Wednesday, August 15, 2012
Mitt Romney's new running mate has authored some provocative policy proposals to cut budget deficits and overhaul Social Security, Medicare and Medicaid. But Rep. Paul Ryan has also been an advocate for a different course for the central banking system of the United States, the Federal Reserve.
For the past 35 years, the Fed has had a dual mandate from Congress: to set interest rates at levels that will both foster maximum employment and keep prices stable. Put another way, the Fed's goals are to get unemployment as low as possible while keeping inflation in check.
Paul Ryan, however, wants to change that. He wants the Fed to stop trying to manage the unemployment rate and focus like a laser on just one goal: stable prices.
At a hearing on Capitol Hill earlier this year, Ryan told Fed Chairman Ben Bernanke that he thought the central bank's focus on employment was a distraction from its effort to fight inflation.
"The result of this balanced approach is that higher-than-preferred inflation may be tolerated; not that it's desired, but that it will be tolerated," Ryan said.
Quoting former Fed Chairman Paul Volcker, Ryan said that "central bankers who are willing to tolerate a little more inflation usually wind up getting a whole lot more than they expected."
Bernanke responded that focusing on jobs as well as stable prices is not a distraction for Fed policymakers. He said that the two sides of the mandate are generally complimentary.
"We agree that low, stable inflation is good for the economy and it's good for growth, it's good for employment," Bernanke said. "And we think most of the time that there is a complimentary relationship between those two."
At the heart of Ryan's argument is a concern about protecting the value of the dollar, which is eroded by inflation. In fact, Ryan has suggested that the country should return to sound money by pegging the value of the dollar to a basket of commodities, somewhat like the gold standard.
In another exchange with Bernanke, Ryan argued that the Fed's response to the financial crisis — using extraordinary measures to inject more money into the economy to keep interest rates low — has created the risk of massive inflation and dollar devaluation, and set the stage for another crisis.
"[A] lot of us believe that the Federal Reserve was too loose for too long in the 2003 to 2005 period, and that is what in part led to the asset bubble ... and the problems that we have today," Ryan said.
"I know you don't agree with that, but because you don't agree with that, our fear is that you're just going to repeat these same mistakes again, but by orders of magnitude that we can't even comprehend right now," he said.
Bernanke's response was that, so far, there's no evidence of accelerating inflation, and that the Fed has the tools and ability to remove the excess money from the economy once it begins growing again at a healthy rate.
Ryan supports legislation that would give the Government Accountability Office the power to audit the Fed's interest rate decisions. Bernanke says that could politicize monetary policy.
Ryan also believes the Fed's low interest rate policy has made it easier for Congress to avoid reducing massive federal budget deficits because borrowing costs are so low.
"That [is] not an excuse for the Federal Reserve to step in and try to bail us out," Ryan said.
While Ryan has sparred with the Fed chairman during hearings, he has not called for Bernanke to be replaced. Mitt Romney, however, the man at the top of the ticket, says that if he's elected, he'll find a new Fed chairman.