Committee
Hearing: Unwinding Emergency Federal Reserve Liquidity Programs and Implications for Economic Recovery
Ron Paul: I thank you, Mr. Chairman. Welcome, Chairman Bernanke. On February 24th we had our Humphrey-Hawkins meeting here and I asked some questions about some of the things the Fed had done in the past, and the comments that you made included the fact that you considered this rather bizarre what I was saying. Chairman Frank followed up with sending a letter and asking to get some clarification for you to look into, and even suggested that you and I get together so I can present exactly what my concerns are and see if we can resolve it. And I am certainly open to that so I hope that we can follow up on that and the suggestions of Chairman Frank.
Also, I wanted to make a comment about the March 19th ruling at the US Court of Appeals in Manhattan because once again the Federal Reserve lost their case against, I guess it was Bloomberg filing [under the] Freedom of Information Act, for information dealing with the $2 trillion of loans during the crisis. Of course that was ruled in lower court and the court of appeals has upheld this and the main argument the Fed uses in the court as well as here in the hearings is that if we knew so much about these banks and where these loans are going, it would stigmatize these companies and banks and do harm to their reputation make our problems worse.
I sort of understand that argument even though I don’t agree with it because in a way that challenges the whole notion of what the SEC exists for. They want accounting procedures. They don’t want to hide information and if they do, if it’s not out in front, it deceives the investors, so in a way the SEC is fighting to get information, to notify investors, and if they don’t do it right they get charged with fraud but it seems to be perverse that the Federal Reserve takes a different position that if a company’s in trouble, or a bank is in trouble, “We don’t want to do this, we don’t want to let the customers know.” So I find that rather challenging because I think revelation of what’s going on, what’s going on especially now with the financial crisis, what the American people want.
I’m also interested in finding out someday whether or not you will appeal this case that was ruled on March 19th, and I think the taxpayers would like to know, “How much does the Federal Reserve really spend on their legal counsels?” I am sure there are a lot of lawyers and I know you don’t have to come to the Congress to get an appropriation for this, so I’d like to know how you pay these bills and how much you pay.
So these are the things that we need to talk about, but also in the question and answer session I do want to bring up some specifics about the challenges that you have for someday maybe shrinking the balance sheet. And I will pursue that in the question and answer period. Thank you.
(Question & Answer Period)
Ron Paul: I thank the gentleman for yielding. I imagine everybody agrees that the increase in the monetary base in this last year and a half is probably historic. I don’t think we have much in our history to look back at as a precedent, so I would assume that we can’t look back too easily and look at trying to solve a problem like this and what we have to do and how much the monetary base has to shrink. As we talk about this I think most people assume that they’re waiting for a signal from you when the balance sheet might shrink. But even in the Depression when it shrunk 16%, it wasn’t done purposely, it was the way the system was working back then. Can you give me a rather quick answer on this? Do you have any idea what percentage the base should shrink or might shrink? Or is that something that you don’t even want to address?
Ben Bernanke: No, I think we would like to bring the balance sheet back to something consistent with where it was before the crisis, which means enough to accommodate Americans’ demand for currency plus a modest amount of reserves in the banking system and that would suggest something under a trillion dollars, I think would be…
Ron Paul: A trillion dollars?
Ben Bernanke: Or less, yes.
Ron Paul: Of course that would be very unprecedented. During the crisis that Paul Volcker had to deal with from 1979 to 1982, it was considered a major problem. The inflation got out of hand at 15%, and he had to come in and do something. And I guess the question is, how much did he have to shrink the balance sheet during those three years?
Ben Bernanke: Well, not very much. He was focused on money growth in particular. So he wasn’t clearly in a situation where we are now, with these large unused balances. I mean, I would point out that he was focused on M1 and M2 growth. M1 and M2 are not doing anything now; they’re very flat. It’s just the base, as you point out.
Ron Paul: Excuse me, but the truth is, is that during that time which was considered very tight money, the monetary base was still growing. During those three years the monetary base grew 31%. So my suggestion is, it might not be so easy to cut back because even in the midst of an inflationary crisis like that, because maybe in six months or a year from now when you decide to do something, maybe there will be an increase in M1 and M2 and then it will be a different ballgame when you’re dealing with this.
I have another question dealing with something you said on page 4 when you talk about one tool that you will have because quite frankly, I think if we get into a situation where this housing crisis reemerges, which I believe it is, it is going to be difficult for you to do what you say because that’s why you have been obviously hesitant to do anything.
You said one of your tools would be to pay interest on the balances, and that will cause banks to do different things and borrowers to do different things and of course I see that as a method of price fixing. In the early part of the last century, the free market economists said that socialism couldn’t work. It wouldn’t work. It would fail. And socialism and communism would fail because of pricing. You know, I assume that you would endorse this principle that wage and price controls isn’t necessarily the best way to handle rising prices. Is that a safe assumption?
Ben Bernanke: Absolutely.
Ron Paul: OK. My question, my concern in economic policy is, isn’t fixing interest rates in order to get the economy to do something a form a price fixing? The importance of prices in a free market is to tell the businessman and the consumer what to do. If the price is too high, they don’t buy and the businessman responds to supply and demand. Why is that not true in money? Money is one-half of every transaction, so if we’re working on this false assumption, that you’re exempt from market forces, and you have some type of unique ability to say, “Ah, interest rates are different. I know what is best. I know what they should be. They should be 0% for 15 months instead of 16 months.” Why does that logic not apply to fixing interest rates?
Ben Bernanke: Because if you believe that wages and prices are not perfectly flexible and there are many that are not, then the economy can get pushed away from full employment, as it obviously is today. And economists of all stripes, including Milton Friedman and others, agree that using monetary policy, monetary policy can be a useful tool to try and create growth and stability. In this particular case, low interest rates create more demand and can help bring the economy back to full employment. Now obviously there are limits to that and we recognize those limits, but changing the interest rate is really just the other side of changing the quantity. Quantity and price are two sides of the same equation, as you know. So we can either change the quantity or we can change the price. By changing the price we affect economic activity and try to achieve the objectives that the Congress has given us.
Ron Paul: Well, my fear is that your results will be the same as wage and price control.