REP. RON PAUL (R-TEXAS): Welcome, Chairman Greenspan. I want to start by referring to a speech you gave on January at the American Numismatic Society, where you spoke profoundly about monetary policy, where you expressed that central bankers have had this relative success over the past decades, and it raises hopes that the fiat monetary system can be managed in a responsible way. So I think you're still at that point of hoping that this system will work. I maintain that the jury is still out on whether fiat money will work on the long term.
And then you foiled it up by saying, in case it didn't work -- and I don't know whether you had tongue in cheek or not about this, but you said that we might have to go back to seashells and oxen as our medium of exchange. And then you reassured everybody that the open discount window would have an adequate supply of oxen.
Chairman Oxley, if we get this point, which I suspect we will someday, I ask you that we have hearings to debate the issue of what medium of exchange that we have before the Fed starts using oxen as a medium of exchange.
HOUSE FINANCIAL SERVICES COMMITTE CHAIRMAN OXLEY: Are you referring to the chairman here?
PAUL: Yes. I hope that you will at least consider that. But I think it is an important point, and I relate that to the Enron issue, because in many ways I think the system that you have been asked to manage it's similar to being asked to manage an Enron system. Because Congress is notoriously in favor of deficit spending; we are currently expanding the national debt at $250 billion a year and we have nearly a $6 trillion debt.
Now, we create that debt by buying votes. We spend a lot of money.
Now, the Federal Reserve comes in and they buy that debt in order to maintain the interest rate that they think is the right interest rate, and they take that and use it as an asset. You put it in the bank, you call this debt that we created as an asset, and you use it as collateral for our Federal Reserve notes.
So that's a pretty good scheme. And I think in the moral terms, as well as the economic terms, it's very similar to what the Enron - how Enron operates.
I'm not convinced this system works very well, because a lot of people here praise you for the adequate amount of liquidity -- and that's what inflation is: create more money, lower interest rate. Every time you ask for liquidity, every time you ask for lower interest rates, you're asking for inflation of the money supply.
And I think what we fail to do is every ask about the cost. Do we ever concern ourselves about the people who have had two-thirds of their income removed because they happened to be savers and living off interest, we gouge them with inflation, the loss of purchasing power, as well as taxing that, and yet a lot of people in this country have suffered from that particularly system?
Now, the analogy I would like to draw is something you said in your testimony on page 13, and you have mentioned several times now that Enron may be a good lesson. And I think it is. And I'm not for more of this regulation by SEC. I think you're correct that derivatives provide a market tool that is worthwhile.
But you said, "The Enron decline is an effective illustration of the vulnerability of a firm whose market value largely rests on capitalized reputation, with very little, if no, physical assets." That's exactly what our monetary system is all about, and that's what I believe the dollar is vulnerable.
We in Congress do not have a responsibly to run Enron. Some other government has a responsibility to deal with fraud. We have a responsibility to the dollar. And I think that's what we fail so often to address around here.
And you said that "Enron provides encouragement that the force of market discipline can be counted on over time to foster a much greater transparency." That's exactly what the market does with money. If you look at the rapid and the sudden devaluations of the fiat currencies around the world, if you look at what happened to us in '79 and '80, that was the market coming in and forcing vulnerability and transparency on us.
Now, gold gives you a hint as to what's happening. Gold has sent a mild message in this past year, in spite of the fact that central banks and others continually sell and loan out gold and pushing the price of gold down. But there is a message there. So I would ask you, can you see any corollary whatsoever on what you're asked to do in running our monetary system to that which Enron was involved in?
FEDERAL RESERVE CHAIRMAN ALAN GREENSPAN: I hope there are fundamental differences. I mean, there are -- first, dealing with essentially a fiat currency, what it is that we are doing is that the currency is granted value by fiat of the sovereign, as it is said in the textbooks. The issue there is that, in years past, there's been considerable evidence that fiat currencies have been mismanaged in general and that inflation has been too often the result.
What I was mentioning in the speech that you were referring to is the fact that there is some evidence that we're learning that lesson, learning how to manage a fiat currency. I've always had some considerable skepticism about whether that in the long run can succeed, but I must say to you, the evidence of recent decades is that it has been succeeding. Whether that continues is a forecast which I can't really project on.
The Enron situation is essentially one in which there was an endeavor to imply that earnings were much greater than they really, that increasing debt was hidden.
I think of no reason to have done what they did with their off-balance-sheet transactions other than to obscure the extent of the debt they had. And what essentially was squandered in that process was the reputational capital which they had succeeded in achieving over a period of time.
And I don't perceive that anything that we are doing as a central bank involves anything related to that. I hope that where we need to be transparent and indicate what we are doing, we do so, and we so except in those areas where it, as I mentioned to you previously, inhibits the ability to actually function as a central bank. But as I say in summary, I hope your analogy is inappropriate.
March 2, 2002