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(Analyst's note: Absolutely must read and consider this interview summary. Don't miss the recommended reading list following this article.)
by Cyrus Sanati
The fallout from the credit crisis has put the financial system of the United States
As Congress debates whether or not to give more power to the Federal Reserve to watch over the financial system, Ron Paul, the Republican congressman from Texas
In an interview with DealBook on Thursday, Mr. Paul discussed his new book, “End the Fed,” as well as his views on Wall Street.
The outspoken lawmaker contends that the government is essentially controlled by the Fed and in collusion with Wall Street, and has created an unsustainable economic system through the excess printing of money. He predicts that the system will eventually break down and the dollar will collapse, creating economic chaos.
Here are edited and condensed excerpts from DealBook’s talk with Mr. Paul.
Q.What would Wall Street look like without the Fed? Do you believe that Wall Street banks — which you’ve described as a “secretive cartel of powerful money managers” — would be able to manipulate interest rates if the Fed didn’t exist?
A.No, the interest rate would be set by savers. Capital would come from savings, which is what happens in a free market. So if there were a lot of savings then interest rates would go down. This would give information to the marketplace, which is the most important thing that has to be corrected without a central bank: sending the right information out to borrowers, investors and savers.
Right now we don’t have a free market in interest rates, so it is basically price controls.
Q.In your book, you argue that ending the Fed would put the American banking system on solid financial footing. With the banks still far from clearing their toxic assets, how is that possible?
A.Well, to get rid of the toxic assets, the Fed said we need to step in because the assets were illiquid. Illiquid means that they are worthless, and if they are worthless, we should take care of that problem like we did in 1921 and eliminate them and get it over with and get back to work again.
But to take these illiquid, worthless assets and dump them on the American taxpayers and not really get rid of them just prolongs the agony.
Q.It’s widely believed that the Fed is independent, made up mostly of academics, not politicians or business leaders. What specific powers do you believe the Wall Street banks have over the Fed that would allow them to influence it?
A.Well, we don’t have a full answer on that, but that’s obviously the reason the Fed doesn’t want a full audit. What we do know is that they do have influence over the Fed; I mean Wall Street was bailed out, and it wasn’t the first time.
We know that Lehman Brothers was allowed to go bankrupt, but Goldman Sachs came out very well outside of this mess. We want to know why this happened, what they did, who got these loans and why. Someone has always been in our Treasury or our Federal Reserve who is closely connected to Wall Street — Goldman Sachs more than anybody else.
Q.So do you think Goldman Sachs has the most influence at the Fed?
A.I think they have been in the news the most, but we might find out a lot of new things once we audit the Fed. We might find out that there are some international banks with influence.
The one thing the Fed is really fighting is to keep us from auditing any of the international agreements they have with other central banks and the international financial institutions — who knows who’s involved. The key issue is transparency, and I don’t think you will know the full extent until we have a true audit.
Q.Which brings us to your bill to audit the Federal Reserve. What would an audit show, and why do you think that information is important?
A.It is going to show what kind of promises the Fed made, what kind of loans they made, which companies benefited, which companies did not. We want to know about these international arrangements. You know if they can enter into arrangements with other countries and other central banks and issue new money and credit — they are literally a government unto itself.
The Fed is making appropriations that are off the books and didn’t go through Congress. That should be unconstitutional. They are making agreements with other governments. That’s treaty-making and we don’t even know about it. They always say it is to maintain an orderly financial system, but there is nothing orderly about it. They created problems, and it is something we deserve to know about.
Q.Congress is considering various ways to increase regulatory oversight of Wall Street. Do you believe that could help alleviate the severity of the financial boom and bust cycles?
A.No, it wouldn’t do a thing because it is a distraction. The real problem is the inflationary monetary policy of the Fed — you have to deal with the problem in order to correct it. I mean Congress is talking about more and more regulations, but that just won’t work.
In a market economy with a gold standard you do have market regulations. Bad businesses and bad banks – they go out of business. They would never be all at one time. F.D.I.C. kind of insurance would be private, banks would be rated by a private company and when they made bad loans, it would be known.
The better they ran their affairs, the lower their insurance rates would be and people would know every single day how a bank is doing, rather than allowing every bank to hide behind government guarantees.
Q.You mention in the book that your ultimate goal is to “repel legal tender laws and letting everyone get into the business of the production of money.” Can you explain what you mean by that? It sounds kind of chaotic.
A.This is kind of a theoretical argument, because I follow what [Austrian economist Friedrich] Hayek said in that you should have competing currencies in one economy. The market would decide if you use gold or silver or some other things – anything to restrain the printing press.
If we follow the Constitution, only gold and silver could be legal tender, but today that is not allowed and the only thing you can use is Federal Reserve notes (dollars). That means you get locked into the system.
Q.Some argue that your view on returning the United States to the gold standard is simplistic and not applicable to today’s sophisticated and interconnected financial system. How do you respond to that?
A.I think the system we have is not a very good system and it is in the process of causing us a lot of trouble. We had the biggest financial bubble in the world just burst and the dollar reserve standard has literally come to an end, so I would say everything we’ve had, especially since 1971, has been very, very impractical and has not worked anyway.
Q.So how close are you in convincing members of Congress to “end the Fed”?
A.They are not ready. They are only going to study it when they see the collapse of the dollar. Although the dollar is collapsing, it’s not happening fast enough for them to think about currency reform. They are talking about financial system reform with all these regulations that will make it worse, but they aren’t anywhere close to dealing with the currency issue. If they think they can double the money supply in a year, they aren’t close to talking about sound money.
That being said, I am excited that now at least people are beginning to take a look at the Federal Reserve. I am very positive about how the college kids have taken to reading Austrian economics. To me it is remarkable that 75 percent of the country said that we should limit the Fed, when a couple years ago they didn’t even think about it.
We now have every Republican on the audit bill and 119 Democrats, so it is very positive that attention is directed toward the Fed.
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For additional reading on the troubled American Economy please consider reading the following" :
- Congressional Budget Office (CBO) - The Long-Term Budget Outlook
- CBO warning on page14 - possible financial insolvency of our gov't - demand for higher interest rates - foreign & domestic lenders may not provide enough funds for the gov't to meet obligations.
- Problem magnitude cannot be underestimated on page 15
- Items NOT factored into the analysis on page 17
- U.S. Federal Reserve -- Flow of Funds Accounts of the United States
- Current impact of U.S. credit markets on page 12
- U.S. Treasury Department - Treasury Bulletin
- U.S. is deep in debt (nearly $7.9 trillion) to the rest of the world on page 48
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