Prepared Statement by Rep. Ron Paul Before the House Committee on Banking and Financial Services
The Asian financial markets are unsteady, and for good reasons. Many have correctly anticipated the ongoing financial events as a natural consequence of a sustained world-wide credit expansion of unprecedented proportions. According to free market/sound money economics, all credit expansions set the stage for the correction. These corrections are undesired by the dreamers of perpetual prosperity generated by loose central bank monetary policy.
The source of the problem, the world financial markets currently face, is unwise monetary policy - plain and simple. Although the business cycle has been fully understood by the Austrian free market economists throughout most of this century, they have been ignored by our government-run universities, the major media and the politicians. And since the now-collapsing financial bubble was the largest ever, due to an unprecedented globalization of credit expansion, the implications for the world economy should gain the attention of everyone concerned about public policy. The world has been functioning with total fiat currencies for more than a quarter century - a first. Even with continuous adjustments in
the international exchange markets, artificial relationships develop between currencies. These imbalances are subject to market forces, demanding new exchange rates, and as we are witnessing, they occur with shocks to the entire financial system. More huge IMF bailouts as are currently planned will not solve the problems.
The suspension of standard lending limits only sends the wrong signal of fiscal and monetary irresponsibility and sets the stage for a larger financial crisis. According to normal IMF lending standards, a country can only borrow up to 150% of its quota with the Fund. However, the Mexican peso crisis created a new precedent and allowed a country to borrow more than the rules allowed. Thailand will get $3.9 billion from the IMF which is 505% of its quota while Indonesia will receive $10.1 billion amounting to 490% of its quota. Mexico was offered $17.8 billion, 688% of its quota, in 1995.
Governments can instill "value" in a paper currency only temporarily; but markets ultimately dictate real worth at great cost to the currency stability the money managers pretend to achieve. More bailouts at the expense of the American taxpayers are wrong.
Monetary inflation and credit expansion of paper currencies mislead all financial participants. Fictitious interest rates promote mal- investment, over capacity, excessive debt, false confidence and rampant speculation. The longer the misdirected economy functions, the more widespread the credit expansions and the bigger the bubble and unfortunately the more serious the correction. And this current expansion has been a big one. The principle engine of this inflation has been the Federal Reserve, fueled by its misperception about the dollar's influence on world-wide credit expansion.
Without the benefit of a commodity standard of money and with a fiat dollar being retained as the reserve currency of the world, our excesses have been paid for by foreigners willing to sell us goods for our paper, buy our treasury bills, hold them in reserve and use them to expand their own currencies and credit, thus feeding their own domestic booms.
Congress does have a role in and responsibility for all of this. Instead of conceding monetary policy to a highly secretive, unaudited, off-budget, without oversight, central bank, our responsibility, under the Constitution, is to guarantee a sound convertible currency. There is no authority whatsoever for reckless credit expansion to be used as a tool for "managing" the economy. This illegal power to do so has given us everything from the Great Depression to the inflation of the 1970's and all the recessions in between. Inflationism has permitted excessive welfare spending and the accumulation of a $5.4 trillion dollar national debt, by a central bank's ever-willingness to monetize the debt generated by the Congress.
As financial conditions continue to adjust, and probably worsen, we here in the Congress must give serious consideration to monetary
policy, our Constitutional responsibilities to maintain a sound economy and assume rigid oversight of the Federal Reserve. Placing blame elsewhere for the turmoil would be a rejection of our responsibilities.
If we fail to address this problem correctly, the dollar and the U.S. economy will one day come under siege similar to what is currently happening in Asia. We should work diligently to prevent that from happening.