Aired on Bloomberg TV 4-30-2012 Ron Paul vs Paul Krugman Debate
Paul Krugman is simply wrong about needing the government to set interest rates. The market would do a better job of managing demand and supply. Where government is needed is to regulate the banks and prevent excessive debt growth by the banks.
The Fed fails to grasp that an interest rate is a price—the price of time—and that attempting to manipulate that price is as destructive as any other government price control. It fails to see that the price of housing was artificially inflated through the Fed’s monetary pumping during the early 2000s, and that the only way to restore soundness to the housing sector is to allow prices to return to sustainable market levels. Instead, the Fed’s actions have had one aim—to keep prices elevated at bubble levels—thus ensuring that bad debt remains on the books and failing firms remain in business, albatrosses around the market’s neck.
The Fed’s quantitative easing programs increased the national debt by trillions of dollars. The debt is now so large that if the central bank begins to move away from its zero interest-rate policy, the rise in interest rates will result in the U.S. government having to pay hundreds of billions of dollars in additional interest on the national debt each year. Thus there is significant political pressure being placed on the Fed to keep interest rates low. The Fed has painted itself so far into a corner now that even if it wanted to raise interest rates, as a practical matter it might not be able to do so.
via Ron Paul: “Blame The Fed For The Financial Crisis” | ZeroHedge.
I agree that the Fed should not interfere with interest rates. It causes market imbalances that later lead to recessions and bubbles in stocks and housing and threaten the very survival of the banking system the Fed is trying to protect.
QE achieved the opposite of its stated objectives, raising long-term interest rates with lowering unemployment, but did not really increase the national debt by a dollar. Sales of bonds by the Federal Treasury to the Federal Reserve is like the US government selling to itself. The Fed is just an off-balance sheet, special-purpose entity (think Enron, bank CDOs and other bad smells) created by the government and banks in 1913 to bypass restrictions in the Constitution on the issue of bank notes. In all but name it is a division of the US Treasury. The majority of the “independent” board of directors are political appointments. Ever seen a dissenting vote coming from one of the political appointees? Regional board members, where most dissenting votes come from, are a minority appointed by regional banks. They can dissent, but when it comes to counting the votes they’re outnumbered.
