Will the Fed be able to survive Ron Paul?December 14, 2010: 11:48 AM ET
The erstwhile presidential candidate and soon to be head of Congressional oversight of the Federal Reserve talks gold, jobs and the presidency with Fortune.
If there's anything to be said about U.S. Congressman Ron Paul, he sure is persistent. And lately, that inner flame that's helped him gain the reputation for sometimes being the "G.O.P. loner" appears to be paying off.
The soft-spoken obstetrician has represented the 14th District of Texas on and off since 1977, spending much of his political career arguing that the Federal Reserve is evil for America and far too secretive. He doesn't see why there's so much faith in paper money, including the U.S. dollar. If Paul had it his way, there'd be a return to the gold standard. He even laid out his case in his book, End the Fed.
What's more, Paul is a big believer in Austrian economic thought – the idea that government has no role in regulating the economy. And for years, he's supported keeping Congress from any action not explicitly authorized in the Constitution, or that he sees as wasteful spending, including – as a recent New York Times article highlighted – on issues as ceremonial as honoring Mother Teresa with the Congressional Gold Medal.
No doubt Paul's views fall outside the mainstream. At times, his thoughts are arguably off-putting and easy to brush off as extremist political rhetoric. Even Libertarians don't always see eye-to-eye with the Texas politico.
Lately though Paul's views are garnering the attention that he and supporters have long been waiting for. Earlier this month, Paul was picked to head the House subcommittee on domestic monetary policy. That means he will help oversee the body he's opposed to -- the Federal Reserve -- as well as currency and the dollar's value.
If anything, it appears the timing somehow worked out for beliefs that Paul has held for decades. The congressman's backing has grown considerably with the rise of the Tea Party, whose frustrations with government bailouts of big banks and corporations following the financial crisis seem to fall in line with Paul's views.
I caught up with Paul this week to talk about his new role, the Fed, how the world could possibly return to the gold standard and the 2012 presidential election. The following is a lightly edited transcript of our talk.
What are the Federal Reserve's shortcomings?
They're doing a job that's impossible to do. So it's not a single person's fault. It's not just former Chairman Alan Greenspan or just current Chairman Ben Bernanke. It's the assumption that anybody knows what interest rates should be, or the assumption that they know what money supply should be, or the assumption that they can have stable prices or the assumption that they could deal with unemployment.
Do you think we're better off without a Central Bank?
Sure, it's better off that we don't have depressions and inflations and financial chaos and the problems that we face. We of course wouldn't have this backdoor financing of big government fighting wars overseas and getting people to depend on the welfare state. None of that can happen without a Federal Reserve.
What do you think of the Fed's latest move to start pumping $600 billion into the economy in hopes to boost the recovery through huge purchases of long-term bonds?
I think it's terrible. They got us into trouble because there was too much quantitative easing. I mean it was a continuous inflation and artificially low interest rates that Bernanke gave us – he gave us all the bubbles so you can't solve all the problems of quantitative easing with more of it. So we had one, we're on number two. But actually we had it under Bernanke. They didn't call it that but it was essentially the same thing – massive monetary inflation with interest rates way lower than the market.
So what do you think the economy would look like without the Fed?
We'd probably have a much healthier economy – it wouldn't be so fragile. Nobody would be worrying about currency exchange rates and people wouldn't be in and out of currencies and spending all their energy doing what they're doing. Also, we wouldn't have a situation where the Fed creates money and hands it out for free and let's the banks make billions of dollars. And the poor people who are retired and have CDs get nothing and because of the downturn in the cycle, which the Fed creates, people lose their jobs and lose their houses. You wouldn't have any of that.
This was all very clearly predicted by Austrian economic theory and it's come about and it's very disturbing to the Fed because they're going to have to recognize that their theories are completely wrong and they're not about to do that gracefully.
As chairman of the House subcommittee on domestic monetary policy, which among other things oversees the Federal Reserve, you've mentioned you will renew your push for a full audit of the Fed. What do you hope this will do?
It would tell us who the beneficiaries are. They've released recently some information but they really didn't tell us exactly about everything and where the money has gone and what kind of collateral they have. The people in this country deserve to know who are the beneficiaries and their budget and what they hand out is bigger than the Congress, which is pretty amazing. They're off budget. They're not responsible to anybody.
Who do you think the beneficiaries are?
We don't know exactly but obviously banks and big corporations and foreign central banks and foreign governments.
How do you think these corporations have benefited from the Fed?
They receive free money. I mean they tide them over. The free market would have allowed General Motors (GM) to go bankrupt and the various companies that got the benefits. The banks would have had to reassess and the bad debt would have been liquidated rather than have all the derivatives and the illiquid assets being dumped on the taxpayer, which is what the Fed holds. Instead of the people who made all the money in the boom times suffering they got bailed out and the people who got stuck with it will be the American taxpayer.
You've long advocated returning the world to the gold standard. Where do you see the US dollar going?
The world will eventually give up on the dollar. That's why the markets are so shaky – they don't know what to do. Gold prices are up and commodity prices are starting up. And most people realize that the world will not be suckers forever and just take our dollars at will. I mean if we can create trillions of dollars and expect to buy goods and services someday they're going to put their foot down and I think we're just starting to see the signs of that happening.
The euro conveys no more confidence than the dollar. All the currencies are paper money. So the only way you can measure the value of the currency is by something that has been used for 6,000 years and that is in its relationship to gold. And that of course shows that all the currencies are weakening, which means in time all the crisis will go up. So the measurement has to be on what the money purchases.
I think what's going to happen is what's happened in the last 10 years. People will start using gold as money, shift some of their paper assets into gold. Purchasing power of gold goes up and it will go up in all currencies, even though there may be minor fluctuations where the yen may do better than the euro – that sort of thing.
Do you really think America could adopt the gold standard? How can this practically happen?
Not only the faith in the gold standard, it's the lack in confidence in paper and insanity of creating money out of thin air. Throughout history, we've seen that money ought to be a real asset whether it's silver or whether it's gold depending on the situation. People always want something of real value.
Look at how many people have money in exchange-traded funds for gold. Billions and billions of dollars. I've always considered myself being on the gold standard. I studied this in the 1960s and the predictions made that Bretton Woods couldn't work. When it failed in 1971 it really caught my attention. Back then you can buy gold at $35 an ounce. I put my reserves in gold and it hasn't hurt at all. People who would have had at the same time parked a bunch of paper dollars back then they would have lost about 80% of their purchasing power where the purchasing power of gold has skyrocketed.
But then some would argue that investment in gold is also a bubble. What would you say about that?
They can believe it, but I think it's the bonds that are at a bubble and the dollar is at a bubble. But no, I don't consider that a bubble at all. There will be corrections – you can have gold go down $200 or $300 and it wouldn't prove a thing.
Although I wrote the book End the Fed, I don't say that you should end the Fed in one day. All I say is allow the constitution to be used – you can use gold and silver as legal tender, that's what the law still says. We have multiple currencies being used around the world all the time. There's no reason why we can't have a couple of currencies circulating here in this country. So we should be allowed to have gold and silver as legal tender to pay our debt.
How do you think the economy would improve if the gold standard were adopted?
The transition is one thing, but if you were on a gold standard the economy would be many, many fold stronger and you wouldn't have the business cycle. You wouldn't have to go through booms and busts. Prices would be relatively stable, the purchasing power of your money would be stable, balance of payments would be adjusted automatically.
But gold over the century has increased in supply by 2% to 3%. If more people are demanding gold and there doesn't seem to be enough physical gold, it pushes the purchasing power of gold up. Then the incentive grows for the people to mine gold. So it has worked many many times over hundreds if not thousands of years of history.
Do you want to end the Fed?
Well, I don't expect to. The Fed's going to end itself when they destroy the system. So yes I would end the Fed but I would do it gradually and have a transition. I would let people voluntarily opt out and not be forced to use depreciating money. Just think about how terrible it is that people make 1% or less on a certificate of deposit and banks get money for free and then they buy Treasury bills for 3% or 4% making billions of dollars. It's just not fair and people are waking up to this.
You're a big believer in Austrian economics, which holds that government does not have a role in regulating the economy. Some people would argue it was the lack of government regulations that contributed to the financial crisis. What would you say to something like that?
I think it was too much regulation. What they did was create the imbalance by keeping artificially low interest rates, which causes excessive debt and mal investments. For instance, interest rates were low, builders built too many houses, prices of houses seemed to go up, seemed like it would last forever, congress comes in and they pass a law, affirmative action that you must give loans to everybody even people who don't qualify.
Will you run for president in 2012?
Sure, there's always a chance. Probably depends on my mood come next January or February. I have not made up my mind. I have a lot of people supporters who are very anxious for me to do it. Right now I'm totally undecided.
It seems a lot of presidential candidates will neutralize their positions on certain touchy topics.Would you ever characterize yourself as extreme?
No, I think what we have is extreme. It's out of wack. I mean I want to balance the budget – I don't know why that would be extreme. I want limited government, I wanted personal liberty, I want to bring our troops home.
But some would consider ending the Fed is a bit extreme, don't you think?
No, I think printing money is extreme and crazy. I think the obscenity is allowing the Federal Reserve to print $3.3 trillion and we don't even know where it went. That to me is what's so extreme. And that's what the American people are waking up to. Government is extremely out of control. That is what I think everybody agrees on in the Tea Party movement.