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U.S. Congress Joint Economic Committee Hearing - The Economic Outlook

Location: Washington, DC


REP. RON PAUL (R-TX): Thank you, Madame Chairman. Welcome, Chairman Bernanke.

There's a political philosophy that advocates the merging together of the interests of business and government, at the same time with a 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. So 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 a hundred 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 as well as just about everything that we have -- government and businesses are very much involved.

But the original purpose of our government was to not -- was to regulate the government and not for the government to regulate the people, because there really isn't any authority of people -- for the government to tell us what to do with our civil liberties or to run our businesses. I mean, if we believe in the marketplace, the market is supposed to be self-regulating. And there can be a case made for that. But we have embarked for many years in this effort to have the government do all the regulating.

But from my viewpoint and the viewpoint of many others, we should be regulating the government. We essentially don't. I mean, when you think about the authority -- you as a chairman of the Federal Reserve and what the Federal Reserve can do -- I mean, it really goes unaudited and very, very little oversight.

And now, when you think about the recent embarking of the President's Working Group -- and this is not an advisory group, it's called a working group. I mean, they're not economic advisors. We have presidential economic advisory. But we don't have minutes of the working group. We don't know what they do, what kind of action, what authority they have. And once in a while we hear a report that we're giving more power to this working group, which means that 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. I mean, 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 that when government creates a regulation, they create the need for two more regulations. And the same way, when we allow our banking system to inflate the economy, it causes the bubbles to occur and then we have to inflate to prevent them from breaking and, you know, deflating. So it goes on and on and we perpetuate our problems.

But it seems to me that the basic question that we don't ask and we should ask is why we have a business cycle.

And for a hundred years, the conclusion has been in this country philosophically and practically at the political level, is that it's a 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 could you tell me, do you accept the idea that the business cycle is a consequence of capitalism and freedom? Or is the business cycle -- could it be that others who say it's a consequence of government interference?

Because that to me is the key question. And depending on how you answer that depends on everything we do from here on out.

MR. BERNANKE: Well, Congressman, first, a word on the President's Working Group.

That's a informal group of the heads of various agencies. It has no separate statutory authorities but it's a chance to get together and 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 that you allude to in the sense that if you're going to give the Federal Reserve power over the financial system, and 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 fluctuations often have a private- sector entrepreneurial component to it. And we are neither able, nor should we try, to completely eliminate fluctuations in the economy.

REP. PAUL: Did the Federal Reserve contribute to the business cycle?

MR. BERNANKE: It has. It has at 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 it resulted sometimes in slowdowns --

REP. PAUL: Does excessive credit and low interest rate cause malinvestment -- artificially low interest rates that aren't market driven?

MR. BERNANKE: Well, the question is, you know, is the judgment about where interest rates ought to be.

We have, of course, a 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 impacts, 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 a full-employment economy.

REP. PAUL: And someday, we may try the market to determine the interest rates.

Thank you.


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