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Monetary Policy
and The State of the Economy hearing before the Committee on Financial
Services, U.S. House of Representatives, July 20, 2006
The CHAIRMAN
[Leach]. The committee will reconvene. And the next person in line is our
good friend from Texas,
Mr. Paul.
Mr. PAUL. Thank
you, Mr. Chairman. 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 4 or 5 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 Federal
Reserve, 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 price 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 price. But back to the issue of
meeting. You tell me it meets irregularly, but are there minutes kept, or are
there reports made on this group?
Mr. BERNANKE. I
believe there are records kept by the staff. There 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 this 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 characteristic of an economy that is based on a 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 workingman 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 to 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 than the underlying capacity of
the economy to produce. Anything that increases the economy to produce, be it
greater productivity, greater workforce, or 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 no control on
– as a burden to the Federal Reserve 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.
Mr. PAUL. I guess
we can –
The CHAIRMAN. The
gentleman’s time has expired.
Ron Paul
www.house.gov/paul
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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