My Conversation With Ben Bernanke

Monetary Policy and The State of the Economy hearing before the Committee on Financial Services, U.S. House of Representatives, March 28, 2007

Vice Chair Maloney. The gentleman’s time has expired. We are under the 5-minute rule. Mr. Paul.

Representative Paul. Thank you, Madam Chairman, and welcome Chairman Bernanke. It seems to me too often that we run into our financial problems, and then there is the wringing of the hands, and yet many have

predicted that we are going to get into these problems. For instance, in the 1990s it was not a total surprise to a lot of people that things were out of whack when it came to the NASDAQ, and yet the NASDAQ bubble collapses, and people panic, and people get hurt, and then there is an outcry. Well, what we have to do is craft more regulations again. And there has been fraud. Of course all the penalties necessary to take care of Enron were taken care of without new regulations, and the market sort of handled the distortions that were there, but nobody asked the questions: Why was there such distortion? The same way in the housing bubble. The same predictions have been going on for years and years, and yet everybody gets reassured, and everybody knows that we have to spread home ownership to those who do not really qualify, and yet the same bubble is being built, and nobody said: Well, where does all this credit come from? I think we fail to ask the question of what the cause is, and then when the problem hits, then we treat the symptoms, and we say, well, what we need are more regulations. If we would only regulate the lenders we could have prevented these problems from occurring. And I do not buy into that. I do not think it is that simple. And I think we fail too often even to look to the fundamental monetary policy, because easy credit does allow people to do things they would not ordinarily do. When you have interest rates down to 1 percent, and then you subsidize Fannie Mae and Freddie Mac with a line of credit, and then you encourage these loans, I do not see why anybody should be surprised this should happen. But my concern is that we do not look to the cause, which is easy credit. I mean, we have no savings rates, so this credit has to come from somewhere. It usually comes out of thin air. And we end up with these problems. But one measurement that we used to have to sort of indicate what is going on monetarily was the M3 numbers, which I think is an important number. And there is a private source now that reports M3 numbers. And I think, most likely, they are pretty accurate compared to the old M3, and they report that M3 is growing at an over-11 percent rate, which I would think would, you know, get people’s attention if it was an official report from the Federal Reserve. So, it seems like there is almost a distraction from the real cause. Then again, we look at our CPI, and we say, oh, the CPI is not going up so badly, we have no inflation. And yet you look at the cost of housing, the prices of houses are soaring. But they are excluded from the CPI. It just seems like we do not have everything on the table, and that we should be more concerned about monetary policy, per se, rather than saying, well, we have problems; all we need to do here in Congress is if we just wrote more regulations we’re going to solve all our problems. But I have one specific question dealing with the recent crisis coming up and the recent changes in the stock market. And that was on the February 27th was a sudden change in the market, and ours went down over 400 points. On days like that, does the Presidential Working Group on Financial Markets? Do you have meetings to talk about sudden changes in the marketplace like that?

Chairman Bernanke. We did not have a meeting on February 27th. It is a usual practice whenever there is some stress in financial markets for the senior staff deputies to be in touch with each other gather information to see if anything is going on. In this particular case there was no indication, other than the computer problem at the New York Stock Exchange, of any kind of breakdown of markets or anything like that. And so, no further action was taken and no meeting of the principals occurred.

Representative Paul. So, the Working Group has not taken any precise action in the last several months, would you say? Or have you taken some action of some sort? And why is that information not readily available to us and to the markets? Because it would have profound significance if we knew that group was interfering in the marketplace.

Chairman Bernanke. We took no action with respect to the stock market. We released, as you know, a set of principles describing how we believe that oversight of hedge funds and private pools of capital ought to be conducted — principally through a market discipline approach, as we discussed in that document.

Representative Paul. Is there any chance that we would ever get minutes of meetings for the Working Group that the Congress would know more about how the Working Group operates, and how often? I understand it’s more active, and you meet more often than you used to.

Chairman Bernanke. I don’t know what the information gathering is. We meet and discuss broad issues of general importance in the financial area in terms of financial regulation, financial markets. And then if we have findings, we present them to the public in the form of the principles, for example.

Representative Paul. My time has expired. Thank you.

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

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