In what is usually the most heated and interesting exchange of Bernanke's excursions to Congress, the Fed Chairman was forced to sit down and listen as Ron Paul scolded him for "debasing" the currency and "destroying" the wealth of millions of Americans.
Ron Paul first asked Bernanke if he did his own grocery shopping, to which the Fed Chairman responded with a "yes." Paul immediately cut him off and said "no one believes the 2% inflation rate," claiming it was actually closer to 9%. "Someone is stealing wealth," said Ron Paul, in full campaign mode.
He then pulled out a silver eagle, a silver coin that has nominal face value of one dollar that is legal tender. Ron Paul told Bernanke that in 2006, as he took the top spot at the Federal Reserve, an ounce of silver bought about 4 gallons of gas. Today, said Paul, it buys about 11.
"That's preservation of value," yelled an excited Ron Paul….Paul once again lashed out, telling Bernanke "the record of what you've done is destroy the currency," before saying he still can't pay his bills or taxes with silver eagles, just as his time was running out and he was forced to forfeit the floor…
For more background on why Paul feels this way about poor Mr. Bernanke, you might want to check out this new review essay of the book Alchemists of Loss: How Modern Finance and Government Regulation Crashed the Financial System, by Kevin Dowd and Martin Hutchinson, written by Austrian economist Roger Garrison from the Winter 2012 issue of The Independent Review.
In it Garrison makes a good scholarly case for the Federal Reserve's complicity in the financial crisis we are still not out of. An interesting chunk of that, about how no degree of intelligence on the part of a Federal Reserve chief short of not inflating the money supply would likely have helped:
The fact that the Greenspan Fed adopted a loose-money stance in the wake of the dot-com bust and well into this century's first decade was a game changer. This accommodation freed the housing sector from having to draw investment funds from other sectors. It fueled an economywide boom—with the housing bubble, leveraged by the practitioners of modern finance, being its most dramatic aspect. In one important respect, the Fed found itself in uncharted waters. Rather than countering an upward pressure on interest rates, as in the earlier episodes, it compounded the downward pressure. With interest rates at historic lows from mid-2003 to mid-2004, the mismatch between saving and the temporal pattern of investment was doubly strong.
It was another episode of turbocharging, but this time it was primarily the ongoing distortion of housing markets that was being turbocharged. The boom's unsustainability could not have been in doubt in the eyes of those who adopted an Austrian view. And the fact that the bubble was doubly artificial provided a strong hint about the difficulties inherent in the subsequent recovery.
A Volckerized Fed would not have served the economy well during this most recent boom. The relatively mild rate of inflation was consistent with an unemployment rate that fell to subnatural-rate levels (that is, below 5 percent in the final throes of the boom) and a corresponding high level of output. A Fed chairman whose exclusive focus was on price stability could only remain agnostic about a coming downturn, claiming weakly, as Alan Greenspan repeatedly did, that you don't know you're in a bubble economy until the bubble bursts.
Moreover, Volckerization could not have been achieved in this most recent episode by Friedman's monetary rule, according to which the growth rate of the money supply should be fixed at some low single-digit value. Such a rule would require that there be a meaningful money-supply target, such as M1 or M2, at which the Fed could take aim, and a predictable relationship between the targeted money-supply aggregate and the price level. Volcker himself was the last Fed chairman who enjoyed that circumstance. After implementation of the Depository Institutions and Monetary Control Act of 1980, the meaningfulness of the various M's and the predictability of the M-P relationship began to fade and were gone by 1987, when Greenspan assumed the chairmanship. Hence, even if Greenspan had asked, "What would Volcker do?" he could not have gotten an answer applicable to his own circumstances.
