Paul, Sanders Join Forces Against Federal Reserve

Senator Bernie Sanders speaks at the Communication Workers of America office in Washington, D.C., on December 17, 2015. Kevin Lamarque/Reuters

Senators Bernie Sanders and Rand Paul are on opposing sides in the presidential race, but the two candidates lined up together Tuesday on a bill to open the Federal Reserve to more scrutiny.

The controversial proposal to "audit the Fed," as the Paul bill was called, didn't get the votes to move forward in the Senate. But it showcased a marquee issue that both candidates are emphasizing as they pitch themselves to primary voters. For Paul, the vote comes at an especially critical time: His poll numbers failed to qualify him for Thursday's prime-time Fox Business Channel debate (he's refused to participate in the earlier debate). And a poor showing in the Iowa caucuses in less than three weeks could wipe out his campaign.

Sanders and Paul are two of Washington's most vocal critics of the Federal Reserve's role driving monetary policy, though for different reasons. Paul, a freshman from Kentucky, takes issue with the fundamentals behind how the Fed gives money its value—he argues that instead of backing our dollars with just the "full faith and credit" of the U.S. government, the country ought to return to the gold standard, tying cash to the value of the precious metal. The premise is that stabilizing the value of the dollar would prevent the roller-coaster ride of economic booms and busts that have occurred over the last century. It's a theory that has generally been derided by economists, but it does have its defenders, particularly among political movements on the right.

Sanders's beef with the Fed has more to do with how its "loose money" policies have benefitted the wealthy, part of a larger critique of rising inequality in the country. The Vermont Independent made a name for himself in the House in the 1990s with his aggressive critique of longtime Fed Chairman Alan Greenspan. Their verbal sparring matches at hearings over the years is something the Sanders campaign now points to with pride as evidence of his commitment to the issue.

Sanders worked with Senator Paul's father, Texas Representative Ron Paul, on the original "Audit the Fed" bill in the wake of the financial crisis this past decade. The Federal Reserve already releases annual reports of its finances and lending, as well as weekly balance sheets. The "audit the Fed" proposals target the behavior of its Open Market Committee, which buys and sells government securities in the open market to influence the amount of money in the banking system. The various bills want to force the Fed to report those activities, as well as its deliberations.

Sanders eventually managed to get a version of the proposal into the Wall Street reform law known as Dodd-Frank, but it was far more limited—to just the Fed's loans as part of its emergency response to the financial sector collapse. Sanders regularly touts that on the campaign trail as one of his signature legislative achievements. But Paul called him a sellout for not pushing for more.

Senator Paul claimed the mantle for auditing the Fed when his dad retired from the House in 2012. And he's garnered support from a growing number of Republicans, including fellow 2016 candidates Senators Marco Rubio and Ted Cruz, who both co-sponsored the bill. But most Democrats, the White House and the Federal Reserve itself, have been fierce opponents.

"Let's be clear: This bill is not about auditing the Federal Reserve. It's not about transparency or bookkeeping. That oversight already exists," Democratic Minority Leader Harry Reid said on the Senate floor Monday. "This bill is about giving Tea Party Republicans and their billionaire donors the authority to control the United States economy. It is an attack on policies that are designed to stabilize the U.S. Economy and help the middle class bounce back."

Critics worry that opening up the Fed's daily discussions and individual monetary decisions to the public could make it more vulnerable to pressure from politicians with short-term aims (like getting elected), as opposed to long-term economic stability.

"Institutionally, Congress is not well-suited to make monetary policy decisions itself, because of the technical and time-sensitive nature of those decisions," former Federal Reserve Chairman Ben Bernanke argued in a blog post for the Brookings Institution, a D.C. think tank. "Moreover, both historical experience and formal studies...have shown that monetary policy achieves better results when central bankers are allowed to focus on the longer-term interests of the economy, free of short-term political considerations."

In a speech in the Senate Tuesday, Paul disagreed. "Both Republicans and Democrats agree that it is absurd we do not know where hundreds of billions worth of our money is going," Kentucky's junior senator said. "I can't seem to understand how a simple check by the GAO [Government Accountability Office] to ensure that there are no conflicts of interest will politicize anything."

Paul and Sanders didn't win their fight against the Fed on Capitol Hill. But they do now have a chance to take their argument to voters, which was the likely aim all along.