Rand Paul’s Federal Reserve Goose Chase

Rand Paul is back in the news carrying his father’s torch on the “audit the Fed” bill.  The bill itself is well intentioned and perhaps even necessary. But I am afraid that it’s a wild goose chase that will produce little change inside the Federal Reserve and is mainly driven by populist politics and monetary misunderstandings.

Rand Paul, like his father, hates the Federal Reserve. He thinks it’s an entity that “prints money”, “debases the currency” and that we would be better off on the gold standard.  This is the sort of stuff we always hear from supporters of Austrian Economics, a school that has gotten so many things wrong in the last 5 years that it’s a miracle that any rational person could still support such an obviously incorrect theory of economics.

Let’s start with the basics though. The Federal Reserve is not some big bad “money printing” entity that is out to steal your lunch. When one understands the modern monetary system it becomes obvious that the Fed is just a big public bank that mainly helps clear interbank payments. The only reason the Fed exists is because the interbank payment clearing system used to be entirely private, but the problem was that this private system would stop functioning at the time when it was most needed (during banking panics). So the Fed was introduced to serve as a public clearinghouse that wouldn’t shutter its doors when liquidity was needed. This wasn’t just a necessary institution. It is, perhaps, one of the most logical and important institutions in our entire financial system as it serves as the oil between the private banks that manage the entire payment system.

Of course, the Fed does more than just clear payments (though that is its dominant role in the system). And unfortunately, this is is where a lot of the bad publicity comes in. They tinker with interest rates, they serve as the lender of last resort and they implement policies like QE. These are controversial actions and there is some real logic in the criticism against them (I’ve been critical of each one at times).  But we should be clear about something – Rand Paul does not understand how these operations work.  He once said:

“The Fed’s favored practice of “quantitative easing” has been questionable at best. One need not be an economist or mathematician to wonder whether printing money out of thin air is a sound way to help the economy.”

Paul has been claiming, for 6 years now, that QE is “money printing” that causes high inflation. And if he had a degree in economics or math he’d probably better understand the operational realities behind QE.  After all, this is a policy, which, according to the inflation critics, has resulted in almost $5 trillion of “money printing” and has been accompanied by a persistent disinflation now veering towards deflation. After 6 years of this policy and so much “money printing” it’s almost unfathomable that one could refer to QE as inflationary.  The evidence is clear – QE does not cause hyperinflation, high inflation or anything of the sort.

I could go on and on here.  The important point is that Rand Paul is not a monetary expert and he has a deeply flawed understanding of fiat money and the way it works. And unfortunately, he promotes an ideological platform based on these misunderstandings. All the “money printing” and “currency debasement” talk sounds great when you’re running for office, but when you look at the facts and the empirical evidence it becomes obvious that something in Paul’s views is deeply flawed. And that flawed logic is leading him on a wild goose chase, that, while perhaps being necessary, is unlikely to yield any substantive change. Unfortunately, this sort of populist rhetoric will garner him a good amount of attention and a large following. And those same people will be lured in by the same ideological rhetoric and misinformation that has led to so many inaccurate conclusions over the last 6 years.

Some related work:

• Understanding the Modern Monetary System
• Understanding Quantitative Easing
• Common Myths About the Federal Reserve
• The Biggest Myths in Economics
• Understanding Why Austrian Economics is Flawed