Thursday, July 17, 2008

My Interview with Congressman Ron Paul

What follows below is an unofficial transcript of my interview on Kudlow & Company last night with former Republican presidential candidate Congresman Ron Paul of Texas. We talked about inflation, bailouts, the Fed's role, Fannie & Freddie and much more. Last night's K&C market panel also joined in the discussion.

Kudlow: All right. We welcome back to the show Ron Paul, Republican Congressman from Texas, former presidential candidate who had some tough words for Ben Bernanke. Take a listen to this please.

[Video of Congressman Paul’s comments during Bernanke testimony: “Inflation is a tax. And if the Federal Reserve, and you as chairman, have this authority to increase the money supply arbitrarily, you’re probably the biggest taxer in the country.]

Kudlow: Oh, Mr. Paul, I heard that this morning, I got so excited sir. I just had to have you on. I’m so glad you’re around today. I say almost nightly that inflation is the cruelest tax of all. And the consumer price index, I’m sure you know this, but I didn’t hear Bernanke reference it today, 1.1 increase in June, 7.9 percent at an annual rate over the past three months, and 5 percent over the last 12 months. Did Bernanke understand what you were getting at sir?

Rep. Paul: Well I was hoping he did. You know, I did bring up the CPI very briefly. But I thought he did concede half of the message that I gave because he did say that inflation was a tax. He did acknowledge that, but he didn’t acknowledge that he had anything to do with it. And you know, I did make the concession to him that he himself didn’t create every bit of inflation that we have today, because it does add up. It’s been over a period of time and we’ve been inflating for a long time. Every time we’ve had a crisis we have sort of arrested that crisis by more inflation, exactly what we’re doing now. But ultimately, people pay for it in higher prices. So if we look at the higher energy prices, and you and I would agree we need free markets and capitalism and more drilling and all this, but if there’s an inflated price there due to the depreciation of money that won’t solve that part of the problem.

Kudlow: Well that’s the deal. Let me go with you on this. The Federal Reserve is accumulating more and more authority now in our financial system. They may well be the so-called “financial stabilizer” of last resort. They now have new regulatory power over Wall Street investment banks. And of course, they’re supposed to balance unemployment and inflation. Mr. Paul, with all these new missions, it seems to me what’s gonna get sacrificed? Inflation and the dollar, isn’t that the way this is going to wind up?

Paul: Absolutely, but also our freedoms. And just that litany of what you listed there is central economic planning. We don’t believe in central economic planning. At least I don’t. But that’s central economic planning through the monetary system. And now the regulatory system, not only does the Fed have the power over the supply of money and the interest rates, but now they want the regulatory function over more than just the banks, all the financial industries. I tell you, I think it’s a bad sign for free market capitalism.

Kudlow: I’ve been talking sir, a little bit, just in recent days and weeks, this funny story, I’m calling it the new socialism. Nobody can fail in America. If something fails, then government’s gonna come in and bail them out. Now the latest of course is Fannie and Freddie. There’s a huge housing bailout bill out there. Who knows? Maybe we may [bail out] the airlines, the automobile companies, I don’t know. You know, Phil Gramm may have had a point. We are a nation of whiners. Nobody wants to lose. Capitalism, you’re supposed to have the great opportunity and freedom to succeed, but you also have the freedom to fail. What’s happened to the freedom to fail?

Paul: Well you know a lot of consumers and people who are losing their jobs, they have a right to be angry and complaining and I sympathize with them. And you talk about socialism, and we do have a form of socialism creeping in, but it sort of is of the fascist type, because we have business and big government, you know, working together. It’s not the old-fashioned type of socialism where government owns everything. But they do control a lot of the financial markets for the benefit of certain industries, whether it’s the banks or other industries. And they do want bailout. And they are socializing their failures and that certainly shouldn’t be what we’re working for.

Kudlow: Mr. Paul, can you stay with us and work with our panel for a moment or two?

Paul: I think so.

Kudlow: All right we’d love to have you. Jerry Bowyer what did you just hear? What’s the way out? And let me ask you too Jerry, I mean once again today, Bernanke, you get this big inflation number in the CPI. Yesterday it was the Producer Price Index. So far as I can tell Bernanke has thrown the dollar overboard. He’s thrown the dollar under the bus. He’s saying we have to worry about financial stability, a weak economy, high inflation. If you try to be everything to all people you get nothing done. I’ve kind of lost hope on the dollar Jerry. You heard Ron Paul. What’s your take?

Jerry Bowyer [chief economist Benchmark Financial]: Well don’t lose hope on the dollar because Bernanke will learn I think from experience. I think Ron Paul is right on the policy side, where he says that the Fed has been far too loose and we are devaluing our coinage. I don’t think he’s right in saying that there shouldn’t be a Fed, that there shouldn’t be a national bank, that it’s unconstitutional. I think that’s an overstatement. I want a Fed that does its job well. I want a lender of last resort, with a good strong money policy, a good strong dollar policy. So at least on that policy, I agree with Congressman Paul.

Kudlow: Mr. Paul, can we have a Fed that does its job well?

Paul: I don’t think so. I think it’s the system that by nature will fail. Because of, you know, the character of the human beings, whether they’re in the Congress or in the Federal Reserve. The temptation is – you know, even Milton Friedman said that you could have a type of Federal Reserve, or a computer, increase the money at 3 percent. But if you understand human nature, 3.5 percent might be better than 3 percent. And the Congress loves this because they can spend money, they don’t have to tax directly, and they can always resort to the Fed. So whether it’s the Fed deliberately doing this or the pressure from the political side and the Congress, no, I don’t think so. It’s the monetary system. You have to have the consumer in charge and only a gold coin standard can do that. Because if you mistrust the system, you can always say, “Hey, are they printing too much money? Let me see if they have the gold in the bank.” And that’s the only real test of money.

Kudlow: Gold, gold…

Bowyer: We didn’t have a gold standard in the 1980s and we had great money.

Kudlow: Yeah gold is definitely my favorite four-letter word. I mean it is, look, we basically had the equivalent of $300 dollar gold for almost twenty years. I mean it worked beautifully. It all broke down at the beginning of the new century. I mean that’s the interesting thing. It just completely broke down. Joe Battipaglia, you’ve heard Congressman Paul. You’ve heard Jerry Bowyer and others. Joe, if you buy into it, I don’t know if you do or not, what do you do as an investor, if you’re faced with this problem, the breakdown in Federal Reserve and monetary discipline. Inflation is the cruelest tax of all. As an investor Joe, what do you do about it?

Joe Battipaglia [Stifel Nicolas market strategist]: Well unfortunately you become a trader, not an investor. Because policy decisions will be made that will work in contrast to the economy’s proper functioning, and you will have bouts of inflation, and you will have bubbles. So, the long-term strategy of buying and holding and growing equity gets tossed over to trading environment. And you swing from commodity classes to traditional assets like equities and bonds. And that’s a very dangerous place to be because you create more risk in the marketplace, you retard investment I think, and you also retard the ability to accumulate wealth over time. Because what’s happening is monetarism is being put at the beck and call of Keynesianism. So now you’ve got government policy run amok and the central banker coming in behind to make sure there’s no failure, puff up the economy, create more credit, keep the bubbles going. It’s a very bad mixture.

Kudlow: Well it’s over-tinkering and fine-tuning. You’re exactly right. David Kotok, what’s your take on all this?

David Kotok [co-founder & CIO of Cumberland Advisors]: Well I have to weigh in on defense of the Fed. The Fed cannot do its job until and unless it restores financial markets with functionality. We have dysfunctional financial markets. That means the Fed…

Kudlow: What does that mean? What does that mean? In plain language, what did you just say?

Kotok: Some markets are not clearing at all, like adjustable rate preferreds, or student loans. Other markets are not clearing at pricing which is not normal. That was true of the federal agencies. So you have to have a fix, and that’s part of this process. And if you look at history far back enough you will find in the Gold Rush days 150 years ago, there was rampant inflation in California during gold discoveries. Gold is not the magic cure.

Kudlow: Jerry Bowyer, did Dave Kotok just blame markets? Did I hear that right Jerry?

Bowyer: Well I think what he did is he saw that there’s a problem in the markets and basically thought that the Fed could solve that with the printing press. There are problems in credit markets, but they’re regulatory problems. A lot of these loans were foisted on the banks by political pressure, [the] Community Reinvestment Act and other things. And so the banks did what the regulators told them to do, and now they’re having trouble selling those mortgages because a lot of them shouldn’t have been issued in the first place. You can’t solve that with the printing press. If you could solve it with the printing press, it would already be solved because the Fed funds rate is at 2 percent and we are pouring money into this economy. The solution is not more money.

Kudlow: Well in Argentina, it would be the center of the world economy. Jim Lacamp do you want to weigh in on this? You’ve heard Mr. Paul…

Jim Lacamp [portfolio manager, RBC Dain Rauscher]: Yeah.

Kudlow: You heard the Kotok opposition to it. You heard Jerry Bowyer and Joe B. I want to know, should we be advising investors to run a sort of inflationist investment policy? In other words, today, commodities, basic materials and energy got hit, but maybe you buy those on the dips because that’s the new long run play. And as Joe Battipaglia said, inflation is inherently unstable. So you can’t buy and hold, you’ve got to trade the market. What’s your take Mr. Lacamp?

Lacamp: Yeah it’s a fiat monetary currency system. And when you have something like that it builds up a bigger and bigger mountain of debt and creates asset bubbles just like Joe said. And so the buy-and-hold really hasn’t worked over the last ten years. The ten years numbers on the S&P right now are about 2.7 percent per year. That’s sub-par throughout history. And the reason is because we keep creating these bubbles. And Fannie May and Freddie Mac are poster children for why we should not have government involvement in our financial system to a big degree. And the reason is that these are semi-socialistic, not even semi-socialistic, they’re socialistic entities that were allowed to create bad business models because of this implied government backing. Well now we have to give this unlimited line of credit with taxpayer money to a bad business. That’s not good policy. It rewards bad behavior. And I think that we need to get government out as much as we can.

Kudlow: Alright Mr Paul, just two quickies on the way out sir. We appreciate your time. You gonna vote for bailing out Fannie and Freddie?

Paul: No. No way. I can’t do that. Because that would contradict everything I’ve been saying. No. We should have the cleansing of the system. All the malinvestment, all the problems came from the artificially low interest rates. Yes, the markets are dysfunctional. But the problem should be laid at the doorstep of the Federal Reserve. Like I said, not just Bernanke, but the system itself. All of the Greenspan years. It caused all of the malinvestment. There were a lot of sound economists over the last ten years warning about this housing bubble. I even had a bill in eight years ago to remove the line of credit to the Fed saying it was a moral hazard because even though it was only $2.5 billion dollars, I said when push comes to shove, it’s gonna be a lot more. Now it looks like it’s $300 billion dollars.

Kudlow: Yeah, we’re gonna go from $2.25 to $300. Last one, real quick sir. Political question. I’m going to switch gears. Have you thrown your support to Bob Barr, the Libertarian candidate?

Paul: No. No I have not. I have not endorsed any one particular candidate. The only question I’ve answered has been would I vote for John McCain, and I wouldn’t be able to.

Kudlow: But you haven’t ruled out voting for Barr, is that correct?

Paul: No I have not. I’ll probably do some type of announcement like that sometime in September.

Kudlow: All right. We appreciate your time very much.

Paul: Thank you.

Kudlow: Congressman Ron Paul, thank you for joining us.