Following is the unofficial transcript of a CNBC interview with Representative Ron Paul on CNBC’s “The Kudlow Report.” All references must be sourced to CNBC.

Fed Under Fire

Discussing why he challenged Fed head Ben Bernanke's monetary policy, with Rep. Ron Paul, (R-TX) House Financial Services Subcommittee chair.

LARRY KUDLOW, host: Welcome back to THE KUDLOW REPORT. I'm Larry Kudlow. At the top of this half-hour, Fed head Ben Bernanke under fire for the second day in a row, appearing before Congress to justify his pump priming, easy money policies. But our next guest, House member Ron Paul, a fierce Fed critic, ripped into the Fed head today, even challenging big Ben on the very simple definition of the dollar. Take a listen.

Representative RON PAUL: The Fed really facilitates this spending, and until we realize this, I think the Fed is involved with our deficit and encourages, as well as the Congress. How can you run your operation and--without a definition of the dollar? And what is your definition of a dollar?

Mr. BEN BERNANKE: My definition of the dollar is what it can buy. Consumers don't want to buy gold. They want to buy food and gasoline and clothes and all the other things that are in the consumer basket.

KUDLOW: All right, the oil shock is an inflation tax hike on the consumer. I'm not sure what Mr. Bernanke was getting at. The question we have, where is Ben Bernanke's recipe that will not drive inflation sky high in the face of this oil shock?

Here now is the aforementioned Congressman Ron Paul. He's a Republican from Texas. He now chairs the House Financial Services Subcommittee, which oversees the Federal Reserve.

Mr. Paul, a hearty welcome back to the show.

Rep. PAUL: Thank you.

KUDLOW: You know, just on this dollar exchange he said--Bernanke says people don't want to buy gold, they want to buy a steady basket. If the dollar were tied to gold, wouldn't the consumer price basket be steadier?

Rep. PAUL: Absolutely. I mean, when they have unlimited ability to print money when they need it, it always has to go down in value. You know, there are certain things that we can't predict precisely from Austrian economics, but you can predict trends and certain economic laws. You print more money, the value goes down. And they don't understand that, and they want license to just go ahead and print the money. But they'd like--like the Fed wants to blame the Congress, and at times the Congress wants to blame the Fed. But I think as long as you have the Fed there willing to keep interest rates low, they will do it. You know, Bernanke was complaining about the Fed--I mean about the Congress spending too much, but I think he was supportive of all those TARP funds.


Rep. PAUL: And, you know, he believes, like a liberal does, that you have to spend more money, you have to increase demand. That's all he talks about, not work and savings and investment, increased demand. So they pay us the money whether it's the Fed or the Congress. So he's not being exactly honest with us on that, I don't believe.

KUDLOW: You know, Congressman Paul, a lot of people are scratching their heads, trying to figure out, in the last two days what is Mr. Bernanke's plan with respect to the oil price shock that will not lead to a big inflation or a recession or both? Did you hear a Bernanke plan, or is it just going to be destroy the dollar?

Rep. PAUL: Well, he hand set that. In his talk he talked about he has a plan, he will do it. He wants the right amount of inflation, not like no inflation. The right amount is not too low and not too high. And if it gets too high, in one of his public interviews he says, `I absolutely, 100 percent know exactly what to do.' And, for him, that is to raise interest rates. And

I mentioned it to him there briefly that, yes, their solution for those problems is to slow down the economy in order to quiet the prices. And they think prices only come by higher demand. But they have to think about the supply and demand of the money. If there's less a demand for money, then, of course, the money is worth less and the prices will go up. But they will not address that. They have all this lists of other things that causes inflation, you know, oil shocks and foreigners and profits and everything else. But they never say, you know, the real culprit in this is the Federal Reserve and their money machine.

KUDLOW: Would oil be $102 a barrel today if we had a sound dollar and a sound policy?

Rep. PAUL: Absolutely not, it wouldn't be. You know, if--as flawed as the Bretton Woods agreement was, you know, if we didn't live beyond our means and cause that system to collapse, you know, oil would probably be $5.


Rep. PAUL: But, of course, that was doomed to collapse because there was too much leeway and to much room for the cheating to go on. And that's why that system fell apart.

KUDLOW: Well, you called inflation a deadly threat to the economy today, blamed it on Fed policy. Bernanke disagreed, says all these threats are temporary. What's your response to his argument about temporary?

Rep. PAUL: Yeah, well, I challenge him on that, that it's not significant and it's temporary. I think he's dreaming. And I often wonder, I personally don't know whether he knows what we know and what we think about. And his job is to be a cheerleader. Because, you know, if I were there and I had to tell the truth, I would be telling what I'm telling now. And, of course, if a Fed chairman said what I said, oh, it would panic the world! You know, `Oh, you mean inflation really is coming?' But the markets will sort it out. They can fool the markets for a little while. He can say one thing, and it works. But ultimately the market rules, and just like it took years and years for that Bretton Woods agreement to break down. But eventually the market ruled and said, `Look, you're abusing it. Gold is not at $35 an ounce.' It had to break down. And once again the market is ruling, and the market is saying prices are going up.

What he doesn't have control of, and he thinks he does, is he's--he has this monetary base almost tripled in size in these last couple of years, but it hasn't responded by the multiplier. It hasn't translated into using. He has no control over that. That is controlled by the psychology of consumers and investors and, you know, the velocity of money. All these things decide those things, and he doesn't have any control over that. The only thing he has control of is the supply of money, and he's already committed the air, and he cannot rescind that very easily. It's going to end badly.

KUDLOW: I don't recall Mr. Bernanke, in the hearing today or yesterday, mentioning the fact that the consumer price index, 0.4 that last two months, each of the last two months, that's 5.1 percent at an annual rate. That is not price stability. That's not even a temporary lift of inflation. That's already 5 percent inflation, sir, and that's before the gasoline price increases hit.

Rep. PAUL: Right. And that is without admitting that if you calculated with the old CPI, it's actually over 9 percent. You know, there is an economist that runs shadow stats, and he measures it, and he claims it's over almost 10 percent inflation rate. So, no, it's out there. And, of course, what the markets want to hear and they always emphasize on the mornings when they release these numbers is, `Oh, but the core rate, we don't count food and energy. That doesn't count.' And so, but it's going to be known. You can fool the markets for a while, but even as much complaining as I do about the power of the Federal Reserve and the power of these spendthrifts in Congress, markets are more powerful. They're stronger, and they will rule the day. And it just takes a little bit of time.

KUDLOW: Congressman Paul, just one other point, regarding the oil shock itself and the potential shortage of oil because of Libya and the Middle East and so forth, as a free market advocate, what would you recommend for US energy policy? I mean, we shouldn't just be a cowering tiger, you know `Everyone's picking on us.' What we should be doing in the free market realm to produce more energy?

Rep. PAUL: Protect the free market. You know, I don't think we should subsidize anybody or encourage certain things. But we should get out of the way. We shouldn't interfere and say, `Grow corn and put it in ethanol.' We shouldn't inhibit nuclear power. We shouldn't inhibit drilling. Get out of the way, and then if there is a real, true oil shock, you know, that is out of our control in the Middle East and we're not over there running the Middle East, you say, `Then what?' Well, the price is going to go up. Price is a good sentinel. What did we do last time a year or two ago? People drove their cars a lot less, saved a lot of gasoline.

But we need to get the government out of the way. They don't have to have an energy policy and say, `Well, it's going to be natural gas. It's going to be ethanol. And it's going to be all these different things.' The market will find the best price. People aren't buying these electric cars so far because so far the price isn't right. But I think what would happen--and let's say we didn't have any oil from the Middle East. But if we had a free market here, we'd probably have a lot of nuclear power. We'd have really super good electric cars, and maybe true ethanol. You know, not based on subsidies, and maybe it would come from sugar cane or even hemp. I mean, the market should--see, we're not even allowed to raise hemp in this country, and it's a pretty good source of ethanol. So we've done a lot. But I--my policy would be to restore the free market and get the government out of the way.

KUDLOW: Congressman, last one, briefly, sir, if you would. With a certain amount of economic policy chaos and the threat of inflation and the threat that it's the 1970s all over again, is this your moment to run for president?

Rep. PAUL: Well, that I don't know. But it might be an opportunity under these conditions for me to keep speaking out. So whether I run or not, I hope I still have an ability to reach some people. And I appreciate very much your willingness to have me on your program.

KUDLOW: Anytime, sir. We always have a place. And the free market must roll. Representative Ron Paul, I can't thank you enough.

Rep. PAUL: Thank you.

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