Ron Paul's New Cloths

In one of the most indescribable moments in Congressional history, Ben Bernanke and Ron Paul looked deep into each other's eyes and a black hole was formed somewhere in the universe. I'm pretty sure that about 45% of the time Congress is in session is spent listening to Ron Paul rant about the Fed but this rant was special because Ben Bernanke was right there to respond.

Here is a video link to the confrontation. It begins with Ron Paul giving a barely coherent speech about the Fed. He makes several obvious points about inflation and a lack of transparency. He tries to respond to criticisms of his bill that would allow Congress to audit the Fed in what vaguely resembles a series of statements. He then accuses the Fed of making loans to Saddam Hussein during the 80's. He also claims that the Watergate scandal was conducted with money from the Fed.

Ben Bernanke's reaction is priceless: “These specific allegations you've made I think are absolutely bizarre." Is there a better word than “bizarre” to describe Paul's allegations? Bernanke tells Paul that full transcripts of all Fed meetings are released after 5 years and that the Fed is actually reasonably transparent.

Paul then tries to make a point about a lack of transparency by saying that the Fed could be conducting a bailout of Greece, as we speak, and nobody would know. Ron Paul then directly asks if Bernanke has spoken to European officials about buying Greek debt and Bernanke says he hasn't. Then Paul asks if the Fed could buy Greek debt if they wanted to. Then, in my favorite moment of this whole exchange, at 4:53, Ben Bernanke looks over his shoulder to the person behind him as if to say, “Is this guy actually insane?!?! Does he even have a real point to make?!?!” Bernanke being the politician that he is, offers his denials over any claim that he is going to buy Greek debt and the conversation is essentially over.

Then in another classic Congressional moment, (Classic Congressional Moments vol. 1 to be released on DVD next fall) Barney Frank says sarcastically that the committee will conduct a full examination of the Fed's supposed involvement with Saddam and Watergate.

Now here's my take, Ron Paul is a doctor. He went to medical school and is surely an intelligent man. I have nothing bad to say about him personally but he is by no means an economist. His philosophy is simplistic and reactionary. Accusing the Fed of funding Saddam is totally believable if you're cynical and even if it's false, those same cynics will cry out, “Dr. Paul is a hero for saying the truth man.” But what good does it do? Paul wastes the committee's time promoting his own simplistic message, making wild accusations and asking irreverent questions and is called a hero on the Internet.

The great thing about the moment Ben Bernanke looked over his shoulder was that it really said everything. It was the emperor's new cloths to Bernanke. Dr. Paul has a huge amount of support around the country. He's set fund raising records. He's gotten bills passed through congress and he's done it without being coherent or offering a serious message. What is this man's appeal; what am I missing here?

The Castration of Ben Bernanke

The New York Times reported recently that Ben Bernanke believes, “Regulation is the best way to prevent financial speculation from getting out of hand and throwing the economy in a new crisis.” This is understandable especially from Bernanke's position. Time's “Man of the Year” makes major decisions in the hopes of fixing the economy but finds that Wall Street's speculations about his actions ultimately have a greater impact than his actual actions, which is probably very frustrating. He keeps interest rates low in the hopes of getting banks to lend money to small businesses and stimulate the economy, but instead, banks hold onto their cash because of speculation that the Fed will raise interest rates in the future. Then in the future, if he doesn't raise interest rates, people will still fear that he will raise interest rates even farther into the future and the cycle continues.

In a sense, Bernanke is completely powerless. It is eerily similar to Japan and the “Lost Decade.” The Lost Decade isn't cool like the Lost Generation but rather a frightening period in Japan's recent history. In 1989, in the middle of gigantic asset price bubble, Japan's central bank raised interest rates to counteract speculating and the aforementioned bubble. The high interest rates acted as a very large needle which popped the bubble and led to a stock market crash, real state market crash and then several government bailout of Japanese banks. Sound familiar? I know that this comparison is hardly groundbreaking. Obama warned about the potential Lost Decade less than a month after his inauguration. What I want to show is how little an impact the central bank has in both cases.

Paul Krugman wrote Japan's economics problems of the 90's were, "simply because its consumers and investors do not spend enough." Krugman, as you might imagine, felt that this could be assuaged just by printing more money. Although it seems to me that the high savings rate among the Japanese is too ingrained in Japanese culture for a simple monetary policy tweak to fix. Japan tried to encourage spending by giving out non-savable tax refunds but the Japanese simply used the refund to buy their essentials and saved the money they would have used for their essentials.

Not to sound fatalistic but you can't make people behave a certain way. If the Japanese don't understand the Paradox of Frugality then you can't make them and even if they do understand the concept, there's still the "rat choice" issue. Samuel Popkin explains, "Everybody’s business is nobody’s business. If everyone spends an additional hour evaluating the candidates, we all benefit from a better-informed electorate. If everyone but me spends the hour evaluating the candidates and I spend it choosing where to invest my savings, I will get a better return on my investments as well as a better government."

Consider Popkin's example but think in terms of the Paradox of Frugality. If everyone spends more money then we all benefit from a strong, stimulated economy. If everyone spends but me, then I benefit from the strong, stimulated economy and I benefit from my extra savings. It's for predicaments like this that government exists. Government coerces people into paying taxes so that everyone has to contribute to things like defense. If everyone contributes money to an army we all benefit from the extra defense, if everyone but me contributes then I benefit from the defense and the extra money. So government makes people contribute for these universal causes because they wouldn't be feasible otherwise. It is the business of government to prevent those who try and take advantage of others collective goodwill.

Now Ben Bernanke is trying to do a similar thing, get Americans to spend money. More specifically, he's trying to get banks to loan money to small businesses to hire people to spend money, but he's having trouble. The banks simply won't loan out money. The Fed has done all you can ask. They're giving the banks easy money to loan but the banks just pocket it.

Bernanke is almost powerless. All he can do his is try to encourage positive economic behavior; he can't actually make it happen. This is why Bernanke wants regulation; he wants to be able to control things. If he can give easy money to the banks then he should be able to make them give loans. He wants a government mandate that says, "Do what Ben says." He won't get the regulation he wants because all of the easy money he's given the banks stimulates the stock market, which a lot of people believe is a economic litmus test, and people will believe the economy is fine and won't need any new tweaks. But be wary because the easy money and the obsession with stock prices is what got us here in the first place. If we come out of this financial crisis without learning a lesson, we'll be doomed to repeat history.