Unfriend the Fed: Rand Pauls Attack Re-examined

Sen. Rand Paul (R., Ky.) has taken over the mantle of leading Federal Reserve critic within the Republican Party from his father, former Texas representative Ron Paul.

Mr. Paul, a likely candidate for the 2016 Republican presidential nomination, has introduced a bill that would allow for congressional audits through the Government Accountability Office of the Feds monetary policy deliberations, something Fed officials say would curb the central banks independence.

It is a controversial and complicated issue, generating sharply divided views. In an effort to clarify some aspects, we fact-checked comments he made Friday at a rally in Iowa, with input from some economists. His comments below, in italics, were transcribed from our audio recording of his speech.

The central banks operations are subject to several layers of financial audits and reviews, which are detailed on the Fed website.

On the website, for example, one can see the March 14, 2014 auditors report by Deloitte & Touche LLP on the combined financial statements of the Fed reserve banks for 2013 and 2012.Also available are links to the reports on each individual reserve bank and the board of governors, a link to Office of Inspector General reports on the Fed and a link to the U.S. GAO reports on the Fed.

Currently, the GAO reviews a variety of Fed activities, but not its conduct of monetary policy. Mr. Pauls bill would allow the agency to also examine the policy decisions.

The Feds assets are not $57 billion, theyre $4.5 trillion. Its capital is $57 billion. The Fed could in theory build a much larger capital cushion, since it has been earning record profits. But the law requires it to turn over its profits to the U.S. Treasury, so Fed officials have not retained additional capital even as its profits rose and balance sheet increased.

Central banks are different from private banks in some important ways. The Fed has the power to create money electronically and use those funds to buy assets. This means it is free from the risk of the kinds of run that brought down Lehman Brothers. The assets the Fed holds on its balance sheet include Treasury securities, agency debt and agency-backed mortgage securities, all of which are effectively backed by the full faith and credit of the U.S. government. Economists we spoke to questioned Mr. Pauls comparison.

A central bank is not comparable to a normal commercial bank, said David Blanchflower, a professor at Dartmouth College and former member of the Bank of Englands rate-setting Monetary Policy Committee. Central banks, with their own currency that they can borrow in, dont go insolvent.

Benn Steil, economist at the Council on Foreign Relations, said, the Lehman comparison is silly.

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Unfriend the Fed: Rand Pauls Attack Re-examined