Ron Paul: What If the Fed Couldn’t Buy Government Debt?

If the Fed couldn’t buy government debt, interest rates would go up and the Congress would have to cut back spending.

Date: 01/26/2011

Transcript

Ron Paul: Thank you, Mr. Chairman. And I appreciate you holding these hearings, because the subject of unemployment certainly is one issue that everybody in the Congress agrees with. We’re worried about it. We need more jobs—Democrats, Republicans, everybody wants to do something with it. But the big problem seems to be that everybody has a different answer. Some people want to increase the spending, others want to decrease the spending. Some people want to increase taxes, other people want to decrease taxes. Then it comes to some saying there’s not enough regulations, and some say that there’s too much regulation. And some people think we can print our way out of it. And that’s where the problem comes from.

I think what the problem really is that we fail to ask the right questions. Why do we have unemployment? Well, it might have to do with the fact that we have a recession. Well, why do we have a recession? We can’t have recessions unless we understand that there’s been a boom period, and there’s a cycle. So it’s really dealing with the business cycle, why we have boom times, and what we do about that. Rather than just dealing with the symptom, I think we have to look at the overall cause of why we have these boom periods, and then we have the inevitable corrections. And that brings us unemployment. So tinkering around the edges, and saying that we can change taxes or regulations will solve our problem, I think we’ll be missing the boat. And I yield back.

[Break.]

Ron Paul: … first say that I was very pleased with Congressman Royce’s [R-CA] remarks. I do want to follow up with Dr. Poole, especially because you had a lot of emphasis on the debt and the deficit that we’re running up. Of course, many people have been talking about that lately. I became fascinated with that subject as far back as the early 1970s with the significant change in our monetary policy, because it was very clear to me and many others that this is what it would lead to. It would lead to massive spending, massive deficit, and a massive increase in the size of government. And that’s where we are. We’re at a point of no return and no solutions. So I’m not a bit surprised that this has happened.

Now, I don’t like to separate the two—have the deficit problem here, and the monetary problem over here—because I think they’re connected. This is what I want to ask you about.

Now, if—I know this is not on horizon, it’s not likely to happen, I know some of the downside arguments from this—but just dealing with the question I’m going to ask, dealing with the deficit, what if the Fed couldn’t buy Government debt? What would that… what kind of pressure would that put on the Congress to act differently?

Dr. Poole [Dr. William Poole, President and CEO of the Federal Reserve Bank of St. Louis]: Congressman, let me answer this, address it, in two pieces.

It’s been known since the late 1970s that the demographics were moving in the direction, and starting in 2010 there would be the beginning of the retirement of the Baby-Boom Generation, and that the entitlements in effect would become untenable with the very large change in the demographic structure, labor force. That was known in the late 1970s, and economists and others have been preaching about that without any effect.

When we talk about a monetary policy adjustment—whatever you want to call it—of the type that you have in mind, it is critical to know what the alternative is. My teacher and mentor, Milton Friedman, always used to say, “You can’t enter a horserace without a horse.” So, you may not like the horses that are in the horserace, but you’ve got to have a horse to enter that race.

Ron Paul: But Milton Friedman also suggested very strongly that he would replace the Fed with a computer. And that’s the way he would regulate the money supply. But my suggestion here is that, if the Fed didn’t buy the debt, interest rates would go up. With interest rates going up, the burden would fall on the Congress, because they would have to cut back, because they would be consuming all the savings. Of course, now, today, we just create our so-called capital out of thin air.

But another question to follow up on this is… With an individual, when they get into trouble, if they have too many credit cards, if they have too much debt, and they get new credit cards, and on and on, but finally it has to come to an end. And they have to make a decision. They declare bankruptcy and liquidate that debt, and maybe get a chance to start over again. Or they might decide, “Well I have to pay my debt down. I have to work harder, get an extra job. My wife has to work. But cut spending!” And they do that, and they can get their house in order again, and then their standard of living might grow again. I don’t know why those rules can’t apply to government as well.

But isn’t true that, in recent decades, we don’t do anything to allow liquidation of debt. Matter of fact, that’s the greatest sin of all, to allow the liquidation of debt. And it is the liquidation of debt that allows the growth to come back. So how do we get growth if we don’t liquidate debt? All we do is transfer the debt. The people who make a lot of money on Wall Street, and the Fannie Maes and the Freddie Mac, and then they get into trouble, and we buy out, we buy up this illiquid debt, the worthless debt, and put it into the hands of the taxpayer, and the problem still exists. How in the world can we get growth again if we don’t liquidate the debt? Or do you buy into the school that said, “That’s unimportant. We don’t need to. We can just build debt on debt, and keep it going forever”? So how do you rationalize and how would you solve this dilemma?

Dr. Poole: I’ve tried to be very clear that we will have a crisis ahead of us if the federal budget is not fixed in very significant ways, and that the “fix” has to focus on spending. I thought I was very clear about that. We will follow the course of Greece, of Ireland, and of the other countries of Europe—Portugal—that are under the greatest pressure right now. We’ll get there if this problem is not fixed. We won’t get there in quite that way because the—quote—“solution,” the result will be a rip-roaring inflation. See, every inflation in the history of the world has come about—great inflation—because of fiscal imbalance.

Ron Paul: See, I agree with that. But I think there’s a much closer connection. I think the Federal Reserve allows Congress to be irresponsible. And if they didn’t facilitate the debt—the Fed is the Great Facilitator of Big Government and debt—if they weren’t there to buy up this debt, believe me, we’d be much more responsible about how we manage our affairs. And I yield back.

168 Comments:

  1. Ron Paul – a modern day prophet. A true hero.

    »crosslinked«

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  2. TheUndergroundrebel1

    I think Ron Paul should of been President instead of NOBAMA LOL he ant done shit but run his mouth and give money away to corporation that don’t need it.

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  3. FACILITATOR: one that helps to bring about an outcome by providing indirect or unobtrusive assistance, guidance, or supervision.

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  4. R P is a genius. This man is constantly heard but, they never listen to him and put something into action.

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  5. Maybe everyone lost track of the numbers and principles that are supposed to make the ‘economy’ and in the process it became some kind of ethereal thing, or myth or fantasy.

    Economic cycles? why should that explain the falling of the economy? or the fact that people are broke because spending is higher than income even among responsible people.

    Economy should not be based on gambling, if anything it should based on concrete numbers which correlate with needs, number of people, which should show some cycles according to ‘wants’ rather than needs.

    Currency is a genuine problem, ilegal of everything compunds all problems because legalized slavery in a competing country can bring down any balanced economy in other.

    So, we have problems, now let’s fix them with honesty and real projection (no gambling).

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  6. hairy faggot

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  7. he completely ignored Ron Paul’s questions, didn’t answer them at all.

    Ron Paul for President 2012!

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  8. We need to audit the Fed so the bankers can’t just give lame answers every time they are questioned.

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  9. President Ron Paul!

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  10. Names are important. The most important thing to be done is to change the name of the “Federal Reserve” which is not federal nor a store of money.

    It could be changed to, for example,

    The Fiat Reissuer.

    Whatever as long as it reflects what it actually is.

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  11. thank you Mr. Paul. now if congress would fix ss and medicare and stop avoidiong it so they can get re-elected. as well as shrink and eliminate overlapping federal agencies and reduce the staff and pay and benefits to meet closer to private industry rates. we’d all be way better off. especially ss. eveytime i hear “your not going to take my check i paid in,” i wince….soon enough that will change to “i wish i was still getting a check,” while these same are back to work at walmart greeting people at the door and pushing shopping carts back into the building. we need Mr. Paul as president, like a no legged man needs a wheelchair. we can’t wait for someone else to fix this decades from now when it’s impossible to fix, we need someone who can fix it and fix it now.

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  12. whoes that guy answering the questions?

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  13. Great job Ron!

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  14. You can listen to these solid factual points that perfectly explain why we are in the shape we are. Now look at the morons the parties choose to represent this nation as president! We don’t elect great fiscal intellectuals, economists or professors. We elect soccer moms and actors. Like there’s any wonder why America has been crushed by the bankers.

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  15. Will someone fix the edit so it doesn’t jump around such that you can’t work with it ? Tnx

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  16. ” If the Fed couldn’t buy government debt, interest rates would go up and the Congress would have to cut back spending. ”

    If the government could print the money, as they do in China (and write off their own debt when they feel like it), we would have no such problems… IF the states also were given a hand in it with nullification powers to keep overprinting from ruining the country with huge deficits as done recently. Further, if the dollar were based on the GNP (generally, tied to it), there would be little inflation nor deflation IMO, as the Federal and state governments would fight it out as they should as to valuations of commodities to determine the money supply, and make proper loans as necessary to boost the economy… again, as in China. (that’s what happens when you have engineers running the country instead of lawyers). We have lost to much ground for a simple recovery, but return of Glass-Steagal would be a good start, then habeas corpus, etal. !

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  17. Whether you like him or not one thing is certain..
    This man has been consistent throughout his tenure.

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  18. I have to stop watching Ron Paul vids!!!

    A politician so consistently making that much sense defies logic???

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  19. Totally ISOLATE the US in every way – land, sea, air, electronic… and watch the world crumble – listen to the WORLD Whine about how they miss us… Then, tell them (yes, I know it’s extortion) if they want us back THEY will have to pay.
    Don’t think we have FRIENDS ?

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  20. Ron Paul a great Man…

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