Friday, February 26, 2010

Has Ron Paul Lost It?

Full disclosure: I am not a Ron Paul fan. I know that he has a loyal and devout following but I am not one of them. He has been going around saying that the Fed has doubled the money supply. It hasn't. M2 (currency, checkable deposits, small time and savings deposits) has increased from $6.6 trillion to $8.5 trillion from 2006 to December 2009 - certainly not a doubling. What Paul probably meant was to say that the monetary base (currency plus bank reserves) has doubled - from $813 billion to $2 trillion. This is not trivial. The base is the fuel of the money supply, but it is not the money supply. The Fed can control the base by contracting reserves which will limit money supply growth. Indeed, Ben Bernanke has outlined such a plan, but I think Bernanke's plan is suboptimal. He wants to discourage the banks from making loans by paying higher rates of interest on their reserves. A more efficient way would be to raise the reserve requirement to 100 percent. Then the banks could not make any loans at all and thereby could no longer create money. Loans would still be made but through a non-depository bank subsidiary that would borrow the funds and then lend them out - much like mortgage bankers and finance companies do already. But I digress. In addition to continuing to spout misinformation, when Bernanke gave his semi-annual testimony to Congress (Humphrey-Hawkins Report) on February 24, Paul used the occasion to accuse the Fed of making secret loans to Saddam Hussein during the 1980s and funding the break-in at the Watergate. Needless to say Bernanke was taken aback, probably both by the sheer audacity of the allegations as well as their irrelevance to his testimony. Bernanke responded the Paul's charges were "absolutely bizarre." Bizarre is an understatement. Ron Paul has simply lost it - if he had "it" in the first place.


Anonymous said...

You might wanna check out Ron Paul’s clever response to all of this:

“I would like to enter into the record the following letter from Professor Robert D. Auerbach, a professor at the LBJ School of Public Affairs at the University of Texas. This letter provides additional information regarding remarks I made at yesterday’s Financial Services Committee Humphrey-Hawkins hearing, remarks which Federal Reserve Chairman Bernanke categorized as “bizarre.””
- I think Ron Paul might deserve a little more credit here – he may have looked bizarre – but he’s milking this for more media and now all of these authors and articles are showing up that verify the things he is saying. I admit, he looked bizarre, but he’s the one getting the ink and exposure out of this! (case in point, this blog post) – And it doesn’t hurt him if he turns out to be largely right. Just take a look at the link above, there are numerous mainstream sources for the claims Paul made. – And his point was that, because of the secrecy, we can’t even really investigate these things. – I think it’s a whole lot nuttier to turn a blind eye to the unbridled power of the FED. – Just a thought…

John in KY said...

I too am not a Ron Paul fan, but sometimes even he does have some good points. I understand he is technically wrong, but what he is trying to point out( I think ) is that we have been printing money like its toilet paper. Soon tp may be worth more, lol. I have been trying to understand why inflation hasn't kicked in much with all the printing and monetizing debt here lately. My best hypothesis is that the money being printed isn't actually in circulation in the public(in the monetary base-being purposely held by bailout banks etc.)so it doesn't create much inflationary pressure. If the banks were to start lending that money-ex. the econ. starts to rebound- then won't that start inflationary problems when that money circulates? Kinda catch 22? Banks don't loan, we stay in a recession- Banks do loan, we have a short boom followed by steep inflation? I hope I'm wrong but isn't that what those two figures are? m2 = generally the money in circulation in public. monetary base= generally all dollars that have been printed? Please explain in more detail. Thanks for your patience. I am trying to better understand what is happening economically because I think it is more dangerous in the short term than any other issue facing the nation- health care, Iran nukes, or terrorism on our soil. I have thought since free trade with China took off that we are in deep trouble long term, it's just here sooner than I thought. A largely service sector based economy cannot rebound well or at all in a downturn.I think our best hope is a Fair Tax type system that removes all taxes from manufacturing to help the USA compete against China.