Weird Monetary Economics and the Republican Party

Ron Paul's views on the role of the Federal Reserve System are well-known. Paul has found little support for actually ending the Fed, but he managed to get a bill through the House during the summer which would have established additional "auditing" of the Fed. Fortunately, the bill went nowhere in the Senate.

The Fed is of course audited by the General Accounting Office. What Ron Paul has in mind is not auditing in the conventional sense, but an opening-up of FOMC deliberations, along with other elements of Fed decision-making. While transparency might seem like a good thing, there are elements of Fed secrecy that actually work to our advantage. A strong and independent Fed may be able to work more effectively in the public interest than a Fed that is constantly being "audited" by Congress.

The view that the Fed is in need of reform has been written into the Republican Party's election platform. The key passage is this one:

...the Republican Party will work to advance substantive legislation that brings transparency and accountability to the Federal Reserve, the Federal Open Market Committee, and the Fed’s dealings with foreign central banks. The first step to increasing transparency and accountability is through an annual audit of the
Federal Reserve’s activities. Such an audit would need to be carefully implemented so that the Federal Reserve remains insulated from political pressures
and so its decisions are based on sound economic principles and sound money rather than on political pressures for easy money and loose credit.

Determined to crush the double-digit inflation that was part of the Carter Administration’s economic legacy, President Reagan, shortly after his inauguration,
established a commission to consider the feasibility of a metallic basis for U.S. currency. The commission advised against such a move. Now, three decades later, as we face the task of cleaning up the wreckage of the current Administration’s policies, we propose a similar commission to investigate possible ways to set a fixed value for the dollar.

There are two ideas in there. The first is Ron Paul's Fed audit, and the second sounds like sympathy for a return to the gold standard. Once we enter into discussions of how precious metals should be an integral part of modern monetary systems, we have slipped into the territory of the lunatic fringe.

But this is just the Republican party's platform. Maybe the candidates aren't actually serious about it. Romney was asked about Fed audits at a town hall meeting, and expressed what the Wall St. Journal characterized as "lukewarm support," coupling sympathy for an audit with comments on the importance of Fed independence (much like in the party platform).

Similarly, public comments by Romney on the Fed's recent policy announcement were somewhat muted. Romney's campaign issued this statement:

The Federal Reserve’s announcement of a third round of quantitative easing is further confirmation that President Obama’s policies have not worked. After four years of stagnant growth, falling incomes, rising costs, and persistently high unemployment, the American economy doesn’t need more artificial and ineffective measures. We should be creating wealth, not printing dollars. As president, Mitt Romney will enact bold, pro-growth policies that lead to robust job creation, higher take-home pay, and a true economic recovery.

Romney seems to understand that directly criticizing the Fed is a bad idea if you are running for President, so he uses this as an opportunity for Obama-bashing. There is some Fed-bashing in the statement though. "Artificial and ineffective measures?" That may be true, but Romney should not be saying that, or approving of other people saying it. "We should be creating wealth, not printing dollars?" Is this saying that financial and monetary factors never make a difference, or what?

Paul Ryan, in his attack-dog role, goes further. He says, commenting on the Fed's new policy:

One of the most insidious things a government can do to its people is to debase its currency.

Now we're venturing into Ron Paul territory. Start talking about "debasement," and you're not many steps down the road to Murray Rothbard, apparently a key influence on Ron Paul. Rothbard is a somewhat confused libertarian. Markets are good, except when it comes to the provision of "money." According to Rothbard, not only should we return to the gold standard, but anything that looks like a transactions medium should be backed 100% by gold. Most economists, including Paul Krugman, can understand why this is a bad idea.

Bad monetary ideas have always been with us. But, like other bad ideas, the financial crisis and the recent recession appear to have flushed those ideas into the open again. Ben Bernanke may think he has been doing the right thing, but he might do well to take a lesson from Alan Greenspan. While Bernanke knows far more economics, Greenspan was a master at staying out of sight. Good central banking proceeds in a way that nobody notices. The more unusual things you do, the more you get noticed.