Some readers are upset because I put Rep. Ron Paul in the same category as Maxine Waters, Michele Bachmann and Jim Bunning in my last post. I apologize. Treasury Secretary Tim Geithner is not forced to dumb himself down when talking to Paul, and I’m sorry I inadvertently gave that impression. I still think that Paul is one of a small group of legislators that tends to most often confuse Geithner, but in a unique fashion only his own.
Seriously, I love listening to Paul every time his turn to talk comes up during a House committee hearing. He is articulate, has a clear point of view, and is utterly unafraid to argue from first principles each and every time he gets a chance. He also manages to make his points without adding the layers of scorn or hostility that many legislators feel prone to, especially when grilling members of the opposite political party. And sometimes that can inspire an equally thoughtful response:
Case in point: During Thursday’s House Financial Services committee hearing on regulatory reform, Ron Paul and Tim Geithner got into an interesting exchange on the usefulness, or lack thereof, of regulation:
PAUL: I am very skeptical of regulations per se, because I don’t think that solves the problem. And of course, everybody knows I’m a proponent of the free market…
But you know, in other areas we never automatically resort to regulations. When it — when it comes to the press, if we had regulations on the press, we would call it prior restraint, and we would be outraged.
If we wanted to regulate personal behavior, we would be outraged and call this legislating morality. But when it comes to economics, it seems like we have been conditioned to say, “Oh, that is OK because that’s good economic policy.”
I have — I accept it in the first two but not in the third, and therefore I challenge the — the whole system.
GEITHNER: I think you’re right to say that we have to be very skeptical that regulation can solve all these problems.
We have parts of our system which are overwhelmed by regulation. It wasn’t the absence of regulation that was the problem. It was despite the presence of regulation you got huge risks built up.
But in banks, because banks, by definition, take on leverage, transform short-term liabilities into long-term assets for the good of the system as a whole, they are vulnerable to runs. Because they’re vulnerable to runs, governments around the world have put in place insurance protections to protect against that risk.
Because of the existence of those protections, you have to impose standards on them — on leverage — to protect against the moral hazard created by the insurance. That is a good economic case for regulation.
I thought that was a pretty nice, eloquent explanation of why a completely free market might not be a great idea for the banking industry, and Geithner was clearly ready to elaborate further. But Paul interrupted, indicating that he wasn’t really that interested in a fundamental defense of banking regulation. He had a more subtle question to ask. According to Paul, the standard system of justice in the United States assumes “we’re innocent until proven guilty, and and yet when it comes to regulations … in the administrative courts we’re assumed to be guilty until proven innocent.”
Now Geithner was confused.
GEITHNER: You’re talking in the criminal context?
PAUL: Well, any way. I mean, any time a regulator comes in and says that you’re guilty of something, why doesn’t the government have to prove he’s guilty? Why can’t we assume…
GEITHNER: Guilty of a criminal violation or of a…?
PAUL: Civil or criminal. Why not? I mean, that’s a principle that’s been around for more than 1,000 years, or at least 800 years.
GEITHNER: I’m neither a regulator nor a lawyer, unfortunately, so I’m not sure I can give you an adequate answer to that. But I’d be happy to think about it a little bit and get back to you with a view on…
Geithner wasn’t sure what Paul was getting at, and I’ve got to say I am befuddled too. I look forward to the treasury secretary thinking about it some more and providing us some further insight.