Since Rand Paul is under the spotlight for some (pathetic) plagiarism, his comments on auditing the Federal Reserve came into mind. This is not the first time Rand has supported such caused. His father had brought a bill to the house, which got the needed votes but Harry Reid blocked it. There are a lot of politics surrounding this bill, I don’t care for politics. Instead I think there is a way to make this auditing worth it in the long-run.Regarding the reasons people like Rand and Ron Paul want to audit the Fed, it is clear they see it as some anti-populist machine. They believe that the Fed is handing out money to select banks and individuals. While in a way that is true I wouldn’t call it unprecedented before the Federal Reserve was created, which is the standard that the Pauls want to return to.
First the reality is that an audit will get very little done. Compared to Greenspan, Bernanke is a very transparent chairman and Yellen will likely be the same. So, really auditing the Fed will not gather any information already not available to the general public. I fear that if auditing is allowed then officials will impose more influence over the Fed and repeat the mistake of the 60s and 70s by using the Fed to inflate the economy for political wins or to support their future unsustainable aims. If the GOP is scared of inflation then giving congress influence over the central bank will create a decade of inflation. When I listen to the conversations congressmen have on monetary policy I really believe that they don’t know anything about monetary policy. I might know more about it then them and I don’t know that much. Auditing the Fed really won’t help the political progress any more, I only see it as a one step towards a period of great inflation.
If Rand Paul or any of his anti-inflation colleagues want to restrain the Fed they should instead push Yellen to define specific rules of conduct for the Fed’s function. I understand that this is hard to get from a gold bug but they should realize that for the time being that rules can at least help market expectations improve and monetary stability to ensue. Of course not all rules are created equal. Some like the Taylor rule seemed to just create inflation outright (and not deal with low rates). Various other rules or quasi rules such as using employment and inflation as a target are useless. This leaves only one rule, one rule to rule them all, and in darkness bind them (any Lord of the Rings fans on this blog). That rule is nominal GDP targeting. There are some slight variations of this rule, but the one promoted by Lars Christensen, Scott Sumner and their company of Market Monetarist is currently a highly viable solution.
NGDP target removes the political motivation, it defines a clear path for expectations, and above all reduces the role of central banks dramatically. It is by far the most free market solution to the current system. The gold standard is not viable and free banking is a little far away (still got hope though). If the GOP and the so called libertarians really want to propose real solutions instead of bucking the line that everything is inflationary then they must propose a policy of NGDP targeting. If you really want to understand how Market Monetarism is not “statists” read this article by James Pethokoukis. As well just read any market monetarist blog. I would also highly recommend reading George Selgin‘s writing on this issue of NGDP so that the free banking perspective can be clear. After all, NGDP targeting is not without its reservations but those reservations are for another day.
PS: Rand Paul’s plagiarism is getting out of hand, guess he might actually become a great president.