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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 President’s 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 don’t.
MR.
PAUL: Because they were charging that there was a problem with General
Motors, and
then there was a spike in GM’s 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 don’t know. I am sorry, I don’t 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 – 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 – would you agree that this assumption – 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 don’t 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 don’t 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 don’t have monetary inflation,
we don’t 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 doesn’t 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 doesn’t come on and keep the nominal wage up, have the
real wage come down and sort of deceive the working man. But it really
doesn’t 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 can’t we just say economic growth is good and it
helps lower prices because it increases productivity?
MR.
BERNANKE: Congressman, I agree with you. Growth doesn’t 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 – and that you have
control on – 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.
Ron Paul
www.house.gov/paul
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Congressman
Ron Paul of Texas enjoys a national reputation as the premier advocate for
liberty in politics today. Dr. Paul is the leading spokesman in Washington
for limited constitutional government, low taxes, free markets, and a return
to sound monetary policies based on commodity-backed currency. For more
information click on the Project Freedom website.
Published
with the authorization of Dr. Paul.
Copyright
Dr. Ron Paul
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