by Matthew Bandyk

The person in Congress with perhaps the most unconventional point of view on the Fed in American politics is Congressman and former presidential candidate Ron Paul (R-TX), a longtime critic of the very institution of the Fed and fractional reserve banking.

He sponsored a bill that would audit the Fed, which attracted co-sponsors such as Dennis Kucinich (D-OH). Matthew Bandyk talked to Congressman Paul about his unique perspective and why the Fed is controversial again.

Do you think the Fed is the main culprit behind the economic crisis?

I don't believe you can have financial bubbles without artificially expanding the supply of money and credit, and only the Fed can do that in collusion with the banks, who can operate under fractional reserve banking. So that's where the financial bubbles come from, whether it's housing or the stock market or the bond market. That's the source of the bubble, and that's what has to be addressed, and yet the Fed has been able to operate in secrecy on exactly how they allocate credit and what they do with international markets.

So yes, the Fed is the number one culprit.

I guess the response from defenders of Greenspan would be that to jack up interest rates enough to defuse the housing bubble would have been really bad for growth and unemployment, and that was unacceptable at the time

Yes, and that's why he inflated it instead. It's like a drug addiction.

Nobody wants the pain that comes with getting off the drug. But it's more than the pain of avoiding addiction that drives Bernanke. It's a deep-seated philosophy that inflation is the cure, and that it can prevent the correction. But the correction has been locked in place. In the year 2000 it was locked in place. The market was trying to tell us we needed a correction. But it was prolonged so the bubble was made even bigger.

This bubble has been going on since 1971 when the dollar became fiat and we had international reserve currency without backing. Ultimately, no matter what the Fed does, you can't prop up a bad system, and that's why this one is different than any recession we've had since 1971.

So that's where your bill to audit the Fed comes in?

In a way it's a mini-step, but it's also the reason I have a lot of co-sponsors because I haven't gotten into the controversy of fractional reserve banking and the issue of monetary policy per se.

My main goal is to find out exactly what the Fed has been doing, especially in this crisis. Since the crisis has hit, there's been this whole idea of transparency about what the Treasury does with the TARP funds. So now the American people want to know what the Fed does. I believe that reform is inevitable, and that's the second step.

What do you mean by "what the Fed is doing"?

What they're doing with foreign governments, international financial organizations, what they buy and sell, and what markets they interfere with... how decisions are made. We don't have absolute figures, but it's estimated that they might have a guarantee of 3 or 4 or 5 trillion dollars. It doesn't have to be on the books because it might just be guarantees. This is big stuff and the Congress should know about it.

What do you mean by reform of the Fed?

This system has failed in a financial sense.

I believe the dollar will fail too. We are going to have very high interest rates and price inflation rates. Finally, they will have to stop. That's why I want to see what the Fed is talking about and what they're saying to the central banks in other countries. They know that reform is coming -- they're looking to the IMF, and Obama's on that side of the argument. That's exactly the opposite type of reform that free-market and strict-constitutionalist people don't want.

We want reform toward honest money and sound money, rather than looking to internationalism propping up the flawed system just by changing it from a dollar-run system to an international system. Debate has to come on what types of reform are necessary.

Why audit the Fed if the goal is to end it?

To expose them, and then people will be convinced of what the problems are. A lot of people don't know too much about the Fed. If we audited the Fed, I would learn a whole lot. I think we'd learn that there's a lot of special-interest financing going on.

We saw with the TARP funds -- which were more open -- these go to certain corporations but not others, some had to go bankrupt, some people got huge bonuses. I think we would see a lot of that in the way the Fed runs their finances.

Tim Geithner has said in statements defending the Obama administration's plan that the Fed is the only player big enough to defend against systemic risk

I wouldn't be surprised to hear him say that, coming from someone who's been the ultimate insider.

When he was at the New York Fed, he was a permanent member of the FOMC [Federal Open Market Committee], so therefore he's going to protect that whole institution. In an interview not long ago, he was quite frank that the Fed kept interest rates down too long and too low. I think he was caught off-guard. But he was telling the truth.

People who don't always see eye-to-eye with you on the role of government in the economy have signed on to the bill, like Dennis Kucinich, what do you think is going on there?

The person who introduced my bill in the Senate is Bernie Sanders, a so-called socialist. They're opposed to special-interest corporatism. They don't like corporatism anymore than I do. I don't like welfare for anybody, let alone corporations.

The Republicans in the Financial Services Committee have floated a plan that would also promote the Fed as a guard against systemic risk

I understand what they're doing, and it's not knock-down, drag-out battle. Actually, if I had my druthers, I wouldn't advocate closing the Fed tomorrow. It'd be much better to work out a transition.

What I want is competition in money -- to have two circulating currencies in the United States, just like you have dozens of currencies circulating around the world, instantaneously adjusting value, and you can do that domestically. In some ways it helps my bill because I can say, look: the American people want transparency, and if you're going to give [the Fed] more power, it's important that we act in our capacity for oversight.

People who might be supporting more power for the Fed still are receptive to the idea that we should know what they are doing.

Pethokoukis: 'Ron Paul's Dumb Plan'

Since I've given Ron Paul a platform to speak the merits of auditing the Fed, I think it's only fair for me to link to former Cap Com blogger Jimmy Pethokoukis' article on why he thinks Paul's bill could damage the economy. Here's one of the key points:

Even if the result of the Fed bill is only more aggressive congressional questioning and criticism, financial markets might well fear the bank would start taking congressional wishes into account when making policy.

"If the markets and foreign investors perceive it that way," says economist Michael Feroli of JPMorgan, "it could immediately push up borrowing costs even if the audits are only a symbolic increasing of congressional oversight of monetary policy."

I'm going to stay agnostic on the issue of whether or not Paul's bill is a good idea. But here's my question to opponents of the bill like Jimmy P:

Almost everyone recognzies that the Fed was a major contributor to the current financial crisis, because, as Jim writes, it kept interest rates down for too long.

So without taking an anti-Fed approach a la Ron Paul, how could similar Fed mistakes be prevented in the future? If Greenspan could make such big mistakes, is there anyone who could possibly be "better"?

Reader Comments

Ron Paul is the only man in government who seems to have a grasp of reality. We are broke and nobody is even looking at the checkbook. Inflation of our currency means we all pay more and more for everything and more and more people will not be able to pay their bills, meaning more mortgage defaults and bankruptcies. Interest rates must rise sooner or later, to oppressive levels that will cripple our economy because small business will not be able to obtain funds to expand. Are banks even lending money these days? Where did that TARP money go anyway? Now take into account the very high taxation that will be needed to service the national debt, not to mention the baby boomers all retiring and going on Social Security and Medicare. A financial disaster is looming, we know it, Ron Paul knows it, but the rest of the boneheads who claim to represent us refuse to see what is going on. I truly fear for our country if foreign countries stop servicing our debt, or worse, call in their chips and threaten war if we can't pay up. Can you spell China? They don't want the dollar to collapse any more than we do, because they own so much of our debt, but inflation is one clever but evil way to devalue that debt. Who really knows where their breaking point is?

Comment by Dan Warner of PA


Those who oppose HR 1207 and stand for re-election will have told the electorate who they represent. With the support shown for HR 1207 in the House, we should expect a "watered down version" to be presented in the Senate, to provide cover for our career politicians. It is way past time to de-louse the criminal and unconstitutional Federal Reserve, which is responsible for a majority of the world's problems.

Comment by Dick Abromeit of MT


Auditing the Fed is important because of its monopoly over money. Competing currencies are now illegal! If we allowed competing currencies people could choose their currency--perhaps a currency backed by silver, or gold, or a basket of commodities. If we believe in a free market and competition, then let's allow competition in currencies. If we had a choice, people would use real money from an open and transparent bank (or other issuer) and Federal Reserve Notes would be used less. Comment by Mike of CO


I truly enjoyed this story. I consider myself to be an independent on political and social issues, liberal on some issues, and moderate and conservative on others. I tend to disagree with Ron Paul on issues facing the nation, but his perspective on the monetary policy of the Fed is insightful. No matter what your political affiliation happens to be, there is no arguing that the American public has a right to know if the Federal Reserve is liable for promoting economic crisis, rather then its stated purpose of preventing crisis. A federal audit should be an annual requirement for the Federal Reserve Bank. In due time, I am sure that the responsibility for printing currency will return to the U.S. Treasury. Every American should be writing their congress people to pressure them to vote for HR 1207, the Federal Reserve Transparency Act of 2009.

Comment by Johnny Oliver of MN


Dr. Paul is doing us all a favor in allowing us to find out more about what the Fed is up to, especially with regards to our money. I agree with Dr. Paul's stances more often than not, and on this issue I am supporting him 100 percent. Very good article.

Comment by Ben of NM


Receive our political analysis by email by subscribing here


© Tribune Media Services, Inc