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


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.


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.

  • ptoutlet

    I really hope he runs 2012, hopefully it won’t be too late but it probably will. With the turnaround we have seen in America recently I think this would be his best chance, even if it is too late, we will need someone to sort out the mess. Its an ugly job but I know Mr. Paul is capable.


  • tlbodine

    Actually I just looked up that this is Dr. William Poole, he was President of the St. Louis Federal Reserve from 1998-2008

  • tlbodine

    It’s incredible to hear a Fed economist admit that the end game of this scenario would indeed be “rip roaring inflation

  • ForrestJBradbury

    There’s a ring of truth to what Ron says. Must be because it’s… THE TRUTH?!

  • This country needs Ron Paul. His understanding of the Constitution, and monetary policy is second to NONE. His voting record, and bills introduced prove this.

  • n8uje

    This country needs Ron Paul. His understanding of the Constitution, and monetary policy is second to NONE. His voting record, and bills introduced prove this.

  • manmanguy

    Quite sure the man in the background is a zombie waiting to feast on human flesh.

  • NCIcaucus

    Ron Paul is surrounded by idiots!

  • manmanguy

    Why does RP’s name-tag say “Mr. Paul” instead of “Dr. Paul”. It’s kind of rude. Look, there is a zombie behind RP at 1:38!!!!!!

  • uturniaphobic

    the “lender of last resort”…anyone else see a warning in that phrase?….the lender of…LAST RESORT! dang! they spend like drunken sailors! count me out!

  • stormcrow2525

    We wouldn’t have these ‘business cycles” Boom and Bust, if it weren’t for Keynes theories and the FED.

  • muckypup1975

    Ron paul owns

  • TheTrueGamble

    I love Ron Paul!

  • tetrasin

    I try to talk to people I don’t know about Ron in hopes they will find out what we have!

  • ChavonnNishino

    I hate it when congressman paul says, “I yield back.” makes me quiver.

  • heatfix04

    I love you Dr. Paul!!! you are so consistent with your views unlike anyone else that runs our country. We can only hope you run in 2012..

  • shenron278

    LOL look at that dumb ass on the left, hangin his jaw open like he doesn’t know where he’s at… is he really one of our representatives? holy shit

  • Dude on the left – I know you don’t have the brain capacity to understand Ron Paul’s amazing wisdom, but would you at least close your damn mouth and stop looking like a retard.

  • israelandersonvideo

    Dude on the left – I know you don’t have the brain capacity to understand Ron Paul’s amazing wisdom, but would you at least close your damn mouth and stop looking like a retard.

  • KENTEA2011

    Getting back to basics!! Keep asking those ‘WHY questions’ 🙂