Ron in Reserve

For decades, libertarian Rep. Ron Paul has criticized the Federal Reserve Bank, putting him outside both parties: Democrats who hoped the central bank could manage sustainable growth and Republicans whose policy idol was conservative monetary economist Milton Friedman.

Now, when Congress reorganizes in January, Paul is likely to be placed in charge of the House panel that oversees the Federal Reserve, and his fellow Republicans, led by Rep. Paul Ryan, are mounting an extensive critique of the Fed's latest policy, even suggesting it's time to rewrite the institution's operating mandate. But Paul is still not exactly on the same page.

"I think they're missing the whole point," he says. "I don't want the Fed to have any power!"

While the right's embrace of Paul's critique of the Fed is revealing of how far right Republicans have shifted on economic issues in the last few years, Paul is correct that few in the GOP entirely share his perspective. The Republican establishment hopes to use Paul's aggressive critique of the Fed to bolster their political ambitions, while Paul hopes Republican politicos can create broader support to abolish the institution.

Things were different eight years ago. After the 2002 elections, Republicans began to reorganize the House and found Paul in line to chair the monetary policy subcommittee. Putting someone with Paul's views in charge of Fed oversight -- especially with conservative favorite Alan Greenspan serving as chairman -- struck Republican leadership as a poor idea, and so two committees, one on international monetary policy and the other on domestic, were merged into one, denying Paul an open slot.

Two years and another election later, Paul was again in line to chair the committee, but Republicans were still leery; Greenspan's term was ending and nominating a new chair would bring the Fed to center stage. Rep. Deborah Pryce, more senior than Paul, was brought from the Rules Committee to take Paul's place.

Paul and the current Democratic chair of the Financial Services Committee, Rep. Barney Frank, confirm this account. "Paul used to joke he'd have to wait for me to become chairman to ever get a senior position," Frank says. What's changed?

According to Paul, it was the financial crisis. "No one was allowed to criticize the Fed, [and] people rebelled against that," he says. The bank invoked sweeping emergency powers, creating novel credit facilities and deploying massive amounts of cash, thrusting Fed Chair Ben Bernanke and then-New York Fed President Tim Geithner into the limelight. Questions about the mechanics of the bailouts and who stood to benefit were met with the Fed's customary opacity, raising public suspicion. Paul saw an opportunity.

"This woke up a lot of people [and] gave us more credibility in looking into the Fed," he says.

A proposal by Paul to subject the Fed to an independent audit by the Government Accountability Office became a cause for populists of both parties during debate over the financial-reform bill. The Fed, however, bristled, invoking traditional fears of any measure that might impinge its vaunted political independence.

The Fed's resistance carried weight with the Obama administration, which depended on Bernanke's cooperation to accomplish its economic goals, and Frank and the Senate Banking Committee chairman, Chris Dodd. They negotiated a compromise with Paul and his allies that limited the audit's reach, while placing new rules on the Fed to create broader disclosure on future emergency actions. Both sides claimed victory.

Paul believes the concerns he raised -- and the results of the audit, due by June 2011 -- will help increase public support for eliminating the Fed. Paul, whose economic views track the Austrian School of Economics, argues that the Fed drives the business cycle, creating the asset bubbles that collapse and lead to recession. These views are shared by many in the GOP-influencing Tea Party, and Paul hopes further efforts to shine light on the institution in the next two years will lead others to conclude the same.

The Republicans giving Paul this platform, though, have different goals in mind. Like liberal critics of the Fed, they seek increased accountability, not elimination. Critics, like Rep. Paul Ryan, who chairs the House Budget Committee, argue the Fed's interest-cutting policies will hurt the economy. However, Bernanke's monetary policy, and his endorsement of fiscal stimulus in concert with long-term deficit reduction -- the same rubric endorsed by the White House -- has backed the GOP into a corner. They've responded with desperation, rallying around an effort to strip the Fed of its "dual mandate" of maintaining price stability (fighting inflation ) and full employment.

"It seems odd to be bringing up the dual-mandate question at a time when we're seeing record-setting disinflation and pressures for more wage cuts," says James Hamilton, an economist at the University of California, San Diego, who regularly comments on monetary policy at his blog, Econbrowser.

The Fed hasn't managed to meet its informal inflation target -- 2 percent -- for two years, leading conservative and liberal economists to raise fears of deflation, and the lack of success on the employment front is plain. Moreover, economists argue that stripping the Fed of its dual mandate wouldn't have much policy effect. Boston Fed President Eric Rosengren has said the Fed would adopt similar policies if it were only charged with price stability.

Paul sees no difference between the Fed's accommodation of the White House today and during prior administrations. He views the situation pragmatically, conceding that the dual mandate "is not a big deal."

"I'd probably vote for [ending] it, because it would look like it's cutting back on Federal Reserve power, but I think it would be a little bit of grandstanding and not have a real effect," Paul says. "It offers an opportunity to associate the Federal Reserve with unemployment."

Democrats believe the opposite: If Republicans attack anything directing the government to create jobs in a time of 10 percent unemployment, they'll appear callous. And, with deadlock expected in the new Congress, the Fed is the only public institution taking much-needed action to boost the labor market.

"That's a fight I'll be glad to have with them publicly," Frank says. Consider, he suggests, "the spectacle of the conservatives joining China and attacking Ben Bernanke, a Bush appointee. There's kind of an America bashing going on from China, Germany, and the Republican Party."

Even with Paul at the helm, Republicans will be hard-pressed to actually change Fed policy legislatively. But attacks on the institution could diminish the Fed's ability to change market expectations.

"I am concerned about the degree of politicization of Federal Reserve policy," Hamilton says. "This ought to be an area where we should all want to do what's best for the country ... [b]ut reaching a constructive consensus may be challenging in the current political environment."

The coming debate is full of strange bedfellows: It will test the Republican leadership's ability to co-opt their increasingly conservative supporters without alienating their traditional constituencies, including the Chamber of Commerce, which supports the Fed's recent decision. Democrats, whose hopes for a political renaissance depend on an economic recovery, find themselves defending a Republican chairman of an institution whose actions they, too, mistrust. With the economy in the balance, and Ron Paul in the middle, we can at least expect transparency.

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