Clueless in Kentucky: Rand Paul’s ideas about the Fed make absolutely no sense
By Matt O'Brien
February 10 at 8:21 AM
U.S. Sen. Rand Paul, R-Ky., speaks during a rally hosted by Liberty Iowa, Friday, Feb. 6, 2015, at the Jasper Winery in Des Moines, Iowa. (AP Photo/Charlie Neibergall)
Sometimes it's hard to tell the charlatans from the cranks.
Take Rand Paul. Does he really believe all the stuff he says? It's hard to tell. Back when he thought it would help him, he was happy to indulge in Bilderberg Group and NAFTA superhighway conspiracy theories. But then he got elected to the U.S. Senate, and had enough self-awareness to realize that talking about them had become a liability. So he stopped. Instead, he's moved on to peddling barely-more-coherent scare stories about Ebola, vaccines, and, above all, the Federal Reserve. In fact, during a swing to Iowa last weekend, he began his trip with an all out assault on the Fed. “Anybody feel that the Fed is out to get us?" Paul said to applause.
What's behind this odd fixation? Like his father before him, Rand Paul is a devotee of so-called Austrian economics. I say devotee, because Austrianism is a cult more than anything else. It preaches that the Fed is to blame for the economy's boom-and-bust cycle ... despite the fact that the busts have gotten smaller and less frequent since the Fed—the nation's central bank—was created. But that's no matter to Austrians who think the only important thing is whether their theories work in, well, theory, and not in, well, practice. That's not hyperbole. Austrians really say it's irrelevant whether their hyperinflation predictions come true—which makes sense, I guess, since they haven't—as long as those predictions logically follow from first principles. That makes their beliefs "true" whether or not they actually are. If that sounds loony, that's because it is. But it's the basis of Paul's attempt to control—I forgot, he's calling it an "audit" of—the Fed.
The first thing you need to know about the Fed is that its emergency lending during the crisis was already audited as part of the Dodd-Frank financial reform. The second is that Dodd-Frank already requires it to disclose any future emergency lending at a one or two-year lag. The third is that the rest of what it does is already audited by, count 'em, the Government Accountability Office, the Office of the Inspector General, and independent private auditors. And the last is that the Fed already publishes a summary of its balance sheet every week. That's a lot of "alreadys." But despite them all, Paul still thinks the Fed is too secretive and out to get us us and needs to be, you guessed it, audited. What it really means, though, is he wants Congress to be able to oversee the Fed's monetary policy decisions. In other words, he wants to grill the Fed about when and whether it raises interest rates.
This is a terrible idea. I mean, would you want Rand Paul, who's worried that Weimar-style inflation is coming, to be looking over Fed Chair Janet Yellen's shoulder trying to tell her what to do? The problem is Paul knows just enough terminology to play an expert on TV, without actually knowing a thing. He just warned an Iowa crowd, for example, that the Fed's "liabilities are $4.5 trillion" and its "assets are $57 billion," which makes it "leveraged three times greater than Lehman Brothers was when Lehman Brothers went bankrupt." So the Fed would be "insolvent," he argued, if we didn't "give 'em a pass" because "they've got a printing press." This is all kinds of ignorant. First off, as Cullen Roche points out, the Fed's assets are actually $4.487 trillion. Its capital is $57 billion. And there'd be a lot more capital if the Fed hadn't given the Treasury $500 billion of its profits the past decade. Indeed, it'd only be "leveraged" 8, and not 80, to 1 if it'd kept all the money it'd made.
But this is besides the point. It doesn't matter how "leveraged" the Fed is. It doesn't even make sense to talk about it. Leverage, after all, is how much money a bank is borrowing. But a central bank doesn't borrow money. It prints money. So its "leverage" is meaningless. Think about it this way. When the things a bank has bought are worth less than the money it's borrowed, it's insolvent—and if its lenders figure that out, they'll push it into bankruptcy by asking for their money back all at once. So we care about leverage because more of it makes this easier to happen. But what would it take for this to happen to a central bank? Well, suppose the Fed's assets, in this case, Treasury and mortgage bonds, lose so much value that it's technically insolvent. Who would the "lenders" asking for their money back even be?
The answer is ... everyone who has dollars? Or none of them, more likely. The Fed's liabilities, you see, are the dollars it's printed and the dollars that banks have on deposit with it. These are pretty good liabilities to have—the best ones, actually—since currency pays zero interest and central bank deposits only pay 0.25 percent (and the Fed could make that zero, like it was before 2008, whenever it wants). So it's not like the Fed is going to default on its mostly nonexistent debt payments that it can make fully nonexistent at will. Nor are people going to rush to trade their dollars in for, let's humor Rand Paul, gold, just because the Fed's bonds have lost more money on paper than it has on hand. The Fed's "capital" is an accounting fiction that depends on how much money it's sending to the Treasury and how much money the Treasury is sending to it—and that has nothing to do with the value of the dollar itself. That last part is the only thing that could make people want to turn in their dollars for euros or pounds (but probably not Bitcoins): if the dollar was already crashing because of high, out-of-control inflation. But that's the opposite of the world we live in now, with inflation at just 0.7 percent and heading even lower as oil prices keep dropping.
Rand Paul seems to understand approximately none of this. He and others in the the GOP have, for years, brayed about high inflation that didn't exist and currency depreciation that wasn't happening, even taking the unprecedented step of publicly warning the Fed off its stimulus efforts, all while the real problems were too-low inflation, and, more recently, a stronger dollar that's put a crimp on the recovery. But despite this, Paul wants these people who have been, to put it charitably, wrong about everything to have more of a say against the ones who haven't. And it's all in the name of "transparency" that the Fed is already providing plenty of, which Paul would know if he actually read something about it anywhere other than the usual Austrian suspects. The worst part, though, is that we know what an economy with the kind of tight money that Republicans prefer looks like right now. It's called "Europe," and it has twice as much unemployment as we do. But hey, empirical evidence doesn't matter, right? Let them eat first principles!
That's the kind of crazy that would make charlatans and cranks both say Rand Paul is giving them a bad name.
By Matt O'Brien
February 10 at 8:21 AM
U.S. Sen. Rand Paul, R-Ky., speaks during a rally hosted by Liberty Iowa, Friday, Feb. 6, 2015, at the Jasper Winery in Des Moines, Iowa. (AP Photo/Charlie Neibergall)
Sometimes it's hard to tell the charlatans from the cranks.
Take Rand Paul. Does he really believe all the stuff he says? It's hard to tell. Back when he thought it would help him, he was happy to indulge in Bilderberg Group and NAFTA superhighway conspiracy theories. But then he got elected to the U.S. Senate, and had enough self-awareness to realize that talking about them had become a liability. So he stopped. Instead, he's moved on to peddling barely-more-coherent scare stories about Ebola, vaccines, and, above all, the Federal Reserve. In fact, during a swing to Iowa last weekend, he began his trip with an all out assault on the Fed. “Anybody feel that the Fed is out to get us?" Paul said to applause.
What's behind this odd fixation? Like his father before him, Rand Paul is a devotee of so-called Austrian economics. I say devotee, because Austrianism is a cult more than anything else. It preaches that the Fed is to blame for the economy's boom-and-bust cycle ... despite the fact that the busts have gotten smaller and less frequent since the Fed—the nation's central bank—was created. But that's no matter to Austrians who think the only important thing is whether their theories work in, well, theory, and not in, well, practice. That's not hyperbole. Austrians really say it's irrelevant whether their hyperinflation predictions come true—which makes sense, I guess, since they haven't—as long as those predictions logically follow from first principles. That makes their beliefs "true" whether or not they actually are. If that sounds loony, that's because it is. But it's the basis of Paul's attempt to control—I forgot, he's calling it an "audit" of—the Fed.
The first thing you need to know about the Fed is that its emergency lending during the crisis was already audited as part of the Dodd-Frank financial reform. The second is that Dodd-Frank already requires it to disclose any future emergency lending at a one or two-year lag. The third is that the rest of what it does is already audited by, count 'em, the Government Accountability Office, the Office of the Inspector General, and independent private auditors. And the last is that the Fed already publishes a summary of its balance sheet every week. That's a lot of "alreadys." But despite them all, Paul still thinks the Fed is too secretive and out to get us us and needs to be, you guessed it, audited. What it really means, though, is he wants Congress to be able to oversee the Fed's monetary policy decisions. In other words, he wants to grill the Fed about when and whether it raises interest rates.
This is a terrible idea. I mean, would you want Rand Paul, who's worried that Weimar-style inflation is coming, to be looking over Fed Chair Janet Yellen's shoulder trying to tell her what to do? The problem is Paul knows just enough terminology to play an expert on TV, without actually knowing a thing. He just warned an Iowa crowd, for example, that the Fed's "liabilities are $4.5 trillion" and its "assets are $57 billion," which makes it "leveraged three times greater than Lehman Brothers was when Lehman Brothers went bankrupt." So the Fed would be "insolvent," he argued, if we didn't "give 'em a pass" because "they've got a printing press." This is all kinds of ignorant. First off, as Cullen Roche points out, the Fed's assets are actually $4.487 trillion. Its capital is $57 billion. And there'd be a lot more capital if the Fed hadn't given the Treasury $500 billion of its profits the past decade. Indeed, it'd only be "leveraged" 8, and not 80, to 1 if it'd kept all the money it'd made.
But this is besides the point. It doesn't matter how "leveraged" the Fed is. It doesn't even make sense to talk about it. Leverage, after all, is how much money a bank is borrowing. But a central bank doesn't borrow money. It prints money. So its "leverage" is meaningless. Think about it this way. When the things a bank has bought are worth less than the money it's borrowed, it's insolvent—and if its lenders figure that out, they'll push it into bankruptcy by asking for their money back all at once. So we care about leverage because more of it makes this easier to happen. But what would it take for this to happen to a central bank? Well, suppose the Fed's assets, in this case, Treasury and mortgage bonds, lose so much value that it's technically insolvent. Who would the "lenders" asking for their money back even be?
The answer is ... everyone who has dollars? Or none of them, more likely. The Fed's liabilities, you see, are the dollars it's printed and the dollars that banks have on deposit with it. These are pretty good liabilities to have—the best ones, actually—since currency pays zero interest and central bank deposits only pay 0.25 percent (and the Fed could make that zero, like it was before 2008, whenever it wants). So it's not like the Fed is going to default on its mostly nonexistent debt payments that it can make fully nonexistent at will. Nor are people going to rush to trade their dollars in for, let's humor Rand Paul, gold, just because the Fed's bonds have lost more money on paper than it has on hand. The Fed's "capital" is an accounting fiction that depends on how much money it's sending to the Treasury and how much money the Treasury is sending to it—and that has nothing to do with the value of the dollar itself. That last part is the only thing that could make people want to turn in their dollars for euros or pounds (but probably not Bitcoins): if the dollar was already crashing because of high, out-of-control inflation. But that's the opposite of the world we live in now, with inflation at just 0.7 percent and heading even lower as oil prices keep dropping.
Rand Paul seems to understand approximately none of this. He and others in the the GOP have, for years, brayed about high inflation that didn't exist and currency depreciation that wasn't happening, even taking the unprecedented step of publicly warning the Fed off its stimulus efforts, all while the real problems were too-low inflation, and, more recently, a stronger dollar that's put a crimp on the recovery. But despite this, Paul wants these people who have been, to put it charitably, wrong about everything to have more of a say against the ones who haven't. And it's all in the name of "transparency" that the Fed is already providing plenty of, which Paul would know if he actually read something about it anywhere other than the usual Austrian suspects. The worst part, though, is that we know what an economy with the kind of tight money that Republicans prefer looks like right now. It's called "Europe," and it has twice as much unemployment as we do. But hey, empirical evidence doesn't matter, right? Let them eat first principles!
That's the kind of crazy that would make charlatans and cranks both say Rand Paul is giving them a bad name.
