Panel I of the Hearing of the House Committee on Financial Services

Statement

PANEL I OF THE HEARING OF THE HOUSE COMMITTEE ON FINANCIAL SERVICES
SUBJECT: LEGISLATIVE AND REGULATORY OPTIONS FOR MINIMIZING AND MITIGATING MORTGAGE FORECLOSURES

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REP. RON PAUL (R-TX): Thank you, Mr. Chairman.

I ask unanimous consent for my complete statement to be put in the record.

REP. FRANK: Without objection.

REP. PAUL: Thank you, Mr. Chairman.

A lot of concern now has been expressed about the collapsing of this housing bubble. It's a shame that we had not talked about this 10 or 15 years ago, when many free market economists predicted it would come and worried about it and wished we could have prevented it. But the irony of all this now is that everything that caused the financial bubble, the housing bubble -- we're resorting to doing the same thing. You can't solve the problem of inflation with inflation.

The debasement of the currency, which is a continual process, is the reason we get financial problems and financial bubbles, whether it was in the 1920s or the NASDAQ bubble or the housing bubble. We have to deal with the cause. We're dealing -- and we talk so much about our solutions, but nobody's talking about the cause. And the cause literally is the excessive credit created by the Federal Reserve System, and we can't deny this.

And then we add fuel to the fire by credit allocation. We come in with the CRA, the Community Reinvestment Act; we come in with insurance by the FHA; we come in with the GSEs and the line of credit and the guaranteed implied bailouts. And then when the collapse comes, all we have -- what do we do? We ask for more regulation, more credit, more debasement of the currency. And that's -- that, to me -- we have heard expressions about going over the line and engaging in moral hazard, but the moral hazard has been going on for years.

And here we are now at a point where we're destroying savers and the poor. We -- literally destroying people by lowering interest rates. People can't save. And who suffers the most? The middle class and the poor, whose cost of living goes up because we deliberately and purposely devalue the currency. That's all we're resorting to, is the depreciation of currency, which in itself should be an immoral act.

So to me, if we don't look to the cause of these problems, you are going to have another.

And patching it together will do nothing more than what we did in the Depression when we patched things together. We just delay the recovery.

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REP. RON PAUL (R-TX): Thank you, Mr. Chairman.

I want to follow up on the discussion about moral hazards. I think we have a very narrow understanding about what moral hazard really is, because I think moral hazard begins at the very moment that we create artificially low interest rates which we constantly do, and this is the reason people make mistakes. It isn't because human nature causes us to make all these mistakes, but there's a normal reaction when interest rates are now that there will be overinvestment and malinvestment, excessive debt, and then there are consequences from that.

My question is going to be around the subject of, how can it ever be morally justifiable to deliberately depreciate the value of our currency, and that is what we do constantly. I mean, we're in the midst of a crisis today, and the efforts have been directed toward propping up financial markets in Wall Street. First, the crisis is noted, there's a panic. We dump in tens of billions of dollars in the reserves, and that reassures the market; Wall Street feels a little bit better. It's still not enough. Then, we take a discount window, we lower the rates, and we don't look at our problem from where -- what caused it. What we say is let's make it a door that's opened up and lower the rates, and again, Wall Street says, oh, this is wonderful. Do the poor people like this, and do they respond, and is this going to help -- get houses when some of them couldn't even afford a house because even with the low interest rates that were available because the costs are going up and cost goes up because the dollar goes down.

Then, even this week, what did we do?

Our Federal Reserve lowers the interest rates by 50 points, and the poor people and the middle-class people say, boy, this is wonderful, my cost of living is going to go down, I'm going to get a job -- no. Wall Street goes up 350 points. So it looks like everything is directed toward a bailout. Whether it's done deliberately or not, the American people see this as a deliberate bailout of the financial markets. The poor people are losing their houses. There's every sincere effort made to try to correct this, but it's inevitable that it's not going to work because the monetary system is such that there's so much misinformation -- we talk about market discipline -- you indicate, Mr. Chairman, that we should have market -- didn't have enough market discipline. But there's no possibility to have market discipline when all the information is erroneous.

Today, with this concept and during this testimony, we see oil prices soaring over $82 a barrel. We see wheat and corn soaring. We see other commodity prices soaring -- gold, 730 (dollars), $740 an ounce. There's a great deal of concern out there. This is all reflecting the fact that the dollar's going down in value, and if we don't deal with that, we can't solve the problem. And we look at this and think, well, we've created all these problems because we've had this malinvestment, all this credit going into the system, and we have all this correction that needs to come about, and we think we're going to solve the problem with inflation with more inflation. But really the bottom line is what moral justification do we have to deliberately devalue the currency and the dollars that people save? This pushes the cost of living up for the people who don't even have a chance to buy a house.

So there's a moral consequence of the system that we have today. And I can't see how we can avoid this moral obligation we have. The responsibility of the Congress should be to maintain the value of the currency, not deliberately tax the people by creating new money and passing on the high cost of living to the people who can least afford it. Wall Street never suffers from that, and we still -- we know of all these things out in the open the Federal Reserve does, but we don't know the details of what the Working Group on Financial Markets do to prop up markets, because I'm sure they're very busy and have been very busy in these last several months. But is there any moral justification for deliberately devaluing the currency?

MR. BERNANKE: Thank you, Congressman.

The value of the currency can also be expressed in terms of what it can buy in domestic goods, that is, the domestic inflation rate. That is part of the Federal Reserve's mandate, which is to maintain price stability, which, to my mind, means the value of the dollar.

The inflation rate is something we pay close attention to and we continue to pay close attention to, but over the last year, it's been a little over 2 percent. We will continue to pay very close attention to the inflation rate; it's an important part of our mandate. And I agree with you, that an economy cannot grow in a healthy, stable way when inflation is out of control, and we will certainly make sure that that doesn't happen.

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