Seven Ways Ron Paul Is Wrong About the Fed

Ron Paul (R-Texas)
Ron Paul (R-Texas)

Ron Paul (R-Texas) is going to have a great time making the Federal Reserve miserable once he takes over as chair of the House subcommittee that overseas it. He has a better microphone than most Fed critics, and he'll use it to broadcast his anti-Fed bunk.

Without further delay, here are seven of Paul's views about the Fed, courtesy of the The New York Times, and why I think he's wrong:

  • The U.S. should return to the gold standard. Paul believes fervently that the only time we had "sound money" is when paper was backed with gold. I'm not sure what he means by "sound money," but the U.S. economy has been leading the world in the nearly 40 years since the U.S. went off the gold standard under Richard Nixon in 1971. I'd love to hear his explanation of how the U.S. has prospered for many decades with unsound money.

  • Bernanke sets the price of money around the world by printing worthless paper. The price of money is interest rates, and Paul argues that the Fed sets interest rates for the world. If that were true, then why are there such enormous gaps among the interest rates in the leading countries. For example, the rate on two-year government bonds in Greece is 11%, while it sits at a minuscule 0.64% in the U.S. Why does Paul think the Fed is setting Greece's interest rate or the rate for any other country?

  • The Fed is producing unsupervised inflation. Paul insists that the Fed's ability to create money leads to inflation. And he's exactly right that the Fed has created money -- witness the latest $600 billion program of quantative easing. One little problem with Paul's theory is that inflation is nonexistent these days. In fact, at 0.2%, U.S. inflation in October was at the lowest level in 53 years. Besides, the Fed has a 2% inflation target, and if it starts to get close to that level, it'll raise rates and buy back some of that money it created.

  • Paul Volcker has been the best Fed chairman since the late 1970s. Paul thinks Volcker is smarter and more personable than Alan Greenspan and Ben Bernanke. Having never met any of them I can only say that they all seem pretty smart to me. I have no way of knowing who's more personable or why that really matters to how well the Fed does its job.

  • Low interest rates steal from savers. Paul thinks that "manipulating" interest rates is immoral and economically destructive. He'd rather that the price of money be based on how much gold can be mined and stored in big underground bunkers. I suppose that would make sense if gold was actually used in the real economy. Otherwise, due to the limited supply, setting rates based on gold would likely cause an enormous upward spike in interest rates and slam the brakes on the economic recovery. Why is using gold to manipulate interest rates any more moral than the way the Fed does it now? And if savers don't like the low rates they're getting, they're free to invest elsewhere -- for example, the S&P 500 has risen at a 26.9% average annual rate since January 2009.

  • The Fed is a dictator in control of the economy. Paul believes that the Fed's bailouts of every major industry allow it to exert control over the entire economy. This is wrong in so many ways. First, the Fed has not taken over any industries -- a quick look at its balance sheet reveals that it has grown from around $800 billion to around $2.3 trillion by absorbing Wall Street's toxic waste. This makes the Fed more of a garbage-collector than a manipulator of the economy. Second, if the Fed controlled the economy, then it would force companies to hire the 15 million people who are out of work in order to ease Bernanke's concerns about high unemployment.

  • The U.S. is in an endless depression, thanks to Obama. I'm not sure how Paul defines depression, but the U.S. economy has been growing for the last six quarters. According to the National Bureau of Economic Research (NBER), which officially dates recessions, the one that began in December 2007 officially ended in June 2009. That was a recession but not a depression. How would Paul explain how the U.S. is in an endless depression if it hasn't even had one since the 1930s?

Paul is certainly entitled to his opinion about all these things. And I wouldn't mind being proven wrong with facts. In the meantime, it will be interesting to see whether Paul is now persuasive enough -- and powerful enough -- to change the Fed's role in the economy.