UPDATE: Senator Rand Paul has responded to his critics. After his latest push to audit the Fed, everyone from Fed governors to journalists like Pedro da Costa in the video above have critized his strategy. The Fed is already audited, they said; its balance sheet is open.
Sen. Paul specifically addressed criticism from Former Fed Chairman Donald Kohn, who said: "There is essentially no credit risk on the Fed balance sheet right now."
In a recent interview with Glenn Beck, Sen. Paul responded:
"When they say there’s no credit risk, they created four-and-a-half trillion dollars to buy these bad mortgages. So is there no risk in creating it?...They didn't borrow money from someone. They didn't go out and work and earn it. They just created a computer entry to pay the banks for these assets. And the point I've been making is, who did they buy these things from, and what did they pay for them? .... The Fed has 4.5 trillion dollars' worth of so-called assets. We don't know what they are."
Many critics siezed on that last statement to note that the Fed's specific holdings are known and available for inspection. "You can search by individual bond number," quips Politico's Ben White. "Go knock yourself out.
Most observers beleive the anti-Fed comments from Paul are meant to target libertarian voters. Paul was quick to dismiss that assertion before launching into another train of thought very popular on Main Street - a criticism of the backroom dealings on Wall Street.
"There's a question of favoritism... I mean, Bear Stearns is bailed out. Does that have anything to do with who runs the bank?" Sen. Paul said. "For decades, there’s been a revolving door between the Fed, the Treasury, and Wall Street again... I’m tired of bailing out these big banks when they make bad decisions.”
EARLIER: It’s a rivalry almost as old as the Yankees and Red Sox: A politician with the last name Paul versus the Fed. The latest iteration comes from Senator Rand Paul (R-KY) who wants to audit the central bank. He’s raised some $88,000 for the campaign via his “Audit the Fed Money Bomb” web site and hopes to hit $150,000 by next week.
We should note that the Fed is already audited by both the Government Accountability Office and an independent auditor, so Paul’s push is about more than just auditing. Some speculate that Paul’s hoping to find out where the Fed buys its debt from, but more than that, the push is likely meant to give Congress more influence over monetary policy.
Paul is also pushing legislation that would allow Congress to be more openly critical of the Fed. Chairwoman Janet Yellen has vowed to fight the push, and several Fed governors have vocally fired back. “Who in their right mind would ask the Congress of the United States — who can’t cobble together a fiscal policy — to assume control of monetary policy?” asked Dallas Fed President Richard Fisher in an interview with The Hill.
It’s important to remember that this fight isn’t new and that in many ways Rand Paul is continuing the legacy set up by none other than his father, former Congressman Ron Paul. “There have been several Republican efforts, going back, of course, to his father Ron Paul, that wanted to overtly end the Fed. But that line about ending the Fed has been moderated into, ‘Let’s audit the Fed,’” said Pedro da Costa, an economics reporter at the Wall Street Journal who focuses on the Federal Reserve. “While that sounds very good, the Fed is already audited. The Fed has fairly open books.”
That’s not to say the Fed is an open institution. Remember, it took a Bloomberg lawsuit to get the Fed to reveal it’s lending practices during the financial crisis. “It’s not that there’s nothing to be criticized at the Fed,” said da Costa. “But in terms of the Fed’s book, they’re already clearly audited and you can find them online. So clearly the Fed audit is a cover for greater Congressional influence.”
In fact, when it comes to the Fed, the Paul apple may not have fallen far from the tree. Congressman Ron Paul had a long and very public war with the central bank that can be summed up with one essential goal: eliminate it. While Rand Paul has not made that call in a major way, there have been signs that he shares his father’s sentiment. Da Costa points out that at a recent campaign rally in Iowa, someone asked the younger Paul about eliminating the Fed. His response, according to da Costa, was, “That would be great, but you can’t, because you have debt.”
“The connection didn’t really make sense,” da Costa said. “But the his point was, ‘Yea, we’d love to end the Fed.’ So he does support the idea of ending the Fed, but short of that he at least wants to have more control over it.”
Over the weekend, Sen. Paul outlined his concerns about the central bank in more detail in a post to conservative web site Breitbart.com. He starts the piece with, “If the Fed was a real bank, without extraordinary powers, it would be insolvent.”
That argument is based on the fact that the Fed has a $5 trillion balance sheet based on a $57 billion capital base, said da Costa. But the argument is inherently flawed. When Yahoo Finance Editor-in-Chief Aaron Task asked da Costa if Paul has a point in the video above, da Costa responded bluntly: “No, he totally doesn’t.”
Da Costa e-mailed economists about the op-ed and said the conservative thinkers didn’t respond, while the middle-of-the road and liberal economists were quick to criticize Paul. “[They] said the reason this is ridiculous is that the Fed is a central bank, not a commercial bank.” That means insolvency is impossible because the bank can print its own currency.
Task pushed the issue further by bringing up Paul’s argument that the Fed’s balance sheet has trillions worth of mortgage-backed assets on it, something many view as risky. “Shouldn’t we be concerned about that?” asked Task.
“He confuses apples and oranges,” explained da Costa. “What he says is that the other $2 trillion that aren’t treasuries are distressed derivatives, used car loans. He threw all these kind of asset backed securities into the mix which is not the case. What the Fed owns is mortgage backed bonds issued by, or backed by, Fannie [Mae] and Freddie Mac.”
That distinction is key, per da Costa, because it means the risk ultimately lies with the Treasury Department. Treasury is the body that would be on the hook if those loans get into trouble. So far, Rand Paul doesn't seem to have a beef with treasury, though, beyond returning large chunks of his office budget to the department.
Paul's Bretibart op-ed also includes a charge that the Fed prints money that it uses to lobby for Congressional oversight, so it seems like the battle of Paul vs. the Fed is set to go at least a few more rounds.
Do you think Congress should have more control over the Fed? Let us know in the comments below.
Editorial note: The original version of this article was published under the title "Rand Paul vs. the Fed: Like father, like son." The title has been updated to reflect the most recent developments.