|from The American Prospect
Ron in Reserve
Why the GOP and Ron Paul finally set aside their differences to bash the Federal Reserve
TIM FERNHOLZ | November 24, 2010 | web only
For decades, libertarian Rep. Ron Paul has criticized the Federal
Reserve Bank, putting him outside both parties: Democrats who hoped
the central bank could manage sustainable growth and Republicans whose
policy idol was conservative monetary economist Milton Friedman.
Now, when Congress reorganizes in January, Paul is likely to be placed
in charge of the House panel that oversees the Federal Reserve, and
his fellow Republicans, led by Rep. Paul Ryan, are mounting an
extensive critique of the Fed's latest policy, even suggesting it's
time to rewrite the institution's operating mandate. But Paul is still
not exactly on the same page.
"I think they're missing the whole point," he says. "I don't want the
Fed to have any power!"
While the right's embrace of Paul's critique of the Fed is revealing
of how far right Republicans have shifted on economic issues in the
last few years, Paul is correct that few in the GOP entirely share his
perspective. The Republican establishment hopes to use Paul's
aggressive critique of the Fed to bolster their political ambitions,
while Paul hopes Republican politicos can create broader support to
abolish the institution.
Things were different eight years ago. After the 2002 elections,
Republicans began to reorganize the House and found Paul in line to
chair the monetary policy subcommittee. Putting someone with Paul's
views in charge of Fed oversight -- especially with conservative
favorite Alan Greenspan serving as chairman -- struck Republican
leadership as a poor idea, and so two committees, one on international
monetary policy and the other on domestic, were merged into one,
denying Paul an open slot.
Two years and another election later, Paul was again in line to chair
the committee, but Republicans were still leery; Greenspan's term was
ending and nominating a new chair would bring the Fed to center stage.
Rep. Deborah Pryce, more senior than Paul, was brought from the Rules
Committee to take Paul's place.
Paul and the current Democratic chair of the Financial Services
Committee, Rep. Barney Frank, confirm this account. "Paul used to joke
he'd have to wait for me to become chairman to ever get a senior
position," Frank says. What's changed?
According to Paul, it was the financial crisis. "No one was allowed to
criticize the Fed, [and] people rebelled against that," he says. The
bank invoked sweeping emergency powers, creating novel credit
facilities and deploying massive amounts of cash, thrusting Fed Chair
Ben Bernanke and then-New York Fed President Tim Geithner into the
limelight. Questions about the mechanics of the bailouts and who stood
to benefit were met with the Fed's customary opacity, raising public
suspicion. Paul saw an opportunity.
"This woke up a lot of people [and] gave us more credibility in
looking into the Fed," he says.
A proposal by Paul to subject the Fed to an independent audit by the
Government Accountability Office became a cause for populists of both
parties during debate over the financial-reform bill. The Fed,
however, bristled, invoking traditional fears of any measure that
might impinge its vaunted political independence.
The Fed's resistance carried weight with the Obama administration,
which depended on Bernanke's cooperation to accomplish its economic
goals, and Frank and the Senate Banking Committee chairman, Chris
Dodd. They negotiated a compromise with Paul and his allies that
limited the audit's reach, while placing new rules on the Fed to
create broader disclosure on future emergency actions. Both sides
Paul believes the concerns he raised -- and the results of the audit,
due by June 2011 -- will help increase public support for eliminating
the Fed. Paul, whose economic views track the Austrian School of
Economics, argues that the Fed drives the business cycle, creating the
asset bubbles that collapse and lead to recession. These views are
shared by many in the GOP-influencing Tea Party, and Paul hopes
further efforts to shine light on the institution in the next two
years will lead others to conclude the same.
The Republicans giving Paul this platform, though, have different
goals in mind. Like liberal critics of the Fed, they seek increased
accountability, not elimination. Critics, like Rep. Paul Ryan, who
chairs the House Budget Committee, argue the Fed's interest-cutting
policies will hurt the economy. However, Bernanke's monetary policy,
and his endorsement of fiscal stimulus in concert with long-term
deficit reduction -- the same rubric endorsed by the White House --
has backed the GOP into a corner. They've responded with desperation,
rallying around an effort to strip the Fed of its "dual mandate" of
maintaining price stability (fighting inflation ) and full employment.
"It seems odd to be bringing up the dual-mandate question at a time
when we're seeing record-setting disinflation and pressures for more
wage cuts," says James Hamilton, an economist at the University of
California, San Diego, who regularly comments on monetary policy at
his blog, Econbrowser.
The Fed hasn't managed to meet its informal inflation target -- 2
percent -- for two years, leading conservative and liberal economists
to raise fears of deflation, and the lack of success on the employment
front is plain. Moreover, economists argue that stripping the Fed of
its dual mandate wouldn't have much policy effect. Boston Fed
President Eric Rosengren has said the Fed would adopt similar policies
if it were only charged with price stability.
Paul sees no difference between the Fed's accommodation of the White
House today and during prior administrations. He views the situation
pragmatically, conceding that the dual mandate "is not a big deal."
"I'd probably vote for [ending] it, because it would look like it's
cutting back on Federal Reserve power, but I think it would be a
little bit of grandstanding and not have a real effect," Paul says.
"It offers an opportunity to associate the Federal Reserve with
Democrats believe the opposite: If Republicans attack anything
directing the government to create jobs in a time of 10 percent
unemployment, they'll appear callous. And, with deadlock expected in
the new Congress, the Fed is the only public institution taking
much-needed action to boost the labor market.
"That's a fight I'll be glad to have with them publicly," Frank says.
Consider, he suggests, "the spectacle of the conservatives joining
China and attacking Ben Bernanke, a Bush appointee. There's kind of an
America bashing going on from China, Germany, and the Republican
Even with Paul at the helm, Republicans will be hard-pressed to
actually change Fed policy legislatively. But attacks on the
institution could diminish the Fed's ability to change market
"I am concerned about the degree of politicization of Federal Reserve
policy," Hamilton says. "This ought to be an area where we should all
want to do what's best for the country ... [b]ut reaching a
constructive consensus may be challenging in the current political
The coming debate is full of strange bedfellows: It will test the
Republican leadership's ability to co-opt their increasingly
conservative supporters without alienating their traditional
constituencies, including the Chamber of Commerce, which supports the
Fed's recent decision. Democrats, whose hopes for a political
renaissance depend on an economic recovery, find themselves defending
a Republican chairman of an institution whose actions they, too,
mistrust. With the economy in the balance, and Ron Paul in the middle,
we can at least expect transparency.