This article first appeared in the St. Louis Beacon, May 8, 2012 - WASHINGTON – Interrupting his quixotic quest for the GOP presidential nomination, U.S. Rep. Ron Paul made a rare appearance Tuesday on Capitol Hill to bash the Federal Reserve and discuss alternatives.
“Over these many decades, the Federal Reserve has gotten a free pass," alleged Paul, R-Texas, at a subcommittee hearing he chaired. He took issue with those who contend that the Fed “should not be interfered with by the executive branch or the legislative branch.”
But the ranking Democrat on that panel, Rep. William Lacy Clay, D-St. Louis, wasn’t buying Paul’s analysis. He defended the Fed’s current “dual mandate of maintaining stable prices and full employment” and argued against Republican proposals to drop the employment mandate from the Fed’s mission.
"I believe the U.S. economy is headed in the right direction, and with the proper nudge will probably improve even more," Clay said. He prodded witnesses about whether the Fed could do more to improve the economy and put more Americans back to work.
Another Missourian on the panel, Rep. Blaine Luetkemeyer, R-St. Elizabeth, was more critical of today’s economic conditions and backed a bill – the Sound Dollar Act – that would drop employment from the Fed’s mandate and would make other major changes.
“I really like” some the that bill’s provisions, Luetkemeyer told its main sponsor, Rep. Kevin Brady, R-Texas, vice chair of the Joint Economic Committee. In the last three decades, Luetkemeyer said, it appeared that the Fed’s “ability to impact our economy is exaggerated. … They can nibble around the edges, but if they actually had the ability to control unemployment, we wouldn’t have the situation that we have today.”
Much of the discussion at the hearing focused on the pros and cons of the “dual mandate,” which originated in provisions of the 1977 Humphrey-Hawkins Full Employment Act.
“The current dual mandate asks the Fed to do something it simply cannot do,” contended Brady. His Sound Dollar bill – whose 35 co-sponsors include Luetkemeyer – would replace the dual mandate with the single mission of long-term price stability; increase the Fed’s accountability and openness; and diversify the Federal Open Market Committee, the Fed panel that oversees the buying and selling of U.S. Treasury securities.
But Clay, Rep. Barney Frank, D-Mass., and two witnesses defended that dual mandate.
The dual-mandate system “has been used effectively on some occasions, less so on others. But it has stood the test of time,” said James K. Galbraith, a University of Texas professor who had helped develop the 1978 legislation. “It is a robust procedure because it serves the interests of Congress, of the central bank, and of the public.”
The assessment was echoed by economist Alice Rivlin, a former vice chair of the Fed’s board of governors who is now a senior fellow at the Brookings Institution. “To change the language of the law to imply that the Fed’s only concern should be inflation would send a misleading signal to a public rightly concerned with jobs and growth, as well as inflation,” said Rivlin.
Other academic witnesses, including Peter G. Klein – who directs the McQuinn Center for Entrepreneurial Leadership at the University of Missouri – argued strongly for major changes, or even dissolving the Fed.
“The mistakes made by the Fed before and after 2008 are not isolated incidents, mistakes that can be corrected by making minor changes in the Fed’s charter, structure, or independence,” Klein said. “They are the predictable result of giving control of the monetary and financial system to a government agency. The best option is to replace the central bank and let the market be in charge of money.”
In fact, one of the six bills discussed by the subcommittee was legislation sponsored by Paul that would abolish the Fed. Another bill, backed by maverick Rep. Dennis Kucinich, D-Ohio, would demote the Fed into an arm of the Treasury Department.
“The Fed continues to reward Wall Street banks while destroying the dollar’s purchasing power and driving up the cost of living for average Americans,” Paul said in a statement. “This reckless behavior must come to an end.”
Scrutiny of the Fed has intensified in the years since the 2008 financial crisis, as the government has become more dependent on the Fed to take unusual, interventionist actions. In the wake of that crisis, for example, the Fed tripled the size of its balance sheet and bought debt and residential mortgage backed securities issued by Fannie Mae and Freddie Mac.
But Frank, the top Democrat on the full Financial Services committee, has pushed for more Fed transparency and on Tuesday argued for more modest changes in the Fed, including his proposal to block regional presidents of Federal Reserve banks from setting policy.
Arguing that banks have too much power in choosing those regional presidents, Frank wants them to be nominated by the White House and confirmed by the Senate.
“I cannot think of another element in American government where there is formal binding legal power given to representatives of the industry,” said Frank. “To have them setting the policies seems to me to be greatly mistaken.”
But Luetkemeyer questioned that proposal, asking Frank whether giving more influence to the White House and the Senate would weaken the Fed’s independence. “Don’t you think there should be more independence?” the Missourian asked.
Instead, Luetkemeyer appeared to back the approach of Brady’s bill, which would maintain the current system of choosing regional Fed presidents and give them all policy-setting votes, rather than rotating votes among them.
Frank rejected that idea, saying it would give bankers too much influence. “It’s not that bankers are bad people,” Frank said. “But there ought to be broader representation in voting on monetary policy.”