|
2008 Ron Paul Chapter 8
Financial
Services Committee Hearing
“Monetary Policy and the State of the Economy”
February 26, 2008
2008 Ron Paul 8:1
Mr. Chairman,
2008 Ron Paul 8:2
Price controls are almost universally reviled by economists.
The negative economic
consequences of price floors or price ceilings are numerous and
well-documented.
Our current series of hearings have been called to discuss the
most
important, but least understood, price manipulation in the world today:
the
manipulation of the interest rate.
2008 Ron Paul 8:3
By setting the federal funds rate, the rate at which banks
in the Federal Reserve System loan funds to each other, the Federal
Reserve
inhibits the actions of market participants coming together to
determine a
market interest rate.
The Federal
Reserve and the federal government do not deign to interfere in setting
the
price of houses, the interest rate on mortgages, or the prices of wood
and
steel.
The Fed’s actions in setting
the federal funds rate however, because it reflects the price of money
to a
borrower and thus affects demand for money, affects prices throughout
the
economy in a manner less pervasive but just as damaging as direct price
controls.
2008 Ron Paul 8:4
The example of the Soviet Union should have taught us that
no one person, no group of people, no matter how scientifically
trained, can
arbitrarily set prices and not expect economic havoc.
Only the spontaneous interaction of market participants can lead
to the
development of a functioning price system that allows the needs and
wants of all
participants to be met.
The sense I
get from reading much of the punditry is that the federal funds rate is
set
often by the whims of the Federal Reserve governors.
Even mechanistic explanations such as the Taylor Rule rely on
inputs that
are often left up to the discretion of the Fed policymakers: what is
the
potential GDP, do we use CPI or PCE, overall CPI versus CPI less energy
and
food, etc.
2008 Ron Paul 8:5
The setting of the interest rate strikes me as quite
similar to the way FDR used to set gold prices in the 1930’s, at his
whim,
resulting in economic havoc and uncertainty.
When market actors have to devote much of their time to
discerning the
mindset of government price-setters, to parsing FOMC statements and
minutes,
they are necessarily diverted from productive economic activity.
They cease to become purely economic actors and are forced to
become
political forecasters.
This is not a
problem isolated to this particular case, as businesses are forced to
reckon
with tax increases, expiring tax credits, import tariffs, subsidies to
competitors, etc.
However, because
the interest rate determines the cost of borrowing and therefore
determines
whether or not marginal long-term business investments are undertaken,
this
politicized interest rate manipulation has far more impact than other
government
policies.
2008 Ron Paul 8:6
This setting of the interest rate introduces the business
cycle into the economy.
Until we
understand the results these Federal Reserve actions have, we will be
doomed to
repeat these periods of boom and bust.
I
urge my colleagues to study this matter, and to resist the urge for
greater
Federal Reserve intervention in the market.
| |
