My Conversation With Ben Bernanke, February 15, 2006

Monetary Policy and The State of the Economy hearing before the Committee on Financial Services, U.S. House of Representatives, February 15, 2006

Chairman OXLEY. The gentlelady yields back. The gentleman from Texas, Mr. Paul.

Dr. PAUL. Thank you, Mr. Chairman. Thank you, and welcome, Chairman. Mr. Chairman, I was very pleased with what you said about your support for transparency, and I want to ask a question dealing with that. Also, at the bottom of page 8, you said something that I thought was very important, where you said that the Federal Reserve, together with all other central bankers, has found that successful policy depends on painstaking examination of a broad range of economic and financial data, and I also think that’s very important. There is a famous quote by an economist, which I’m sure you’re familiar with, that inflation is always and everywhere a monetary phenomenon. And likewise, another famous economist from the 20th Century, and I’ll paraphrase this, said that monetary authorities deliberately confuse the issue of inflation by talking only about price increases. Yet it’s the price increases which are merely the inevitable consequence of inflation. This is done on purpose to distract from the real cause, which is the increase in the quantity of money and credit. And I notice in your report to the Congress, you do report M2, and it went up last year at four percent. And M3 was not mentioned, other than the fact that it won’t be reported any more. M3, interestingly enough, went up twice as fast, and M3 is going up probably more than two times as fast as the GDP. And this is information that I consider important and I know a lot of other economists consider important. And I find it rather interesting and ironic that one of the reasons that the Federal Reserve has given — of course, this was before you were the chairman — for this change is the fact that it costs money; it costs too much money. Now that is really something in this day and age, especially since the Federal Reserve creates their own money and their own budget and they have essentially no oversight, and all of a sudden it costs too much money to give us a little bit of information. So that to me is a bit ironic that this information will not be available to us. And my question to you is, would you ever reconsider this policy of denying this information to the Congress just so that we have another tool to analyze what’s going on with monetary policy? It seems like with your support for transparency, this should be something that you would heartily support.

Mr. BERNANKE. Congressman, first, you’re absolutely right. We do look at a wide variety of indicators, and money aggregates are among those indicators. In particular, M2 has proven to have some forecasting value in the past, and I think the slowdown this year is consistent with the removal of accommodation that’s been going on. In regard to your references to M3, a still broader measure of money, we have done, and I’m now speaking about the Federal Reserve before my arrival, but we have done periodic analyses of the various data series that we collect to see how useful they are. And our research department’s conclusion was that M3 was not being used by the academic community, nor were we finding it very useful ourselves in our internal deliberations. Now it’s not just a question of our own cost; although, of course, we do want to be fiscally responsible on our own budget, but it’s also I think important for us to recognize the burden that’s placed on banks that have to report this information. And so when we can reduce that burden, we would like to do so. And that was one of the considerations in the decision that was made about M3. Would we reconsider it? If there were evidence that this was an informative series and that it was useful to the public and to the Federal Reserve in forecasting the economy, naturally we would look at it again. There’s nothing dogmatic going on here.

Dr. PAUL. If the Congress expressed an interest in receiving this information, would you take that into consideration?

Mr. BERNANKE. If there was broad interest in the Congress in receiving this information, we would look at it. But, again, Congressman, remember, it’s a burden on the reporting banks to provide the information, and we are trying to reduce that burden as much as we can.

Dr. PAUL. But, of course, this has been available to the financial community for a lot of years, and for some people it’s very important to measure what you’re doing. If the money supply is important, which a lot of people believe it is, and it causes the inflation, this to me seems like we’re taking information about the money supply and literally hiding it from the people. And I yield back.

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

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