Vice president candidate Ryan's Fed policy views well outside mainstream

August 20, 2012

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Paul Ryan doesn't quite want to end the Fed. But if Mitt Romney's pick for vice president had his way, he might curb the central bank's powers enough to make it harder for policymakers to respond aggressively to economic downturns.

The Wisconsin Republican has supported controversial legislation that would strip the US Federal Reserve of its mission to seek maximum employment, and has been a harsh critic of the central bank's continued loose monetary policy.

Further, he has hinted at sympathy for the days when the US dollar was tied to gold, a regime that constrained the Fed from printing dollars to help the economy.

Romney's choice of Ryan suggests the campaign could step up attacks on the Fed if the central bank moves to ease monetary policy further as many economists expect, and that a Romney White House might want to restrict the institution's powers.

In a detailed speech on monetary policy in December 2010, Ryan hardly minced words in his criticism of the Fed.

"There is nothing more insidious that a government can do to its countrymen than to debase its currency - yet this is in fact what is occurring," Ryan said at an event sponsored by FreedomWorks, a right-wing think tank originally called Empower America, where Ryan worked as a speech writer in the 1990s.

Such strongly worded criticism is viewed by some analysts as a challenge to the Fed's independence, an effort to dissuade the central bank from taking the type of unconventional and aggressive actions it has pursued under Chairman Ben Bernanke.

Ryan's perspective on the Fed is in keeping with the free-market, limited-government stance that has marked his signature budget plan and made him a favourite of Tea Party conservatives.

The Romney campaign declined to comment on Ryan's monetary policy views.

Romney, the presumptive Republican presidential nominee, has already said he does not think a third round of Fed stimulus through bond purchases would do much to help the fragile economic recovery.

He has also said he would not reappoint Bernanke, a Republican originally nominated to the post by President George W. Bush and whose second term expires on January 31, 2014.

Ryan, who argues that the central bank's bond buying has allowed Congress to delay tough decisions on trimming the budget, has said Fed officials are overconfident in their ability to set interest rates at appropriate levels. That suggests some longing for the abandoned and widely discredited practice of linking currencies directly to commodities like gold.

Indeed, Ryan praised a FreedomWorks pamphlet entitled "A Guide to Sound Money," which harkens back to the days when "our Founders ... required that the dollar be defined in precise weights of precious metals." Ryan called the missive "the best 25 pages on money I've read in a long long time. I'm going to be tweeting and facebooking this all day all week long, encouraging people to read this," he told the audience at the event.

Ryan sponsored legislation in 2008 to force the Fed to focus solely on inflation, and he backs legislation proposed by outgoing Texas Representative Ron Paul - author of a book entitled "End the Fed" - that would expose the central bank's monetary policy decisions to a congressional audit.

Paul's supporters are seeking to insert a Fed audit plank in the Republican electoral platform.

Bernanke has argued that Paul's bill, which handily cleared the House of Representatives but was never taken up by the Senate, would be a "nightmare" for the central bank and threaten its independence.

Romney has said he supports a Fed audit but has not explicitly endorsed the bill. The backing of a Romney White House might easily give the legislation the impetus it needs to become law if Republicans win control of the Senate in the November 6 election.

Asked about Ryan's view of the Fed, Brad DeLong, a Berkeley economics professor who served as a Treasury official during the Clinton administration, said: "Quite frankly it is terrifying."

"Price stability is one goal of macroeconomic management, but only one goal: there are others. To command the Federal Reserve to pursue price stability alone is to create the preconditions for macroeconomic disaster," he said.

The view that currencies should be linked to commodities is largely perceived as fringe, several decades after the world fully abandoned a gold standard that was seen as economically crippling and inefficient.

"I think it's fair that most economists, certainly most mainstream economists, are skeptical that that's going to be a solution to some of the perceived problems with monetary policy," said Michael Hanson, senior US economist at Bank of America-Merrill Lynch, who added that he was not aware of Ryan's views on monetary policy.

"It would, almost by design, remove the discretionary flexibility of monetary policy to respond to recessionary shocks."

The effort to make the Fed focus solely on inflation does have proponents in the economics profession.

Myron Scholes, a co-founder of the failed hedge fund Long-Term Capital Management who now teaches finance at Stanford University's business school, says too much central bank intervention makes it impossible to read the signals sent by financial markets.

"We should not allow the Fed to try to smooth the economy," said Scholes, a Romney supporter. "We need volatility to warn all of us not to assume that the Fed can control the economy."

In response to the deepest financial crisis and most severe recession in generations, the Fed slashed overnight borrowing costs to near zero in late 2008 and more than tripled the size of its balance sheet to $2.8 trillion by buying up mortgage and government bonds.

ROMNEY ADVISERS PROVIDE COUNTERWEIGHT

It is unclear what type of say Ryan would have if the Republican ticket proves successful. His more radical inclinations could well be drowned out by the more mainstream views toward the Fed of top Romney economic advisers and potential appointees, like John Taylor and Glenn Hubbard.

"I don't put a lot of stock in Ryan's view of monetary policy and the Fed," said David Kotok, chief investment officer of Cumberland Advisors. "I don't think he's a big player in this. Romney will decide these things."

Harm Bandholz, an economist at UniCredit in New York, says pushing for single-mandate legislation would not necessarily interfere with the Fed's independence.

He added, however, that the criticisms Ryan and other Republicans have levelled against the Fed have been unfair, particularly given the inability of Congress to make any kind of substantive legislative progress.

"The Republicans are really serious on bashing the Fed about buying bonds," said Bandholz. "To put all the blame on the Fed - I think that's just ridiculous."