The Fedís Funny Money
by Ron Paul: The
Pesky Neighbor and the Debt Ceiling
the US House of Represenatives Subcommittee on Domestic Monetary
Policy, Hearing on the Impact of Monetary Policy on the Economy,
July 26, 2011
is the second in a series examining the relationship between Federal
Reserve policy and the performance of the United States economy.
Today we are receiving testimony from the Federal Reserve banks.
Of the half-dozen Reserve banks we contacted, only President Hoenig
was willing to testify in front of this subcommittee, and we welcome
him here today.
Like many critics
of the Fed's monetary policy, I fear that quantitative easing will
soon return. Despite what we hear from the cheerleaders in government
and in the media, the economy remains in a complete shambles. Unemployment
remains high and seven million jobs lost during the recession have
yet to be regained. The Federal Reserve has kept interest rates
at or near zero for over two and a half years and pumped trillions
of dollars into the banking system in a vain attempt to revive the
economy. Yet even now after the failure of the zero interest rate
policy (ZIRP) and quantitative easing have become readily apparent,
we still hear calls for more stimulus, more easing, more loose money.
Like any other government program, the solution for failure is to
throw more money at the problem, never mind the fact that throwing
more bad money after good in such instances has never succeeded.
press releases from the Federal Open Market Committee (FOMC) we
see that the FOMC intends to keep interest rates at a low level
for an extended period. Chairman Bernanke has hinted at a further
round of quantitative easing, the effects of which will undoubtedly
be calamitous. Moneyholders seek a return on their holdings, and
in an era of near-zero interest courtesy of the Fed, saving makes
no sense. Combined with the still-shaky condition of the banking
and financial sector, it is not surprising that much of the recently-created
easy money has flowed into tangibles such as agricultural commodities,
metals, and land. Rather than allowing the housing bubble to burst,
overall prices to return to normal and overleveraged banks to break
up, the Fed has thrown more fuel onto the fire and created the conditions
for an even larger bubble that will eventually burst.
The Fed's easy
money policy has also enabled the federal government to increase
its total debt by 56% since 2008, an increase of over $5 trillion.
Thanks to the Fed driving down interest rates and purchasing debt
as fast as the Treasury has issued it, the federal government faces
a crunch not only in terms of running up against the debt ceiling,
but also in the structure of the debt. Large amounts of short-term
debt are coming due in a short period of time. ZIRP and quantitative
easing cannot hold down interest rates forever, as at some point
investors will rebel and insist on higher interest rates for US
debt. At this point this maturing debt will either have to be paid
off or rolled over at higher interest rates, both of which will
be very costly for taxpayers.
I disagree with Pres. Hoenig on many matters of monetary policy
and especially on key policy issues such as the existence of the
Federal Reserve System, we both have been critical of the Fed's
policy of quantitative easing and its maintenance of zero interest
rates. Pres. Hoenig has been the most outspoken member of the Federal
Reserve System against Chairman Bernanke's policies, consistently
voting against the Chairman during meetings of the Federal Open
Market Committee last year. Due to Pres. Hoenig's impending retirement,
the Fed will lose a much-needed counterbalance to the inflationists
who dominate at the Fed.
Hoenig and I realize that printing money out of thin air as the
Fed has done and threatens to continue to do is not a panacea. If
zero interest rates and quantitative easing could really solve unemployment,
there would be no reason not to maintain such policies in perpetuity.
Such policies, however, lead to the formation of asset bubbles,
as both Pres. Hoenig and I know. Chairman Bernankeís predecessor
Alan Greenspan fueled the dot-com bubble and attempted to stave
off its collapse by resorting to one percent interest rates. That
created the housing bubble whose collapse Chairman Bernanke is attempting
to stymie through zero percent interest and massive quantitative
easing. The next bubble is already forming, although which sector
will be hit hardest remains to be seen. Pres. Hoenig has alluded
to some possible bubble sectors in his district, so I look forward
to his testimony and his answers to our questions.
the Ron Paul File
Paul is a Republican member of Congress from Texas.
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