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Ron Paul: I thank the chairman, and I welcome Chairman Bernanke to our hearings. Yesterday Mr. Bernanke said that the economic outlook remains unusually uncertain, and a lot of people would certainly agree with you on that. And yet the free market economist don’t find it unusual; they find it was predictable, they expected it, and they’re also making predictions that current policies are not going to solve our problem. We’ve had 2 years at a chance to take care of this with the usual fiscal and monetary answers, and in the course of these past 2 years we spent 3.7 trillion dollars. In that period of time, the real GDP essentially hasn’t moved and unemployment is a disaster. Yesterday you even mentioned that we lost 8.5 million jobs and the real rate, of course, is much higher. Free market economists say it is over 22%. And even the BRS(?) says it’s at least 16% when you count everybody. But so far we don’t see any good signs of anything happening. But of this 3.7 trillion dollars we spent, it’s interesting to know that it’s almost identical to the number that our national debt went up. And I guess it shouldn’t be too surprising. So we pumped in 3.7 trillion dollars and that’s both, fiscal and monetary, and we end up with more unemployment and the most anybody can say, “Well, if we hadn’t done that, we would have lost even more jobs”. And I think that’s a pretty weak answer for the policies that we have today. But just putting a pencil to this, it’s interesting to note that if we would have taken this 3.7 trillion dollars and put that to these 8.5 million people who lost their job, you could have given them $435,000 an individual. I would think that is not a good result, and it’s a gross misallocation of resources. So the more we pump in, the more we bail out, the more the unemployment goes up. Today’s statistics weren’t very helpful. So something is wrong with this type of stimulus and it just be hoots me to wonder which way are we going, when and where are we going to stop and think that maybe we’re not on the right course. Of course, we can look at more current statistics in the last month or two and say, “Oh, everything is on its way up.” But quite frankly, if you’ve been unemployed and the unemployment is getting worse, they’re not waiting for a double-dip, they’ve been in one big dip. And the fact that there are a few statistics that show that there has been a bump in the financial markets, it really doesn’t reassure the people. So I’m looking for the day that we look at the fundamentals, look at our monetary policy, look at our fiscal policy, and just wondering how did we get in this mess. And someday I would also like to suggest that the people who were right on this for the past 10 years knew about the bubble, warned about the bubble, said this was coming; I don’t even know why we just don’t talk to them and say, “How were you guys right? And what have we being doing wrong?
I yield back.
Ron Paul: I thank the chairman. The chairman mentioned a little while ago about my emphasis on spending. I want to just clarify something: I am not opposed to spending, I’m just opposed to government spending. I want the people to spend, I want them to spend a lot more money. Generally in the past, I’ve often approached economics and monetary policy from a Constitutional viewpoint and, quite frankly, I don’t get very far on that. So I don’t want to push that which is disappointing. And a lot of times I mentioned the business cycle coming from a free market perspective indicating that low interest rates will encourage mal-investment and cause financial bubbles. And I haven’t gotten very far on that, but today I want to approach it slightly differently from a moral viewpoint and see if there is any concern of yours in this regard. Back in 2002 you gave a speech and you said that the people know that inflation erodes the real value of government debt and therefore that is in the interest of the government. And I can understand this because the real debt goes down if you can erode the value of the money. But, to me, there is a moral component to this, because you’re depreciating the currency, you devaluing the currency and I always thought that the purpose of government would be to protect the value of the currency. And people do suffer from this. So, to me, I think that it’s not fair because the people (?) of debt are cheated in many ways. But also there is a moral component, too, when you fix and manipulate interest rates that those who say that old-fashioned idea that people should save and put money in the bank and they have their CDs and they’re still responsible and they want to take care of themselves and they’re elderly and they have CDs, all of a sudden they get 1% or 2% when the market would say they’re getting 6%, or 7% or 8%. That, to me, means they’re being cheated as well. And also, you have emphasized and you have always had a concern about deflation. I think of deflation more as being a monetary phenomenon than prices going down, but your definition is, “If prices drop, you’re having deflation”, and you don’t like that. And you have made attempts to distinguish different reasons for prices going down. But generally speaking, prices going down is helpful. I mean, this helps poor people. You know, why shouldn’t we welcome prices going down so that the people can compete and go in and buy things, rather than protecting profits or the businessman or high labor costs or whatever. The market is supposed to protect the consumer. So to me I still see there is a moral component to that. Could you comment on this?
Ben Bernanke: Certainly. And I think you raised some good points. On protecting the bond-holder, half of the Federal Reserve’s mandate is price stability, and inflation is very low and so people holding bonds are making real returns. Normal interest rates are above inflation. And that is one of the reasons to try and maintain stable prices, which is what we’re doing. With respect to fluctuations in interest rates, normal interest rates are not determined by the market alone, because you need to have some kind of monetary system. Of course, that could be the gold standard; there are many different ways to structure your monetary system. Our current system is a central bank oriented system, as you know. And variations in normal interest rates reflect the monetary policy that we take. But what I’m trying to argue here is that no matter what kind of you have, there is going to be some policy component to interest rates, not just the free market component. On deflation, there have been periods where deflation has not been harmful. In the 19th century there have been some examples where high productivity brought down prices, and that was good. But remember, in general, if prices are falling, wages may also be falling. And the real question is, what is happening to wages relative to prices. I’ll end quickly. The 1930s obviously are a case where a very sharp deflation was counterproductive in helping cause …
Ron Paul: I might respond also the point you make about the latter part of the 19th century when it was beneficial, we were also on the gold standard, and maybe that should be making a strong point.
A very quick question: Is there a point where you might say, “Maybe my theories are wrong, and I have to change my course”? Or will you pursue this for 5 more years, or 10 more years? What would it take to make you reassess your basic fundamental ..?
Ben Bernanke: Pursue what? I believe that it is not practical to go to a gold standard, I think we have to stay with the central bank. But certainly we are modifying our views on the financial system and our monetary policy is reflecting what has happened in the last few years. I certainly believe, as Keynes once said, “When the facts change, I change my mind”.
Ron Paul: But there’s nothing that would come across and say, “This system is failing. If we don’t get the economy moving, maybe just spending and inflating and increasing the balance sheet doesn’t work”. What if the unemployment rate, even according to government statistics, goes up to 20% and we’re worse off in 2 years from now? Would you say, “Maybe we have messed up”?
Mr. Chairman: The gentleman’s time has expired.
Ron Paul: I thank the chairman. So far I don’t think our recovery has gone too well. Matter of fact, I remain pessimistic, just as I remained pessimistic before the crisis hit because it was easily anticipated that bubbles had formed and had to be corrected. But we’ve invested, with fiscal and monetary policy, 3.7 trillion dollars in the last two years. Unemployment has gone up; there have been 8.5 million jobs lost. And if you take the 3.7 trillion dollars that we spent investing in try to preserve this economy, it turns out that we’ve invested about $435,000 per unemployed. You know, you could have taken one forth of this and given them each a $100,000 and maybe the whole country would be better off, or they certainly would be a lot better off. But instead we’re still thinking about tinkering on the edges and taxes and regulations and what are we going to do with monetary policy.
But I have a question dealing with monetary policy for Dr. Meltzer. The 1930s have been well described by many of the monetarist, explaining that there was the allowance of deflation and that’s why we stayed in the depression too long. And those who have studied that have very much to say about policy today and there is no shrinkage of the monetary base. I mean, it’s been doubled and more than two times as high, and things aren’t working. So what would you advice now on monetary policy? They’re talking about even more quantitative easing, but is that necessarily going to do much good? Certainly, we prevented the deflation of the monetary base in the 1930s, but if anybody cared about M3 anymore, which we don’t record, but we do record it in the private sector. M3 was growing at 18% at the beginning of this recession. It’s decreasing at the rate of 6% right now. Real M3 now is down a little bit over the last 2 years: a 100 billion dollars. So that sounds to me like deflation, according to what the monetarist say. And so what do you think quantitative easing is? They’re even talking about buying bonds, which I suspect and predict they will, because conditions are going to get bad. Is this really going to be it, or have we exhausted all our efforts with monetary policy by dealing with the monetary base?
Allan Meltzer: As you well know, we have a trillion dollars worth of excess reserves. People can create, banks can create all the money they want. Adding more excess reserves to that stock is not going to do anything positive for the country. As a matter of fact, the Federal Reserve does not have a serious program for getting rid of those excess reserves over time. And that’s a risk that adds to the uncertainty. People like me worry about the fact that they don’t know how they’re going to bring that sum down. There is no central bank anywhere in the world in a developed country that has more than half of its balance sheet in illiquid long-term securities. None. There has never been a Federal Reserve with a trillion dollars worth of excess reserve, measured in real terms or any terms you want. So we don’t suffer from a need for more monetary policy. We suffer from a need to reduce the uncertainty that hangs over that is deterring businesses because they don’t know what their costs are going to be in the future. They don’t know what the inflation rate will be. The other day I had a dinner with two of the shrewdest and most successful investors. I asked them, “Who do you think is buying U.S. government bonds at 2.8%, 2.9%?” The answer they gave me is an answer I just don’t like to believe. They said, “Well, basically it came down to the ‘greater fool theory'”. Well, the greater fool theory can’t work for everybody, there has to be a greater fool. So they think, “Well, we’ll invest in 2.9% bonds now, but we’ll get out of them in time”. Maybe, maybe. Otherwise we have some loses.
Ron Paul: Do you suspect that the multiplier effect will kick in soon or never, or does it depend on a fiscal policy and what we do in the Congress?
Allan Meltzer: I believe it depends upon increasing … let me say, velocity is way down. I have a chart published, it comes out of my “A history of the Federal Reserve”. It shows base velocity from 1919 annually through 2007. The current numbers are on that chart. That is, we have very low interest rates, we have very low base velocity. That’s not terribly surprising, maybe it’s off a little bit but it isn’t off a great deal. So what we need is the confidence to get investment up. That’s what we need. And again, at the risk of repeating, you have to do things to give businessmen a belief that they know what they’re costs are going to be for the next 5 years.
Ron Paul: I thank you.
Mr. Speaker: The gentleman’s time is expired.