Federal News Service March 25, 2004 Thursday
HEADLINE: HEARING OF THE HOUSE FINANCIAL SERVICES COMMITTEE
SUBJECT: THE STATE OF THE INTERNATIONAL FINANCIAL SYSTEM
WITNESS: TREASURY SECRETARY JOHN SHOW
CHAIRED BY: REP. MICHAEL OXLEY (R-OH)
LOCATION: 2128 RAYBURN HOUSE OFFICE BUILDING, WASHINGTON, D.C.
BREAK IN TRANSCRIPT
REP. OXLEY: -- the gentleman from Texas, Mr. Paul.
REP. RON PAUL (R-TX): Thank you, Mr. Chairman. Welcome, Mr. Secretary.
I have a question dealing with the free market economists-economy. And it basically-the question is, is where do you believe the free market, proponents of the free market capitalism go wrong? And let me develop that question for a minute, because I don't think we follow that. I don't think we're very close to the free markets and a sound economy based on free-free and open trade, that we have an artificial system that you have to deal with on a daily basis. And from a free market standpoint, it's mostly patch-up work, trying to correct problems. And, of course, the free market proponents, especially Mises, always said that when you intervene in the marketplace, domestically or internationally, you usually create more problems than you solve. You usually create two new problems for each one.
But the free market economists from Mises on down to Rothbard and Hayek-all of them-I think were absolutely accurate in their projections and predictions, because in the '20s, they talked about the bubbles in the '20s and what would happen in the '30s. They were correct in the '60s and predicted that Bretton Woods would break down. Even Henry Hazlitt that wrote from his viewpoint, when the IMF was established, he said Bretton Woods can't last. And he was absolutely right in 1945, in 1971 it collapses.
And this same group of economists said in the '90s that the same thing would happen, that we cannot sustain, you know, the bubble in the stock market, and it comes for a very precise reason, dealing with monetary policy.
Now, I know when I ask the chairman of the Federal Reserve about money and dollar policy, he defers to Treasury. Of course, Treasury can, I think, legitimately defer to the Fed, because they have so much to say and do with the dollar policy. They're the ones who create the money out of thin air. So-so I understand that.
But-but still, where-where do they-where do they go wrong? And why - why is it that we have gone so far away from accepting the notion that capital-true capital should come from savings rather than out of thin air? Why shouldn't we encourage savings instead of manipulating the economy with artificially low interest rates? Why do we do economic planning through all this manipulation in the monetary system and then we resort to this patchwork effort internationally, which costs a lot of money-not a little bit, but billions of dollars?
Now, these same economists would say today that the international financial system is very, very shaky, probably not much better off than long term capital management. And, I-I have to pay attention to them when they talk about this.
But, the system that we have literally encourages the congress to be extravagant spenders. They never have to worry about raising taxes. Debt can always be taken care of. And that's why our national debt is going up $700 billion a year. So, if we don't get back to the basics of why we get away with what we do, I don't see how you can ever patch the system together.
And this idea that we can just give IMF money, World Bank money, development bank money, come up with Millennium Challenge Account money-I mean, this is not a couple of dollars. And this all comes out of our domestic economy.
So, I am a strong advocate of free markets, where interest rates are set by the marketplace, that budgets have to be balanced because we don't have the authority, moral authority, to print money out of thin air, and we don't have-it really doesn't make good economic sense in the long term.
So, where, in your view, do we go wrong in thinking along these lines?
SEC. SNOW: Well, one where-one place we go wrong, I think, Congressman, is not to acknowledge explicitly the implicit contingent liabilities that exist in a number of U.S. programs-good programs, important programs-Social Security, Medicare, Medicare, veterans payments, and a-the postal service, a variety of these very important programs that serve very-very important and legitimate purposes. Where the potential liability to the United States government, the contingent liability, the taxpayer obligation, or, as you say, the other side of that, a borrowing obligation, is very, very large. I testified yesterday before the Ways and Means Committee on the Social Security system and on the Medicare and Medicaid systems. And I had to bear the very unhappy news that Social Security is not sustainable, and that the Medicare system, unless put on a different course, isn't sustainable either. And the reality is the contingent liabilities that are implicit in those programs are a huge portion of the GDP of the United States.
So, I would say one thing-I admire all those economists you cited, by the way-the one thing I would say is to try and make explicit when Congress acts and when the administration acts the real cost of the things we are doing.
REP. PAUL: Thank you.
REP. OXLEY: The gentleman's time has expired. The gentleman from Vermont, Mr. Sanders.