“I don’t agree with him on everything, but he is right about the out-of- control and unaccountable Federal Reserve.”
– Sen. Jim DeMint R-SC, referring to Rep. Ron Paul
The Republican Party has a problem trying to decide how to handle Texas Rep. Ron Paul, the presidential candidate who wants to end the Federal Reserve Bank’s independence from congressional oversight.
To assuage Paul’s concerns, Republican consultant Matt Mackowiak suggested the eventual Republican nominee might give Paul a role in choosing the new Fed chairman or incorporate some of Paul’s proposals on monetary policy into the Republican platform.
On the other hand, Republicans cannot alienate the U.S. Chamber of Commerce, which represents more than 3 million businesses. In 2010, it strongly supported the nomination of Bernanke to a second term as Fed chairman.
In Ron Paul’s book, “End the Fed,” he wrote, “There is no greater threat to the security and prosperity of the United States today than the out-of-control, secretive Federal Reserve.”
Paul argued that the “The Fed essentially creates money out of thin air, manipulates interest rates and interferes with the free market. By doing so, the Fed fuels our economy’s boom-bust cycle and has helped devalue our dollar by over 95 percent since its founding in 1913.”
Almost every mainstream economist believes keeping the Federal Reserve independent is important to achieve the monetary policy objectives Congress has established: maximum employment, stable prices and moderate long-term interest rates.
In a Wall Street Journal article entitled “Politicians Are Threatening the Fed’s Independence,” Frederick Mishkin, a former member of the Federal Reserve Board of Governors, wrote, “A substantial body of economic research and practical experience shows that insulating central banks from short-run political pressure improves both performance on employment and inflation.”
To prevent another Great Depression, Federal Reserve Chairman Ben Bernanke has presided over some of the most interventionist Fed actions since the central bank’s founding. Bernanke cut interest rates to near zero, opened the Fed’s discount window to a new range of financial institutions, conceived the $700 billion federal bailout of the financial system and tripled the Fed’s balance sheet, to about $2.3 trillion.
Bernanke is grappling with economic issues beyond the Fed’s control, including congressional gridlock over fiscal policy, the moribund housing market and Europe’s debt crisis.
The Fed, possibly in response to its critics, announced on Jan. 3 a major policy change to increase transparency. The first forecast is likely to make clear that the Fed intends to keep short-term interest rates near zero beyond the middle of 2013.
Republicans do not have a cohesive strategy on what should be done with the central bank. Some Republicans want to change the Fed’s dual mandate of low inflation, high employment to a single, unambiguous mandate focusing on inflation.
A Sept. 20, 2011, letter by the top two Republicans in both houses of Congress to Bernanke showed the dichotomy. It opened by saying the Fed “must be free and independent from political pressures” but then expressed the following concern: “It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate.”
Joseph Gagnon, a senior fellow at the non-partisan Peter Peterson Institute, wrote that “Republican politicians for the most part know that touching the Fed is stupid, but they want to be responsive to that vocal minority because those people are usually Republicans.”
Mitt Romney, the Republican front runner, appears to be among those straddling the divide between the mainstream and Paul’s views. He has promised deep spending cuts, smaller government and a new Federal Reserve chairman.
Or has Romney just become a Latter Day Libertarian?
Originally published in the Sarasota Herald-Tribune
