Kentucky Senator Rand Paul has had better weeks. On Monday, he suggested there could be a link between vaccines and autism in a CNBC interview. Later on in that interview, he actually shushed as in, pressed one finger to his lipsthe female CNBC anchor. On Tuesday, a New York Times article linked him to a medical group that promotes anti-vaccine theories. But Pauls dumbest comments came in Iowa on Friday nightand they show why Paul has the most dangerous economic views of any presidential candidate. Speaking in front of more than 150 Iowa activists, Paul ripped into the Federal Reserve and promoted his Audit the Fed bill, which he introduced earlier this week. I think there needs to be some sunshine, he said, according to reports of the event. Im going to fight em, and were going to get a vote on audit the Fed. Im not sure if Paul will get that voteultimately, thats up to Senate Majority Leader Mitch McConnell. But I do know that Audit the Fed is a terrible idea. First, the Fed already is extensively audited by the Governmen t Accountability Office (GAO), the Office of the Inspector General (OIG) and even private sector auditors like Deloitte. Each week, the central bank also releases its b alance sheet and even has an inte ractive guide of its balance sheet available for further explanation.
However, the GAO and OIG audits exclude a few parts of the Feds policymaking, including transactions by the Federal Open Market Committee. Pauls bill removes those exclusions and requires recommendations for legislative or administrative action" from the Comptroller General. Sounds innocuous, right? Its not. That would significantly damage the Feds independence, which exists so that politicians cannot influence the central bank for their own political purposes. In other words, Audit the Fed would lead legislators to interfere with monetary policy matters and put the entire economy at risk. For further explanations why the legislation is so dangerous, see the Roosevelt Institutes Mike Konczal and the Washington Posts Catherine Rampell.
With President Barack Obama in office, Pauls legislation stands no chance of becoming law. Its hard to imagine it overcoming a filibuster in the Senate, and even if it did, the president would veto it. If Paul were to win the presidency, "Audit the Fed" would still face long odds in the Senate since, even in the best case scenario, Republicans likely wont have a filibuster-proof majority in the next Congress. So while Audit the Fed is theoretically dangerous, its not much of an actual threat to Fed independence.
But a Paul presidency would still have disastrous effects on the U.S. economy, for other reasons that were on wide display in Iowa on Friday night.
Once upon a time, your dollar was as good as gold, he said. Then for many decades, they said your dollar was backed by the full faith and credit of government. Do you know what its backed by now? Used car loans, bad home loans, distressed assets and derivatives. Pauls comments make very little sense. When Paul asks what backs the U.S. dollar now, hes effectively asking what makes it valuable. When the U.S. used a gold standard, it meant that a dollar was worth a certain amount of gold. Economists overwhelmingly agree that that was a terrible idea, but the connection seemed to explain why dollars had value. The real reason dollars had value is the same today as it was back then: Its the only currency the government accepts to pay taxes. Businesses and consumers thus have an incentive to carry out transactions using dollars. Paul's quip about dollars being backed by "used car loans, bad home loans, distressed assets and derivatives" may sound good to Iowa conservatives but it betrays an incredible ignorance about the economy.
What Paul and his followers are concerned about is the purchasing power of the dollar. They want to return the U.S. to the gold standard to ensure that inflation doesnt undermine the actual purchasing power of the dollar. Over the long run, a gold standard would guarantee that price stability. But over the short run, prices would still fluctuate violently, as happened when the U.S. used the gold standard.
In terms of current policy, goldbugs, as they are often called, think the Feds recent decisionsits zero interest rate policy and bond-buying programwill cause skyrocketing inflation and reduce what you can buy with dollars. Those warnings look more foolish by the day. Inflation over the past year was just 0.7 percent, 1.3 percent if you remove volatile food and energy prices. Inflation expectations for the next 10 years are also very low. You would think that these low inflation rates would convince Paul and his followers to rethink their economic theory.
Pauls economic ignorance doesnt end there. [The Feds] liabilities are $4.5 trillion; their assets are $57 billion. Do the math, he said in Iowa. "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 theyve got a printing press, and they can print up some more money. Paul apparently cant read the Feds balance sheets, because as of November, its assets were $4.487 trillion and its liabilities were $4.430 trillion. Where did the $57 billion figure come from? Thats its total capital. But as Cullen Roche, the founder of financial services firm Orcam Financial Group, points out, Paul also ignores the fact that the Fed remits most of its profits to the Treasury Department. In 2013, they gave Treasury nearly $80 billion. The Federal Reserve isnt just a profitable entity, Roche writes. It is perhaps the most profitable entity on the face of the planet.
As all this shows, Pauls views on monetary policy are profoundly misguided. As long as he's in the Senate, that doesnt really matter. He can spout his nonsense without having any effect on the Federal Reserve. But if he became president, he would be responsible for choosing the next Fed Chair when Janet Yellens term expires in 2018 and for nominating board members to the FOMC. That doesnt give Paul unlimited power, since the Senate would still have to confirm his nominees. But as president, Paul would be the leader of the GOP, with an even greater ability to dictate its position on monetary policy and convince Republican senators to support his nominees.
Of course, the Republican Party itself has an incredibly misguided position on monetary policy. In 2012, its platform included returning to the gold standard. Thats a good reason why just about any Republican nominee would be a dangerous president. But Paul is far more open about his disdain for the Fed, and given his ideological bent, he's far less likely to listen to conservative economists who reject his monetary policy views. At least on the economy, that makes Rand Paul by far the most dangerous candidate in the 2016 field.