The Corner

Janet Yellen Becomes the Most Powerful Woman in the World, Rand Paul Not Pleased

By a 56–26 margin this evening, the Senate, including eleven Republicans, confirmed Janet Yellen to become the chairman of the Federal Reserve, replacing Ben Bernanke effective February 1. Yellen has been vice chairman of the Fed under Bernanke since 2010, and was a popular choice for many on the left who’d like to see the Fed take a more active role in driving down unemployment — but also some on the right who subscribe to Milton Friedman–inspired market monetarism, and believe the Fed should be (and most important, should have been in 2008) doing more to loosen the money supply and support inflation. (In more complicated terms, they’d like the Fed to help nominal economic growth or nominal spending hit a certain target, but we don’t need to go into what that means).

But the Federal Reserve’s work under the Bernanke–Yellen team in recent years hasn’t been bad, actually: While most economists expected U.S. economic growth in 2013 to be pretty weak, because of the significant tax increases and the spending cuts that hit the economy, it actually turned out to be a pretty strong year. It was as good as you’d expect, in fact, if those fiscal headwinds had never appeared, and most economists think that had something to do with the monetary policy the Fed pursued. Meanwhile, the entire economy of the European Union continues to wheeze as its central bank has run a very different monetary policy from the Fed’s, more focused on curtailing inflation than growth and employment.

So that’s one reason that it’s too bad more Republican senators weren’t willing to vote to confirm Yellen, though eleven is a nice start: She has a good track record. And taking over from Bernanke, she may be open for an even more comprehensive rethinking of monetary policy along the lines that have worked already (and along the lines that people like Larry Kudlow are calling for).

That won’t stop some Republicans from continuing to rail against Yellen’s views and the very existence of the bank she’ll run. Most prominent among them, Rand Paul has faithfully taken up the anti-Fed mantle of his father, and delivered an incoherent speech tonight apparently intended to criticize the Federal Reserve’s policies and make the case for the gold standard. He tweeted some of his more choice lines, such as this one:

That should read $4 trillion in assets, and Rand’s arithmetic is correct: You can find the numbers for yourself on the oh-so-secretive Federal Reserve’s most recently published balance sheet, which reflects the bank’s status last Thursday. But the concept is ridiculous on its face: The Federal Reserve isn’t “any bank”; it’s different from every other bank in the United States. It’s a bank of banks, for one, so its assets (U.S. Treasuries and mortgage-backed securities, for the most part) are remarkably safe, and its liabilities are, too: About $2 trillion of the Fed’s $4 trillion in liabilities are deposits that private banks are required to hold with the Fed.

And, of course, the Fed is a central bank, not a regular, private bank. Conservatives sometimes get irked when liberals and economists contend that you can’t compare the U.S. government’s debt and deficits to a household, because the government can print its own money, and a household can’t. Well, here, the distinction is even more important: You can’t compare the Federal Reserve to a regular bank because the Federal Reserve itself creates money. And Paul’s line is even more deceptive if it’s supposed to scare people about the expansion of the Fed’s balance sheet by the quantitative-easing program: The Fed actually had a similarly high leverage ratio back in 2007, before it began the first QE.

Paul’s comparison therefore teaches people absolutely nothing about how a central bank works, what the Fed does, or why a central bank might be risky — but he does believe they’re risky, and would prefer a gold standard:

Why? Because central banks set the price of money (or rather, try to), and Paul thinks that’s too important to leave to the government:

Instead, under Paul’s preferred system of a gold standard . . . the government sets the price of money by setting the price of gold and the price of other currencies. It has a limited ability to do so, since it can only afford so much gold and other currencies, but that actually then leaves it at the mercy of other forces, albeit generally slow-moving ones, such as the world gold supply (global inflation, in fact, was set off at one point in the late 1800s probably in part by the explosion of the South African mining industry). Under the gold standard, the U.S. didn’t experience the kind of constant inflation we do now; instead, it saw alternating periods of inflation and deflation — the latter being the unfortunate phenomenon when people’s wages fall overall, and exactly what’s happening to Greece right now. Gold-standard nostalgia makes for some stirring speeches, I’m not sure why all that makes Rand Paul think the gold standard is the best way to run the U.S. money supply right now — when the Federal Reserve run something like how Yellen would do it has done a pretty good job recently.

(Note: This headline is unequivocal only because Angela Merkel is on the funfzhen-tage DL.)

Patrick BrennanPatrick Brennan is a writer and policy analyst based in Washington, D.C. He was Director of Digital Content for Marco Rubio's presidential campaign, writing op-eds, policy content, and leading the ...


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