Monetary Policy and The State of the Economy hearing before the Committee on Financial Services, U.S. House of Representatives, February 27, 2008
The CHAIRMAN. 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 you.
The CHAIRMAN. 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.
The CHAIRMAN. 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?
Mr. 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?
Mr. BERNANKE. 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.
Mr. BERNANKE. 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.
Dr. Ron Paul is a Republican member of Congress from Texas.