'Plunge Protection,' Fiat Money, and the Fed
by Ron Paul
From the Hearings on Monetary Policy and the State of the Economy
Committee on Financial Services, the U.S. House of Representatives
July 20, 2006, Washington, D.C.
MR. PAUL: Good afternoon, Chairman Bernanke.
I have a question dealing with the Working Group on Financial Markets. I want to learn more about that group and actually what authority they have and what they do. Could you tell me, as a member of that group, how often they meet and how often they take action; and have they done something recently? And are there reports sent out by this particular group?
MR. BERNANKE: Yes, Congressman. The Presidentís Working Group was convened
by the President, I believe, after the 1987 stock market crash. It meets irregularly, I would guess about four or five times a year, but I am not exactly sure. And its primary function is advisory, to prepare reports. I mentioned earlier that we have been asked to prepare a report on the terrorism risk insurance. So that is what we generally do.
MR. PAUL: In the media you will find articles that will claim that it is a lot more than an advisory group you know, if there is a stock market crash, that you literally have a lot of authority, you know, to impose restrictions on the market. And we are talking about many trillions of dollars slushing around in all the financial markets, and this involves Treasury and, of course, the Fed, as well as the SEC and the CFTC. So there is a lot of potential there.
And the reason this came to my attention was just recently there was an article that actually made a charge that out of this group came actions to interfere with the prices of General Motors stock. Have you read that, or do you know anything about that?
MR. BERNANKE: No, sir, I donít.
MR. PAUL: Because they were charging that there was a problem with General Motors, and then there was a spike in GMís stock prices.
But back to the issue of the meeting. You tell me it meets irregularly, but there are minutes kept, or are there reports made on this group?
MR. BERNANKE: I believe there are records kept by the staff. These are staff mostly from Treasury, but also from the other agencies.
MR. PAUL: And they would be available to us in the committee?
MR. BERNANKE: I donít know. I am sorry, I donít know.
MR. PAUL: The other question I have deals with a comment made by one of the members of the Federal Reserve Board just recently. He made a statement which was a rather common statement made. He expressed a relief that the economy was weakening, mainly Ė inferring that the weakening economy would help contain inflation. And I hear these comments a lot of times, the economy is too strong, and therefore we need a weaker economy. If this assumption is correct Ė would you agree that this assumption Ė that a weaker economy is helpful when you are worried about inflation?
MR. BERNANKE: Congressman, as I talked about in my testimony, we need to go to a sustainable pace. We need to have a pace which matches the underlying productive capacity; that will probably be a bit less robust than the last few years, because over the last few years we were also reemploying underutilized resources, and going forward we donít have that slack to put to work.
MR. PAUL: But if you accept the principle, as it seemed to be in this quote, that if you are worried about inflation, you slow up the economy, and then inflation is brought down, it is lessened, it infers that inflation is caused by economic growth, and I donít happen to accept that, because most people accept the fact that inflation is really a monetary phenomenon. And it also introduces the notion that growth is bad, and yet I see growth as good. Whether it is 3 or 4 or 5 or 6, if you donít have monetary inflation, we donít need to worry, because if you have good growth in the marketplace rather than artificial growth, that it is this growth that causes your productivity to increase. You have an increase in productivity, and it does help bring prices down, but it doesnít deal with inflation.
And I think what I am talking about here could relate to the concerns of the gentleman from Massachusetts about real wages. There is a lot of concern about real wages versus nominal wages, but I think it is a characteristic of an economy that is based on fiat currency that is just losing its value that it is inevitable that the real labor goes down. As a matter of fact, Keynes advocated it. He realized that in a slump, that real wages had to go down; and he believed that you could get real wages down by inflation, that the nominal wage doesnít come on and keep the nominal wage up, have the real wage come down and sort of deceive the working man. But it really doesnít work because ultimately the working man knows he is losing, and he demands cost of living increases.
So could you help me out in trying to understand why we should ever attack economic growth? Why canít we just say economic growth is good and it helps lower prices because it increases productivity?
MR. BERNANKE: Congressman, I agree with you. Growth doesnít cause inflation; what causes inflation is monetary conditions or financial conditions that stimulate spending which grows more quickly that the underlying capacity of the economy to produce. Anything that increases the economy to produce, be it greater productivity, greater workforce, other factors that are productive, is only positive. It reduces inflation.
MR. PAUL: Do you see our deficits that we produce Ė and that you have control on Ė as a burden to the Fed in managing monetary affairs and maintaining interest rates as well as maybe even living with a lower increase in the money supply?
MR. BERNANKE: Well, in our short-term monetary policymaking, we are able to adjust for the conditions of fiscal policy, however they may be. I think fiscal issues are more important in the long-term sense because of the long-term obligations we have, for example, for entitlements. We have not found the fiscal situation to be a major impediment to our short-term management of monetary policy.
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