Policy and The State of the Economy hearing before the Committee
on Financial Services, U.S. House of Representatives, July 16, 2008
Without objection, it is so ordered.
Dr. PAUL. Thank
you, Mr. Chairman.
The Federal Reserve doesn’t get to object.
Dr. PAUL. I
think everybody recognizes today that our financial markets are
in a big mess, and I have complained for many years about the Federal
Reserve System. But I would have to say that Chairman Bernanke himself
is not responsible for this mess. Not that I think he has the answers
in this deeply flawed monetary system,
but obviously the seeds of this mess have been planted over a long
period of time. It is more a reflection of the system rather than
that of one individual. It is amazing how panicky people have been
getting, and how everybody is wringing their hands, and yet our
government tells us, well, there is no recession, so things must
be all right. A lot of people are very angry. Yet we know there
is something seriously wrong, with all the mess that we have in
the financial markets. And now we see this morning that inflation
is roaring back, yet it is still way below what the private economists
are saying about what inflation is really doing. But the consumer
knows all about it. It seems like around here, whether it is from
Treasury or the Federal Reserve or even in the Congress, all we
need now is to have a world-class regulator that is going to solve
all our problems, and I think that is so simplistic. From my viewpoint,
what we need is a world-class dollar, a dollar that is sound, not
a dollar that continues to depreciate, and not a system where we
perpetually just resort to inflation and deficit financing to bail
out everybody. This is what we have been doing. It hasn’t been just
with this crisis, but an ongoing crisis. We have been able to pull
ourselves out of these nosedives quite frequently. One of the worst
with the dollar was in 1979. We patched it together. I think the
handwriting on the wall is there is a limit to how many times we
can bail the dollar out, because conditions are so much worse today
than they have ever been. We talk a lot about predatory lending,
but I see the predatory lending coming from the Federal Reserve.
Interest at 1 percent, overnight rates, loaning to banks, encouraging
the banks and investors to do the wrong things causes all the malinvestment.
These conditions were predictable. They were predicted by the Austrian
free market economists. It should surprise nobody, yet nobody resorts
to looking to those individuals who are absolutely right about what
was coming and what we should have done. Even as early as 7 years
ago, I introduced legislation that would have removed the line of
credit to the Treasury, which was encouraging the moral hazard and
the malinvestment. Here, it looks like now we are going to need
$300 billion of new appropriations. So we need to look at the monetary
system and its basic fundamental flaws that exist there, and then
we might get to the bottom of these problems we are facing today.
The gentleman from Texas, who may not be quite so lucky in getting
the answer that he wants.
Dr. PAUL. Thank
you, Mr. Chairman. I want to address the subject of the inflation
being actually a tax. Today, most of us who go home and talk to
our constituents hear a major complaint, and that is the rising
cost of living, especially the cost of gasoline, medical care, food,
and education. Most economists from all fields, whether they are
monetarists or Keynesians, they generally recognize that inflation
is a monetary phenomenon. But it is interesting that once we get
rising prices, very few people talk about the real source and the
cause of the inflation, and they go to saying, well, it’s the oil
companies. They charge too much. That is inflation. Labor makes
too much money, and it is a labor problem. Others just say, well,
it’s just pure speculation, if we didn’t have the speculators, we
wouldn’t have the inflation. Yet, most people conclude not that
we have too much money, but that we don’t have enough. If we only
had more money, we could pay all these bills, which I think is absolutely
the wrong conclusion. What we need is more value in the money. In
terms of gold and other commodities, prices aren’t really going
up. Sometimes they actually even go down. In terms of paper money
worldwide, whether the euro or the dollar, the prices are going
up. But I maintain really that inflation is a tax. If the Federal
Reserve and you as Chairman have this authority to increase the
money supply arbitrarily, you are probably the biggest taxer in
the country. You are a bigger taxer than the Congress, because they
are talking now about a bailout package of $300 billion, and we
will have to raise the national debt to accommodate to take care
of the housing crisis. But you as the Federal Reserve Chairman and
the Federal Reserve Board and the system create hundreds of billions
of dollars without even the appropriations process. Then this money
gets circulated, and some people benefit — the people who get to
use it first benefit, and the people who get to use it last suffer
the consequence of the higher prices. So every time people go and
complain about these higher prices, they should say to themselves,
I am paying a tax. Because whether you are monetizing debt or whatever
or catching up for buying up securities, we have had a free ride
for all these years. We have been able to export our inflation.
We have the Chinese buying up our securities. We haven’t had to
monetize it. But now it is coming home, and you have to buy these
things to prop them up. So I maintain that inflation, as the increase
in the supply of money for various reasons is a tax, it is an unfair
tax, it is a regressive tax, it hurts the poor, it hurts the retired
people more because labor never goes up and keeps up with inflation.
We never keep up with the need for retired individuals to keep up
with the cost of living. So I would like you to comment on this.
Is this completely off base, or is there something really to this?
Every time we see the cost of living going up, we indirectly are
paying a tax.
BERNANKE. Congressman, I couldn’t agree with you more that inflation
is a tax and that inflation is currently too high, and it is a top
priority of the Federal Reserve to run a policy that is going to
bring inflation to an acceptable level consistent with price stability
as we go forward. I would make one distinction, which is that what
the Federal Reserve can control is the increase in prices on the
average, over the overall basket of consumer goods and services.
The enormous jumps in oil prices and other commodity prices are
to some extent at least due to real factors out of the control of
the Federal Reserve. The Federal Reserve cannot create another barrel
of oil. It is the global supply and demand conditions which are
affecting those particulars things to the most significant extent,
but to the extent that the Fed does have influence on the overall
inflation rate, you are absolutely right that it is very important
to maintain price stability, and I take that very seriously.
Dr. PAUL. But
if the oil prices were going up for another reason other than monetary
reasons, other prices would have to come down because there would
be a limit in the money supply. I think — and the prices are going
up today, like I indicated in my opening statement, not necessarily
because of the monetary policy of the last year but maybe for the
last 15 or 20 years and the fact that we were able to export, so
to speak, our inflation. Now it is coming home. Those people who
have been holding these dollars are not wanting to buy them as readily.
Fortunately, foreign central banks are still not dumping them but
even the other central banks might not be as cooperative. So I still
see tremendous pressure. I don’t see any signs that you are able
to do very much because all we hear about is more inflation. You
know, it is not so much that they are too big to fail. It just means
that everybody needs to be propped up. Congress participates in
it. And all the pressure is put on the dollar. It is a dollar bubble.
And I think what we are seeing is the unraveling of a dollar bubble
that had been building for more than 35 years.
Paul is a Republican member of Congress from Texas.