Ron Paul - Ben Bernanke April 2, 2008

Economic Outlook Hearing, Capitol Hill

(Watch the video here.)

Paul: There is a political philosophy that advocates the merging together of the interests of business and government, at the same time with the loss of civil liberties of the people. And I’m afraid we’re moving in that direction, not just in the last year or two, but over many, many years.

When you think about -- especially since 9-11, there has been some loss of civil liberties that we shouldn’t be unconcerned about.   There are warrantless searches, there’s no really financial privacy or medical privacy in this country.   Habeas corpus has been challenged, as well as the internet, privacy is being challenged.  The civil liberties have been challenged.

But the combination of business and government has been ongoing for a good many years -- I would say possibly for 100 years -- but more so now, and I see what we’re doing today, or at least the proposal by Treasury, as a massive move for a lot closer association of business and government.

Most everybody’s aware of the military-industrial complex and the combination of how military contractors and government are in bed together.  Now we have a medical-industrial complex.  The media is very much involved with government.  In just about everything we have, government and businesses are very much involved. 

But the original purpose of our government was [for the people] to regulate the government, not for the government to regulate the people.  There really isn’t any authority for the government to tell us what to do with our civil liberties but to run our businesses.

If we believe in the marketplace, the market is supposed to be self-regulating, and a case can be made for that.  But we have been barred for many years in this effort . . .

From my viewpoint and the viewpoint of many others, we should be regulating the government.  We essentially don’t.

When you think of what the federal reserve can do, it really goes un-audited.  Very, very little oversight.

When you think about the recent embarking of the President’s Working Group -- and this is not an advisory group.  It is called a Working Group.  These are not economic advisors.  We don’t have minutes of the Working Group.  We don’t know what they do, what kind of authority they have.  Once in awhile we hear a report.  But we’re giving more power to this Working Group.  Which means it looks like we’ve really given up on the republic -- you know, freedom, and the marketplace, and sound money -- and all we accept is, more encroachment of our civil liberties, more collusion between business and government, and it looks like this is a massive increase in the combination of government and big business.

So my concern, really, is very philosophic.  Most of us deal here from day to day -- Is this regulation good, or is this regulation bad? -- without realizing that, the general rule is, when government creates a regulation, they create the need for two more regulations. The same way, when we allow our banking system to inflate the economy it causes the bubbles to occur then we have to inflate to prevent them from breaking and deflating, so it goes on and on and we perpetuate our problems.  It seems to me that the basic question we don’t ask and should ask is, Why do we have a business cycle?

For 100 years the conclusion has been in this country, philosophically and practically, at the political level, that it’s the consequence of freedom, it’s a consequence of capitalism, and therefore we need government to save the people from their freedom -- freedom of choice personally, loss of civil liberties, and the freedom of choice of businesses.  So, can you tell me, do you accept the idea that the business cycle is a consequence of capitalism and freedom, or is the business cycle a consequence of government interference?  Because that to me is the key question, and depending on how you answer that, [determines] everything we do from here out.

Bernanke:  Well, Congressman, first a word on the President’s Working Group.   That’s an informal group of the heads of various agencies.  It has no separate statutory authority.  It’s a chance to get together to talk about issues and on a number of occasions, as you’ve noted, we’ve put out reports that have no statutory authority but represent our thinking and our staff’s thinking on some various issues. 

Certainly, large parts of the fluctuations in the economy are from the free market.  They represent changes in productivity, for example, changes in business activity.  There are probably also, though, circumstances in which fluctuations are due to government intervention -- government spending during wars, for example.  An example which is particularly relevant to the current discussion is that, during the 19th century the United States had periodic financial crises where banks would fail and there would be sometimes effects on the broader economy.  And it was dissatisfaction with that that led in 1913 to the creation of the federal reserve to try and stop these periodic financial crises.  This created the set of consequences you allude to in the sense that if you’re going to give the federal reserve power over the financial system -- in particular, if there’s going to be moral hazard induced by that -- then for protection you need to have some regulation to prevent the moral hazard from creating further distortions in the financial system.

But I do agree with you that the fluctuations often have private sector entrepreneurial component to it, and we are neither able nor should we try to completely eliminate fluctuations in the economy.

Paul:  Does the Federal Reserve contribute to the business cycle?

Bernanke:  It has.  It has in times, most notably during the 70s when inflation got out of control and the Fed had to raise interest rates sharply to control inflation and resulted sometimes in slowdowns in the--

Paul:  Does excessive credit and low interest rate cause malinvestment?  Artificially low interest rates?  That aren’t market-driven?

Bernanke:  Well, the question is, you know, is the judgment about where interest rates ought to be.  We have, of course, the mandate for maximum employment and price stability.  We’re trying to balance those obligations.  So, we could make mistakes and put the interest rate at the wrong place, and that would have negative impact.  So, I agree.  So, we’re doing the best we can to find the right place to put the interest rate -- the one that’s consistent with the neutral rate, or the rate that establishes the full-employment economy. 

Paul: [caustically] And someday we may try the market to determine the interest rates.  Thank you.