Ron Paul and the Fed

September 29, 2009

First of all, thanks to my good friend Stan Collender over at the Capital Gains and Games blog who has jumped to my defense (and that of Bruce Bartlett) vs. the misguided Ron Paul supporters who interpret any criticism of the congressman’s ideas as proof of membership of some global conspiracy.

You know, it is possible to  think both a) overly easy monetary policy was a contributing factor in the economic crisis, and b) Fed actions helped prevent the recession from being worse than it was. And as far as the audit bill goes, letting Congress have greater influence on monetary policy would only result in a Fed that was less vigilant about inflation.

Better they focus their efforts nudging the Fed toward policies based in forward-looking market metrics as opposed to backward-looking economic indicators like the unemployment rate. But their dime, their dance floor.


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

Months ago, you stated, “I have taken a lot of heat about my coverage of Ron Paul’s idea to audit the Federal Reserve. I would love to do a piece on economists in favor of the bill. So I am looking for names.”

I am a Ron Paul supporter who was misguided in thinking that, having been provided with many suitable names, you would produce the piece.

Posted by yoikes | Report as abusive

You’re a joke, your article is a joke, and your research is a joke. Your attempts to smear RP supporters are pathetic and amazingly weak. Please grow up and write something worth reading.

Posted by CivilRadiant | Report as abusive

I agree that some supporters go to extremes in their statements. Hate filled speech is not going to get anyone very far. However, this is the minority of individuals who subscribe to the political philosophy of Dr Paul. Which is essence the original political philosophy on which our country was based.

Your statement,

“misguided Ron Paul supporters who interpret any criticism of the congressman’s ideas as proof of membership of some global conspiracy.”

will not exactly win any awards for civil discourse and tact either.

With that said, what is your proof that ANY FED action helped limit the effects of a recession? You make the statement but don’t back it up.

The position that the FED helped create the problem in the first place and is making things worse with their more recent actions can easily be concluded by the data present. A record low dollar, falsely manipulated interest rates creating bubbles, a 2 trillion dollar balance sheet explosion, partisan bailouts, on and on.

But one main thing it does is help facilitate runaway govt. spending by creative ways to raise funds for the bond markets. They DO NOT keep the government in check with their monetary policies. That again is a platitude with no substance.

Ok, make your statements, but lets see the proof.

Posted by bgodley | Report as abusive

You are absolutely correct that the Fed’s monetary policies led to the economic crisis. You are also correct that their later actions have staved off as much of a depression or recession than might have been possible. But this is a very bad thing.

What you are missing is that we need the recession. The recession is the correction. Without it, the malinvestment and moral hazards continue and will lead to much worse consequences had they not tried to make things “easier.”

Imagine a foolish teenager with his first credit card. He overspends and now has hit his limit. The only way he can get out of the mess is to slowly pay off the debt and try not to make the same mistakes again. Instead, the Fed is acting like same boy who decides the best way to avoid the pain of paying his bills is to get MORE credit. Sure, it may help him feel better right now, but it is not the best thing for him to do.

Worse, the Fed’s actions steal money from responsible savers who should be getting a high rate of interest from their savings right now and gives it to the irresponsible who don’t care who they hurt as long as they don’t have to feel the pain of their own actions.

I do suggest you read End the Fed. It explains a lot about the Federal Reserve that you do not seem to be aware of. It is a short book. Then, instead of attacking the people who disagree with you, you might debate the actual subject.

As far as monetary policy goes, what an immoral set of words those are. “Money” is simply a unit of exchange agreed upon by two people. No one should be able to interfere with that exchange by exerting influence over the “policy” of that unit of exchange. Not Congress. Not the Fed. Not John Q public. No one. If you interfere with that exchange you take from one party and give it to the other and that is stealing and immoral.

Posted by Alex | Report as abusive

Wow! If we hadn’t given that drug addict another injection, he would have crashed really hard.

(By the way, James, did I miss the article you did in response to the challenge you issued for us small government-types to produce a list of economists who didn’t support the stimulus?)

Kudos to Ron Paul for putting monetary policy back into the public,and hopefully political, discourse.

Posted by Angela | Report as abusive

Once again, you don’t even read what you write:

“You know, it is possible to think both a) overly easy monetary policy was a contributing factor in the economic crisis, and b) Fed actions helped prevent the recession from being worse than it was.”

I disagree…

Please explain how an EVEN MORE easy monetary policy (0% interest rates) helped prevent a recession brought on by overly easy monetary policy… What happens when that money gets into circulation? Have you even considered where that new money has gone? Perhaps that could explain the 50% jump in the stock market? Could the stock market be sucking up all the liquidity as the housing market did?

At this point, I’m not even sure you realize that they *really* do create money out of thin air and just how evil/diabolical that really is…

Posted by Michael | Report as abusive

Personally I never lumped you with any global conspiracy, though I did question your pro-Fed motives.
Hey someone finally ran to your defense. Nice.
You ran to the defense of those poor persecuted central bankers, and Ron Paul supporters ran to the defense of sound money & constitutional government.
Nothing new here. :)

Posted by Idaho | Report as abusive

To try and marginalize those with whom you disagree by claiming: “misguided Ron Paul supporters who interpret any criticism of the congressman’s ideas as proof of membership of some global conspiracy” is pathetic. How can you can anyone (yourself included) take you seriously after spouting off such ad hominem attacks.

“Misguided” according to whom? You? Based on your prior attempts at reasoning how can anyone take such an opinion seriously. Why are we misguided? Because you “feel” that we are? You don’t even provide any factual backup for such a statement other than to try and allude to a separate opinion concerning the supposed conspiratorial nature of your opposition. Have you ever taken a discrete math course, logic, reasoning? Or have you realized that you can get away w/ juvenile/nonsensical attacks of your opponents in this “short-attention span” culture of ours where rhetoric and campaign slogans like: “mission accomplished” and “Yes we can” carry more weight than substantive discussion and real debate. Arrogance should not be a substitute for critical thinking.

We are repeating the same mistakes we made after the crash of the NASDAQ bubble. This is no conspiracy it’s backed up by history. Your unwillingness to consider the consequences of our past actions may be a result of your apparent bias for short-termed considerations. In order to stave off the deeper recession we should have had after the bursting of the bubble the govt. did exactly what it’s doing now: lower short-term interest rates and call on all Americans to go spend their money; which they did. With cheep credit available (with other incentives from Fannie and Freddie bent on creating a “home ownership society”) American’s managed to postpone the deeper recession that was supposed to occur by spending their way into a housing bubble. Using their homes as ATM’s they used their equity to load themselves up on debt getting swimming pools, big wheels for their cars, big cars, granite counter-tops etc…All of these debts (Mortgage & revolving) were securitized and sold off to foreign govts, insurance companies, pension funds, mutual funds, hedge funds. Their higher tranches were rated AAA because of their supposed “sound” structure. All tranches were wiped out as soon as short-term interest rates were raised high enough to make option-arm, negative am, teaser interest rates jump up through the roofs making it impossible for homeowners to keep up w/ their dramatically increased mortgage payments that now made up over 50% of their living expenses. Along w/ the excess malinvested inventory of new homes (because even homebuilders thought real estate could sustain 10% gains ad infinitum) this brought housing prices down. People now began to owe more than what their houses were worth. They chose to stop making payments. Delinquencies, foreclosures rose and MBS holders got wiped out. All the major banks who were heavy players in the origination, securitization and investment in said securitizations started to fail. First the Bear Stearns hedge funds in july and oct of 2007. Then Bear Stearns failed and had to get sold to JP Morgan. But Bear Stearns wasn’t the only one playing this dirty game. Lehman who had underwritten a large number of the MBS’s got screwed, so did Fannie and Freddie. Then came AIG who “insured” said MBS’s w/ CDS’s. So the financial sector got F’d and now big and small business found it difficult to borrow because no one trusted any one to pay back given the circumstances. So business started laying people off. Unemployment rose. These were jobs that would never have been created if the initial irresponsible lowering of the interest rates didn’t give incentive to people to come up w/ such crazy schemes as the one’s I’ve described above. So what do we do to try and resolve this mess created by erroneous monetary policy. The govt. chooses to exacerbate the dilemma by doing exactly what it the last time there was trouble. But creating a temporary up-tick in the dow (housing), and giving people the impression that things have been resolved when really the real issues are still an underlying mess is nothing more than a cosmetic attempt to fool those who lack a clear understanding of history. Like you James.

Posted by dave | Report as abusive

So, you just had to write “misguided Ron Paul supporters who interpret any criticism of the congressman’s ideas as proof of membership of some global conspiracy”.

Really? Were you so incapable of debating the issue that you found the need to throw out a snide comment like this? Really? We may disagree, but I thought that you would debate an issue with intellectual honesty.

From this comment one might think that people who had debated this issue in yesterday’s article might have made comments about a global conspiracy. Not true.

I went back and read those comments. Most of the comments from yesterday were very well reasoned and intellectual. I didn’t see any that spoke of a global conspiracy.

Rather than have any debate on the issue, this author finds the need to imply things about people who offered rational and reasonable points of dispute. How childish and lazy. This blog belongs on Facebook not Reuters.

(Shaking head in disappointment at how low the media has sunk these days.)

Posted by Alex | Report as abusive

Thank heavens for Ron Paul. Absolutely the best representative America has. James shouldn’t try to smear Ron’s supporters as conspiracy theorists. Ron’s supporters are generally pretty intelligent folks and could teach you a thing or two.

Posted by jason | Report as abusive

“”And as far as the audit bill goes, letting Congress have greater influence on monetary policy would only result in a Fed that was less vigilant about inflation.””


Kid, you’ll be wiping your ass with Federal Reserve Notes soon.

Posted by joe | Report as abusive

I guess it was just by pure dumb luck that we were able to survive at all for all the years this country had no central bank. Your article is really intellectually bankrupt and you really don’t present any data so your arguments are not credible. Sound money is just common sense. Fractional banking is ( and rightly so) under scrutiny. I really do kind of feel sorry for you and I mean that sincerely. I wish you the best and pray that for the sake of your family that you wake up soon.

Posted by Parasite Protector | Report as abusive

Dear James Pethokoukis

I sincerely hope Sir, that you dont think every Ron Paul supporter is a global conspirator theorist, that is sad of an educated man to assume. Also, May it be the Conspiriacies you have read or the majority would not exist if their was a boring public utility type audit that show the exemptions on foreign lending, domestic lending etc. Until this happens you will constantly be bombarded on a wide number of conspiracy theories across the spectrum and then some.

It would be interesting to see how you would define the “overly easy monetary policy [set by Bush/Greenspan/ Bernake to fight NASDAQ bubble pop] [which] was a contributing factor in the economic crisis, and how the Fed actions [that supposedly] helped prevent the recession from being worse than it was” be different then the Monetary policy set after the NASDAQ collapse. A year from now new shortfalls and continued disappointing economy will almost make it impossible to raise interest rates without a contractor impact, so Inflation will take off as we our in able to raise rates.

Also I argue with the premise that 0% interest rates, has saved the economy. One Major UNFORSEEN Consequence I can list, is how the USD and its ultra low rates makes it the cheapest funding currency. The U.S. dollar will continue weakening, and investors will continue to borrow it to invest in higher-yielding assets profiting from the diffrence.

This achievement falls at Bernanke Door. A weak dollar and low U.S. interest rates push the greenback toward becoming a carry trade currency, which, like the yen for many years, attracts investors to borrow it cheaply to invest elsewhere. When we should raise interest rates Bernanke wont because he is no Paul Vockler, he will be troubled by a continued disappointing economy, High unemployment, Mortgage rates, and a high number of new low loan interest loans made by the TARP banks, Non-TARP Banks, Government backed programs, on top of all the past administrations debt, Obama new 12 trillion and 1 trillion alone is our budget deficit projected to be 1 trillion year for 10 years. All this debt garners interest that has to be paid and at 0% interest make the annual payment to our creditor very low, when Bernanke tries to raise rates he will hit a brick wall. Inflation then will take off, we had a unique chance in 2008 to become debt free and so we could raise the interest rates to curb our long term declining dollar.

I also like Ron Paul question the importance of a FED, at least in the 1930s and before we did have a lot of social injustice but change was by individuals like Rosa Parks,Martin King, and that white women who stood up for her right to vote, never did government bring these issues to light, Also Im not defending that, has America has never had a true free market has its always found a way to ignore a peoples contribution whether be in the 1800s through simple means to not allow people to vote as to capitalize off the fruits of their labor(Women, Blacks) or in more Modern times subtle ways by deceiving the Savers and Borrowers, Traders and Investors through artificial interest rates.

Anyway back to point I bring this time line into question has to compare times a family of 8 could rely of one bread winner, a extremely lower wage then compared today, a higher interest of ranges of 20% and manage to feed and clothe and educate the family, Americans found a way eh? compared today a hundred years later, and We have 95% percent drop from previous generations High valued USD. People should people to live off low wages, if today wages were paid in 1930 value people would not have very much to complain about from health care to education, we just wouldn’t be facing rising cost; in fact probably more then a few would accept lower wages would be a net positive for our companies. To shore up a dollar we need higher interest rates and not just for a year but for a decade to stop a almost 100 year long term decline in the USD.

Brandon L

Posted by Brandon l | Report as abusive

The author of this blog post is a Keynesian (or a monetarist, which amounts to the same thing), so he understandably disagrees with Ron Paul. Too bad Mr Pethokoukis does not appear to possess the intellectual fortitude to debate the actual ideas. It seems he would rather defame Ron Paul’s supporters.

Posted by Pablo Escobar | Report as abusive

UHMM…. You realize they cause the inflation right? And Congress auditing them, so we know what they do with the money is the only thing the bill asks for. No more oversight or influence. It bring light onto their books.

So from your stance we should have just let Eron and Worldcom keep on going, making them not get audited, going right on with business as usual. Not to say the Fed is as bad, but they are not a Pinksheet stock, they are control our money. Come on, seems like a no brainer for at least an audit.

Posted by tajitj | Report as abusive

No, Our dime, our dance floor, what is wrong with the way you think? You certainly will never know.

Posted by Donn | Report as abusive