Policy and The State of the Economy hearing before the Committee
on Financial Services, U.S. House of Representatives, February 27,
Without objection, the gentleman and any other members of the committee
who wish to submit written statements will be allowed to do so.
There will be no need for further requests. We will have general
leave for everybody.
Dr. PAUL. Thank
And Chairman Bernanke’s full remarks will be submitted as well.
Dr. PAUL. Welcome
to the hearing this morning, Chairman Bernanke. Obviously, the world,
and especially we in this country, have come to realize that we
are facing a financial crisis, and I think very clearly it is worldwide.
That of course is the first step in looking toward solutions, but
I would like to remind the committee and others that there were
many who anticipated this not a year or two ago when the crisis
became apparent, but actually 10-plus years ago when this was building.
The problem obviously is in — the major problem is obviously in
the subprime market, but, you know, in the last — in one particular
decade, there was actually an increase, in $8 trillion worth of
value in our homes, and people interpreted this as real value, and
$3 trillion was taken out and spent. So we do live in an age which
is pushed by excessive credit, and I think that is where our real
culprit is. But traditionally, when an economy gets into trouble,
and they have inflation or an inflationary recession, the interpretation
is always that there is not enough money. We can’t afford this,
we can’t afford that. And the politics and the emotions are designed
to continue to do the same thing that was wrong, that caused our
problem in the first place; that is, it looks like we don’t have
enough money. So, what does the Congress do? They appropriate $170
billion and they push it out in the economy and think that’s going
to solve the problem. We don’t have the $170 billion, but that doesn’t
matter. We can borrow it or we can print it, if need be. But then
again, the financial sector puts pressure on the Fed to say, well,
there’s not enough credit. What we need to do is expand credit.
But what have we been doing for the past 2 years? You know, it used
to be that we had a measurement of the total money supply, which
I found rather fascinating, and still a lot of people believe it’s
a worthwhile figure to look at, and that is M3. Two years ago, the
M3 number was $10.3 trillion. Today it is $14.6 trillion. In just
2 years, there has been an increase in the total money supply of
$4.3 trillion. Well, obviously, if you pump that much money into
the economy and we’re not producing, but the money we spend comes
out of borrowed money against houses, where the housing prices are
going down, and that is interpreted as increasing our GDP, I mean,
it just doesn’t make any sense to come back and put more pressure
on the Congress and on the Fed to say what we need is more inflation.
Inflation is the problem. That has caused the distortion. That has
caused the malinvestment, and that is why the market is demanding
the correction in the malinvestment and the excess of debt which
is not market-driven.
Thank you. The gentleman from Texas, a ranking member of the subcommittee.
Dr. PAUL. Thank
you, Mr. Chairman. Chairman Bernanke, earlier you were asked a question
about the value of the dollar, and you sort of deferred and said,
u2018u2018You know that is the Treasury’s responsibility.” I always find
this so fascinating, because it has been going on for years. Your
predecessor would always use that as an excuse not to talk about
the value of the dollar. But here I find the Chairman of the Federal
Reserve, who is in charge of the dollar, in charge of the money,
in charge of what the money supply is going to be, but we don’t
deal with the value of the dollar. You do admit you have a responsibility
for prices, but how can you separate the two? Prices are a mere
reflection of the value of the dollar. If you want to control prices,
then you have to know the value of the dollar. But if you are going
to avoid talking about the dollar, then all you can do then is deal
with central economic planning. You know, if we stimulate the economy,
maybe there will be production and prices will go down, and if prices
are going up too fast you have to bring on a recession. You have
to try to balance these things, which I think is a totally impossible
task and really doesn’t make any sense, because in a free market
if you had good economic growth you never want to turn it off, because
good economic growth brings prices down just like we see the prices
of computers and cell phones, those prices come down where there
is less government interference. But you know the hard money economists
who have been around for a while, they have always argued that this
would be the case. Those who want to continue to inflate will never
talk about the money, because it isn’t the money supply that is
the problem, it is always the prices. And that is why the conventional
wisdom is, everybody refers to inflation as rising prices, instead
of saying inflation comes from the unwise increase and supply of
money and credit. When you look at it, and I mentioned in my opening
statement that M3, now measured by private sources, is growing by
leaps and bounds. In the last 2 years, it increased by 42 percent.
Currently, it is rising at a rate of 16 percent. That is inflation.
That will lead to higher prices. So to argue that we can continue
to do this, continue to debase the currency, which is really the
policy that we are following, is purposely debasing, devaluing a
currency, which to me seems so destructive. It destroys the incentives
to save. It destroys — and if you don’t save, you don’t have capital.
Then it just puts more pressure on the Federal Reserve to create
capital out of thin air in order to stimulate the economy, and usually
that just goes in to mal-investment, misdirected investment into
the housing bubbles, and the NASDAQ bubble. And then the effort
is once the market demands the correction, what tool do you have
left? Let’s keep pumping — pump, pump, pump. And it just is an endless
task, and history is against you. I mean, history is on the side
of hard money. If you look at stable prices, you have to look to
the only historic, sound money that has lasted more than a few years,
fiat money always ends. Gold is the only thing where you can get
stable prices. For instance, in the last 3 to 4 years, the price
of oil has tripled, a barrel of oil went from $20 to $30 up to $100
a barrel. And yet, if you look at the price of oil in terms of gold
it is absolutely flat, it is absolutely stable. So if we want stable
prices, we have to have stable money. But I cannot see how we can
continue to accept the policy of deliberately destroying the value
of money as an economic value. It destroys, it is so immoral in
the sense that what about somebody who saved for their retirement
and they have CDs. And we are inflating the money at a 10 percent
rate, their standard of living is going down and that is what is
happening today. The middle class is being wiped out and nobody
is understanding that it has to do with the value of money, prices
are going up. So how are you able to defend this policy of deliberate
depreciation of our money?
BERNANKE. Congressman, the Federal Reserve Act tells me that I have
to look to price stability, which I believe is defined as the domestic
price — the consumer price index, for example — and that is what
we aimed to do. We looked for low domestic inflation. Now you are
correct that there are relationships obviously, between the dollar
and domestic inflation and the relationships between the money supply
and domestic inflation. But those are not perfect relationships,
they are not exact relationships. And given a choice, we have to
look at the inflation rate, the domestic inflation rate. Now I understand
that you would like to see a gold standard for example, but that
is really something for Congress, that is not my —
Dr. PAUL. But
your achievement, we have now PPI going up at a 12 percent rate.
I would say that doesn’t get a very good grade for price stability,
wouldn’t you agree?
No, I agree. The more relevant one, I think, is the consumer price
index, which measures the price consumers have to pay. And last
year that was between 31⁄2 and 4 percent. I agree that is
not a good record.
Dr. PAUL. And
PPI is going to move over into the consumer heading as well.
And we are looking forward this year, trying to estimate what is
going to happen this year, and a lot of it depends on what happens
to the price of oil. If oil flattens out, we will do better, but
if it continues to rise at that rate in 2007, it will be hard to
maintain low inflation, I agree.
Paul is a Republican member of Congress from Texas.