Fed basher Ron Paul should focus on outcome, not process

Rep. Ron Paul wants to reform how monetary policy is made. Other reformers suggest looking at policy outcomes.

The Federal Reserve is under attack – again. If 2010 seemed tough for the central bank, 2011 holds the prospect of even more criticism.

That's because Rep. Ron Paul (R) of Texas will become chairman of the House subcommittee on domestic monetary policy, which oversees the Fed. That appointment should give him a trumpet to sound his negative views of the Fed. He's written a book titled "End the Fed."

Furthermore, Mr. Paul last month indicated there's a 50-50 chance he will again seek the Republican nomination for the presidency in 2012, as he did unsuccessfully in 2008.

An "independent" group pushing for his nomination includes on its website a ballad titled "Audit the Fed." The singer, accompanied by a rhythmic band, speaks of "a scam" and "no accountability."

Paul introduced "The Federal Reserve Transparency Act" in 2009 calling for "reform" in the way the comptroller of the United States audits the Fed's board of governors. The act calls for the audit to include the expansion of Fed activities during and following the financial crisis of 2008, such as agreements with foreign financial firms. A related Senate bill was introduced by Vermont's independent senator, Bernard Sanders.

Neither bill has passed. Paul insists public support for greater transparency is growing.

It's an old issue. In the mid-1970s, this correspondent wrote a column calling for more and quicker information from a secretive Fed on its monetary policy actions. At a background interview shortly afterward with then Fed chairman Arthur Burns, he scolded me. "David," he said, "that column wasn't worthy of you."

By now, though, the Fed is generally far more transparent. Last month, for the first time, it provided a live webcast of its key monetary policymaking Open Market Committee meeting, a session held every five weeks.

Paul is "on the wrong track," says Allan Meltzer, a Carnegie Mellon University economist who is writing the three-volume "History of the Federal Reserve." He says Paul's bill deals with the process of making monetary policy. What's crucial for the public is the policy's outcome.

The Fed's role, under its instructions from Congress, is to work for both low unemployment and low inflation. Many see a conflict in these goals. For example, today the Fed has been expanding credit dramatically with the aim of trimming the jobless rolls. Critics say those extra trillions of dollars raise a risk of high inflation.

Dr. Meltzer proposes a system where the Fed would announce each year its unemployment-inflation goals for two or three years ahead. If not achieved, Fed brass could be asked for their resignation. Something similar to this system has been established for central banks in some 20 nations, including Britain and New Zealand, Meltzer notes.

Meltzer complains about the major expansion of the Fed's role with the recent financial crisis. An original aim for granting the Fed a large degree of independence from Congress and the presidency was to prevent it from being forced to finance the federal debt, and thereby possibly ballooning inflation. But with the Fed's recent "quantitative easing" measures, it has bought hundreds of billions of dollars of Treasury bonds.

Meltzer also calls putting the Consumer Protection Agency under the Fed, where it largely escapes congressional review, "a run around the Constitution." As for Paul's legislation, he says, "nobody cares."

David R. Francis writes a weekly column.

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