What Does Rand Paul's Presidential Campaign Mean For A Nervous Fed?

The Kentucky senator's presidential bid poses the clearest populist threat to the central bank in generations.

A woman walks past the Marriner S. Eccles Federal Reserve building as it is reflected in a puddle of water in Washington, D.C., U.S., on Tuesday, Jan. 27, 2015.

Photographer: Andrew Harrer/Bloomberg

MANCHESTER, N.H.—Nearly six years ago, flanked by members of the Campaign for Liberty started after his father's presidential campaign, a longshot Kentucky candidate for Senate leaned into a bullhorn and called for the Federal Reserve to be scrapped.

"I don't oppose the Federal Reserve because it is secretive, though it is," said Rand Paul at an April 25, 2009, "End the Fed" rally. "I don't oppose the Federal Reserve because it lacks congressional oversight, although it does. I don't oppose the Federal Reserve because it's a private cartel, though it is. I oppose the Federal Reserve primarily because it wreaks havoc on the economy. We need to understand that this is the most important question of the last 30, 40 years. What caused the panic of 2008? Was it capitalism or was it the Federal Reserve?"

The crowd gave Paul the answer he craved. It was the Fed, obviously, that sparked the crash. In those early days of the Tea Party movement, activists inspired by the Pauls and seeking culprits for the Great Recession brought Fed-bashing into the political mainstream. Rand Paul, who won a Senate seat in 2010, has perennially introduced legislation to audit the central bank and give Congress power over its decisions; versions of this passed the Republican-controlled House of Representatives in 2012 and 2014.

Defenders of the Fed have put up with plenty, but the launch of Paul's presidential campaign Tuesday poses the clearest populist threat to the central bank in generations. Reporters from at least 10 countries flocked to Louisville to cover Paul's announcement. Paul's elevated status in the Republican Party is likely to boost the latest version of the "audit" bill—the first to be proposed while Republicans control both houses of Congress. Texas Senator Ted Cruz, a Republican and the only other announced candidate for president, often deploys "audit the Fed" as an applause line in his speeches. Paul goes further and promotes the concept on his campaign website.

"The Fed is now in every nook and cranny of banking with unprecedented regulatory powers and no Congressional oversight," reads the copy on his site, written in Paul's voice. "I believe the Fed should be Audited and the regulatory power should be placed back under the control of Congress."

That's one of Paul's most popular positions, a combination of ancient American fears about central banking and more recent Republican anger about the Fed's intervention in the economy. In 2008, when Representative Ron Paul's supporters turned "End the Fed" into a campaign chant, 61 percent of Republican voters told Gallup they had a positive view of then-Fed Chair Ben Bernanke. One year later, only 36 percent of Republicans said that.

The Fed's moves during the great recession had repelled conservatives. They'd blanched at the Troubled Asset Relief Program. They'd opposed the rounds of quantitative easing that had the Fed buying hundreds of billions of dollars in bonds. By 2011, Texas Governor Rick Perry was telling an Iowa audience that Bernanke would get treated "pretty ugly down in Texas" if the Fed "printed more money between now and the election."

The ham-handedness of that wounded Perry. Rand Paul, who's far more comfortable on the anti-Fed ramparts, has never made it personal. He's just warned that the Fed's investments are opaque and that the dollar, effectively, is now backed by "used car loans, bad home loans, distressed assets and derivatives," and he's claimed that the Fed is over-leveraged 80 to 1.

The Fed's defenders are dumbfounded by that message—and by its popularity. Paul's definition of over-leveraging fails to account for the Fed's practices, and how its pays for assets with reserves. The purchases of Treasury and mortgage-backed securities more than quadrupled the Fed’s balance sheet to a record $4.52 trillion earlier this year.  Since the conclusion of the third round in October, Fed officials have said they plan to hold the assets and reinvest maturing securities in order to maintain stimulus. Paul insists that the Fed's balance sheets are hidden; the Fed publishes the levels of all its holdings each Thursday.

"I’ve actually seen some of the major proposers of Audit the Fed not even know some of the things about the Fed that they should know," said Tennessee Senator Bob Corker last month in a roundtable with Bloomberg reporters. "I mean, the Fed has no debt. They say we’ve got, you know, leverage 50 to one debt or—there’s no debt. What are you talking about?"

The question has an answer: Paul is talking about the deep-seated fear that America's currency is based on nothing and can collapse if the Fed keeps debasing it. In 2007, when the radio host Alex Jones told Paul that the dollar might sink to the value of the Mexican peso or Russian ruble, the future senator hedged, then hinted at future problems.

"It’s a house of cards," he said. "It depends on confidence of all these other countries, not only to keep those dollars in their circulation and in their central banks, but also to use them to buy treasury bills to finance our debt."

Yet the dollar's collapse simply never happened. The dollar has soared against global peers as the Fed has signaled its intention to raise rates this year for the first time since June 2006 while the European Central Bank and the Bank of Japan have acted to aggressively ease monetary policy. The dollar has soared 18 percent since July 1 against a basket of 10 leading global currencies tracked by the Bloomberg Dollar Spot Index. Fed officials have attributed part of the rise to the relative strength of the U.S. economy.

The dollar rose to a 12-year high against the euro last month, when the ECB began buying sovereign debt under a plan to inject 1.1 trillion euros ($1.2 trillion) into the economy. The dollar has been boosted by demand for U.S. Treasuries from foreign investors seeking higher yields than they can find in the debt markets of countries such as Germany and Japan. The stronger greenback is making American goods more expensive abroad, potentially hurting exports, which comprise 13 percent of U.S. gross domestic product. Right now it takes nearly 54 rubles to buy a dollar, and nearly 15 pesos—not that this has calmed Alex Jones.

Nor has it calmed the people showing up to support Rand Paul's presidential bid. In conversations on Tuesday, at Paul's Louisville launch event, Paul fans either echoed his worries about the central bank or said they were still learning about the fulsomeness of its problems. 

“I feel that the Fed is the root of all evil in this country," said Steve Berecek, a retired auto engineer from Ohio. "They have continually raised the debt ceiling every since the Fed was formed.” He actually distributed anti-Fed literature and films every year on tax day and on the anniversary of John F. Kennedy’s assassination. 

"That’s why they killed him," he explained. "I mean, there was more to that story and it’s going to come out. Kennedy started printing U.S. Treasury notes to lend to the American people interest free. The other president who did that was Abraham Lincoln—and they have something in common.”

Berecek's theories got at just how nervous some conservatives had become about the Fed. Yet on Tuesday, the central bank's beleaguered supporters caught a small break. In his announcement speech, Paul did not mention the Fed even once.

Before it's here, it's on the Bloomberg Terminal.