The Corner

Rand Paul’s Mixed-Up Math on the Fed

No one can accuse Senator Rand Paul of offering the same-old Republican boilerplate. From the Wall Street Journal

Speaking to an enthusiastic crowd of Iowa activists, Sen. Rand Paul on Friday evening delivered a blistering attack on the Federal Reserve, calling for an audit of the institution’s books and blaming it for fueling income inequality. Mr. Paul, a Kentucky Republican and likely 2016 presidential candidate, said the central bank’s monetary policies had contributed to a weakening of the U.S. currency and represented a threat to the stability of the economy. In criticizing the Fed, he embraced an issue that helped propel his father, former Rep. Ron Paul , into the national spotlight. “Once upon a time, your dollar was as good as gold,” Mr. Paul said, speaking at an event organized by the libertarian-leaning group Liberty Iowa. “Then for many decades, they said your dollar was backed by the full faith and credit of government. Do you know what it’s backed by now? Used car loans, bad home loans, distressed assets and derivatives.”  . . .

He blamed the Fed’s interest-rate setting policies for making income inequality worse, saying that wealthy Americans could survive an era of low interest rates because they had a diversified portfolio of assets. Low-income Americans, Mr. Paul said, weren’t seeing their wealth kept in bank accounts grow because of low-interest rates set by the central bank. . . . In addition, Mr. Paul expressed support for the Fed’s eventual abolition, though he said that the current rate of borrowing by the United States government was the reason a central bank was needed now. “People say, ’Well, just get rid of the Fed’—which would be great,” said Mr. Paul. “But the reason we have a Fed is because we have debt.”

And this account from Bloomberg:

Paul said that Fed bankers were “going crazy” with paranoia about an audit, asked activists to consider what would happen to a small bank that behaved as the Fed did. “They’d be bankrupt, they’d be insolvent,” he said. “[The Fed’s] liabilities are $4.5 trillion; their assets are $57 billion. Do the math. They are leveraged 80-1. They are leveraged three times greater than Lehman Brothers was when Lehman Brothers went bankrupt. Why do we give ‘em a pass? Because they’ve got a printing press, and they can print up some more money.”

Without getting into a debate about the (awful) case for a gold standard, here are a few brief thoughts on Paul’s other Fed comments:

1.) Paul’s numbers are not quite right. The Fed’s assets are not $57 billion. They are $4.487 trillion (including $2.5 trillion in U.S. Treasuries) vs. liabilities $4.430 trillion for total capital of $56 billion.

2.) Wealth inequality is different from income inequality. A U.S. economy where the Fed has acted like the tight-money European Central Bank would look more like Europe’s depressed economy — and that would be terrible for workers. As JPMorgan recently noted, “. . . as an empirical matter wage inequality is reduced when the economy is operating closer to full employment. To the extent Fed policy has been stimulating economic activity and closing the output gap, it is serving to narrow wage disparities—or at least offset other longer-run forces that have been contributing the growing wage inequality.”

3.) Even with the Fed “money printing” that worries Paul so much, the U.S. dollar has been rising for four years vs. a broad basket of currencies and is stronger today than before the Fed’s extraordinary monetary actions.

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