Exclusive Conversation With Ron Paul: The Future of the Federal Reserve

President Obama's financial regulatory plan has created controversy over the role of the Federal Reserve in our economy like rarely before. The person in Congress with perhaps the most unconventional point of view on these issues in American politics is Congressman and former presidential candidate Ron Paul (R-TX), a longtime critic of the very institution of the Fed and fractional reserve banking. He has recently sponsored a bill that would audit the Fed, which has attracted cosponsors such as Dennis Kucinich (D-OH).

I talked to Congressman Paul about his unique perspective and why the Fed is controversial again.

Me: Do you think the Fed is the main culprit behind the current economic crisis?

Paul: I don't believe you can have financial bubbles without artificially expanding the supply of money and credit, and only the Fed can do that in collusion with the banks, who can operate under fractional reserve banking. So that's where the financial bubbles come from, whether it's housing or the stock market or the bond market. That's the source of the bubble, and that's what has to be addressed, and yet the Fed has been able to operate in secrecy on exactly how they allocate credit and what they do with international markets. So yes, the Fed is the number one culprit.

I guess the response from defenders of Greenspan would be that to jack up interest rates enough to defuse the housing bubble would have been really bad for growth and unemployment, and that was unacceptable at the time.

Yes, and that's why he inflated it instead. It's like a drug addiction. Nobody wants the pain that comes with getting off the drug. But it's more than the pain of avoiding addiction that drives Bernanke. It's a deep-seated philosophy that inflation is the cure, and that it can prevent the correction. But the correction has been locked in place. In the year 2000 it was locked in place. The market was trying to tell us we needed a correction. But it was prolonged so the bubble was made even bigger. This bubble has been going on since 1971 when the dollar became fiat and we had international reserve currency without backing. Ultimately, no matter what the Fed does, you can't prop up a bad system, and that's why this one is different than any recession we've had since 1971.

In a way it's a mini-step, but it's also the reason I have a lot of co-sponsors because I haven't gotten into the controversy of fractional reserve banking and the issue of monetary policy per se. My main goal is to find out exactly what the Fed has been doing, especially in this crisis. Since the crisis has hit, there's been this whole idea of transparency about what the Treasury does with the TARP funds. So now the American people want to know what the Fed does. I believe that reform is inevitable, and that's the second step.

What they're doing with foreign governments, international financial organizations, what they buy and sell, and what markets they interfere with... how decisions are made. We don't have absolute figures, but it's estimated that they might have a guarantee of 3 or 4 or 5 trillion dollars. It doesn't have to be on the books because it might just be guarantees. This is big stuff and the Congress should know about it.

Dr. Ron Paul is a Republican member of Congress from Texas.