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Larry Kudlow: This is story No. 1, Ben Bernanke and the Fed’s ominous warning: growth will be much slower than expected, unemployment will be at 8.6% a year from now, and the Fed stands ready to buy mortgage backed bonds; more quantitative easing. How do we solve all this? Well, Congressman Ron Paul is our special guest tonight. We welcome back to the show Texas Congressman Ron Paul, who is obviously a Republican Presidential candidate as well. He is also an expert on Federal Reserve policy who is following Ben Bernanke’s news conference today. Congressman Paul, welcome back to the program. I just want to get your take and pick your mind on a couple of Bernanke’s key statements. Probably the most provocative thing was that he argued to help housing and to solve the high unemployment. The Fed stands ready to buy mortgage-backed bonds, which would mean more Quantitative Easing. What’s your thought on more QE and buying bonds?
Ron Paul: By the way, I think we’re still in QE because he’s guaranteed that interest rates are going to stay at about 0% for the next couple of years. But to buy more just exasperates our problem, we’re just transferring debt from one group to another group; basically from those who held this mortgages to the taxpayer. And I see no benefit from this whatsoever, I think we don’t get the correction that we need. We need some of that debt liquidated, we need some of that mal-investment taken care of, we need prices to go down. So he’s doing, from my viewpoint, exactly the opposite of what he should be doing.
Larry Kudlow: Well, that’s interesting, because some of the reporters asked him, given his relatively gloomy assessment of the economy – I mean, unemployment is expected to be near 9% even a year from now – “What went wrong?” We’ve had all these Fed activism as you point out, 0% interest rates, QE1, QE2, and Bernanke basically said, “Bad luck”, he basically said, “Bad luck” was the problem. What would you answer? How would you respond to Bernanke?
Ron Paul: Well, somebody asked me this yesterday, “What should he do?” and I said what I would really like to hear that he’s thrown in the towel and he’s giving up, that he admits that his theories are wrong and that all this QE stuff doesn’t work. But, you know, really right now the consequence of all this, and I know nobody looks at the money supply anymore, but M1 is growing at a 30% rate for these past 6 months. So that’s a lot of quantitative easing. And to continue to do this for ever and not talk about getting the tax rates down and get taxes lower with cutting spending, if we don’t do that, all the QEs in the world won’t solve our problems, it will eventually destroy our currency. And the world financial markets are not receiving what he’s saying or doing or what anybody else is saying or doing, because they’ve all studied from the same economic text books and I’d like to get them to think about free markets and how they should work.
Larry Kudlow: Congressman Paul, let me ask you about another Bernanke statement. He maintains that inflation is not going to be a problem, this despite the fact that, as you may know, the Consumer Price Index is up 3.9% in the last 12 months; oil and energy prices are still historically rather high. He says inflation is not a problem, and therefore the door would open for some Fed easings; that was his implication. Your comment on inflation, sir?
Ron Paul: Well, I think he’s wrong and I think the inflation is here because I start with the increase in the money supply, and I’ve already mentioned that. But I don’t believe the government statistics on CPI because if you look at this from the old measure of the CPI, actually it’s over 9%. And if you look at the unemployed and the low-income people, their inflation rate is always much higher. But if he’s admitting it’s almost 4% already, that’s pretty big. And besides, he doesn’t know exactly what the rate will be next year, I don’t know, I don’t believe you know exactly what it will be. It could be much, much worse because there are a lot of factors that go into pushing prices up. But we know that the stimulus has been put out there, and all we need to do is have a multiplier effect, and this thing could get way out of control and eventually I believe that’s what’s going to happen.
Larry Kudlow: Alright, 1.6 trillion dollars in excess reserves, the Fed could go into it. Let me ask you about another one. Bernanke was asked about Republican criticism of his policies, you, of course, being among them. As a Fed expert, you’ve been very critical of Bernanke. They asked, “So what are you think of them? He said, “I don’t listen to them, the Fed has to be independent”. I want to ask you, what would a President Paul do? What do you think about the Fed, how to reform it?
Ron Paul: Well, the whole thing is, to them independence is one thing, but to me that’s secrecy and I don’t think it should be secret. Of course, my ultimate goal would be to diminish the power of the Fed to monetize debt, because that gives the incentive for the members of Congress to spend forever. If we didn’t have the Fed to be the lender of last resort, interest rates would go up and that would restrain the Congress. So, in the mean time, because I can’t get competing currencies going, I would say the more transparency, the better. And I think it’s great that’s he’s being forced to hold these press conferences, I think it’s great that the country now, in the last 3 or 4 years, has come to look at the significance and the importance of monetary policy. 5 or 10 years ago I never dreamed this would happen. I think we’re making great progress, the American people are now with my arguments, 65% Americans believe now that we should have more transparency of the Fed, and that’s why he’s holding these press conferences. But he is going to be stubborn, because for him to do what I want him to do, he’d have to admit his whole career was misdirected. So that’s not going to happen, eventually you’d have to have a new Fed chairman at least to look at this thing differently.
Larry Kudlow: Congressman, you have said, as I recall – this will be the last question – that if you were elected, you would not reappoint Bernanke. Is that the case?
Ron Paul: Absolutely.
Larry Kudlow: And who might you reappoint? I think you actually indicated a name at one point, did you not?
Ron Paul: Yea, I did the other day, and you may know him, it’s somebody that I have admired for a long time. He’s very bright, he’s known on Wall Street, and that’s Jim Grant. And I think he’s capable because he is a free market person, he understands sound money, and I think if he had to work within the system, he would be able to restrain the Fed money machine as much as anybody else could.
Larry Kudlow: Jim Grant is an old friend of mine and a frequent guest on this program. Congressman Ron Paul, thank you for helping us, sir, good luck on the campaign trail.
Ron Paul: Thanks a lot.
Larry Kudlow: Alright, by the way, Jim Grant is a staunch advocate of gold, it’s interesting that Ron Paul would like to see Grant run the Fed.