Kentucky Sen. Rand Paul's "audit the Fed" campaign could come back to bite him in the backside during a potential presidential challenge, according to Politico
, citing financial experts.
The libertarian senator has been attacking the Federal Reserve while giving speeches in the early presidential voting state of Iowa, and comparing it in an op-ed piece to Lehman Brothers, saying that the bank is basically bankrupt.
But Politico maintains that Paul's "bash the Fed" routine could result in a voter backlash as he seeks the GOP nomination in 2016 because experts says his math is all wrong and the party's establishment feels his approach to the bank is dangerous and irresponsible.
"He seems to have a poor understanding of what's actually on the Fed balance sheet and how the bank operates," said James Pethokoukis, of the American Enterprise Institute. "And if you don't have a firm grip on one of your signature issues, people eventually are going to doubt other things you have to say."
Pethokoukis, a scholar at the conservative organization, said it appeared that Paul eventually planned to abolish or severely limit the actions of the Fed, which in the scholar's estimation would be a major mistake.
"Every other advanced economy has a central bank. We are going to somehow do something different? That's going to strike a lot of business people and people on Wall Street as a very extreme and not very responsible position to take."
Paul claimed in his op-ed that the Fed has $4.5 trillion in liabilities and only $57 billion in equity. "It is leveraged at 80:1, nearly three times greater than Lehman Brothers when it failed," Paul wrote.
But Politico pointed out that the Fed actually has $4.5 trillion in assets, mostly in the form of Treasury bonds and mortgage-backed securities guaranteed by the federal government.
The Fed has only $57 billion in equity because it sends most profits to the U.S. Treasury, a total of around $500 billion in the past 10 years. Politico also noted that the Fed, in fact, is not really leveraged because it does not borrow money like Lehman Brothers did before it went bankrupt.
"The capital of a central bank has very little importance relative to a private institution. The deposits cannot run. They are created by the central bank through asset purchases," said Donald Kohn, a former Fed vice chairman now at the Brookings Institution.
"There is essentially no credit risk on the Federal Reserve's balance sheet right now, and I don't know of any institution in the United States that is subject to more oversight."
Paul's attack on the Fed may be his attempt to reach the people who voted for his libertarian dad, former Texas Rep. Ron Paul, and want the government to stay out of governing as much as possible. Ron Paul won 21 percent of the vote in the 2012 Iowa caucuses.
"Audit the Fed is an issue that plays to our base voters," Steve Grubbs, a top Paul strategist in Iowa, told Politico. "It's an issue that's been around for a number of years and it's one that's important libertarian Republicans know Sen. Paul is fully behind."
Grubbs also told the political news website that "the core of our base [voters] are liberty voters" and that "our first job is to earn as much of that base vote as we can."
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