Targeting the Fed

To prop up the sagging economic recovery, the Federal Reserve announced last month that it would purchase $600 billion of long-term government debt in an effort to force down interest rates and spur private investment -- an emergency measure known as quantitative easing. Because it did something similar to halt last year's financial crisis, this latest round is being called QE2. Mere anticipation of it produced exactly the intended effect: Mortgage interest rates hit record lows in October, once it became clear that the Fed was going to act.

But two weeks ago, a group of Republican economists, lawmakers, and political operatives launched a coordinated attack on the Fed's chairman, Ben Bernanke, for pursuing QE2. They called on Bernanke to halt asset purchases on the grounds that printing money to buy bonds risked debasing the dollar and sparking inflation; on a broader level, they seemed to object to the Fed's helping the White House try to jump-start the economy.

Spooked by the unexpected attack, and worried that QE2 could be aborted, the financial markets responded by jolting up interest rates. A month after the Fed's announcement, those rates are higher, not lower, than before and therefore are inhibiting, rather than hastening, the recovery. Meanwhile, quantative easing looks to be one of the few avenues left to stimulate the economy; Congress appears serially incapable of doing anything further.

The Republican criticism of the Fed and of Bernanke -- himself a Republican, appointed by George W. Bush -- seems grounded more in politics than in policy. Nothing about quantitative easing was obviously objectionable to Republicans, at least in the past. Conservative luminaries like Nobel laureate economist Milton Friedman have prescribed it to counteract similar conditions. But sincere or otherwise, the recent attacks have had consequences.

Now the only question is how far Republicans will carry them.

One important indicator will be who is chosen to lead the House subcommittee that oversees the Fed when Republicans take control of the House of Representatives in January. First in line for the job is Representative Ron Paul of Texas, the libertarian renegade Republican, frequent presidential candidate, and outspoken critic of the Federal Reserve who wrote the best-selling polemic, "End the Fed.''

Were he to assume the chairmanship, Paul would represent an altogether different type of critic: he really means what he says. But he's no lock for the job. His views on monetary policy, and his disinclination to defer to the GOP leadership, have twice before led his own party to ignore his seniority and deny him control of this subcommittee, in 2003 and 2005. One acid test of whether the Republican Party is serious about trying to aggressively influence monetary policy and thwart QE2 is if it finally lets Paul loose on the chairmanship.

Paul expects it will. "I'm assuming that I'll get it,'' he said. "I've had no indication at all that I won't.''

Representative Barney Frank, the outgoing chairman of the Financial Services Committee, agrees. "I think the GOP is afraid to deny him that chairmanship. The Tea Party would revolt."

If he does get it, Paul says that he will indeed go after the Fed, whose current strategy he considers to be "insanity.'' This would add the force of a major House subcommittee -- with investigative and subpoena powers, and able to hold hearings -- to the anti-Fed campaign, which would surely roil the markets and further interfere with the struggle to engineer a recovery.

Paul's stance toward the Fed is no different than it was in 2003 or in 2005. What has changed since then is that many other Republicans are now singing from the same hymnbook. That's significant because until very recently, the Republicans worshiped Federal Reserve chairman Alan Greenspan and dismissed Paul as someone whose economic views were so far outside the mainstream as to make him an embarrassment.

But not anymore. One measure of the Republican Party's dramatic shift to the right on economic policy is that those differences have all but disappeared. "If other Republicans want to target QE2 then obviously we should do it,'' Paul said. "Dealing with QE2 is a great idea because that would be a takeoff point for looking at the big picture: should the Fed be able to monetize debt? Should it even exist?''

Joshua Green writes a weekly column for the Boston Globe.