Santorum's Federal Reserve Position Shows Economic Common Sense

by: Howard Richman

In a February 23 interview on GBTV, Senator Santorum's discussion of the Federal Reserve showed off his economic common sense. Click here to watch the interview. (The first segment includes the discussion of the Fed.)

Santorum was being interviewed by Glenn Beck, who has taken the foolish position that the Federal Reserve should be eliminated and that the United States return to a gold standard. Santorum did not agree, but he had sensible ideas of how the Federal Reserve should be reformed. His discussion showed his understanding of three key economic principles:

  1. Stable monetary growth. That the Fed has an important role to play in maintaining a stable currency.
  2. Problem with the gold standard. That the gold standard is not a good alternative because the amount of gold does not keep up with the amount of money needed for economic transactions.
  3. The "rules vs. authority" principle. That the Fed should be bound by rules; it should not be making up the rules.

Although Federal Reserve Chairman Ben Bernanke did a great job in October 2008 of making sure that the money supply increased at a time of severe contraction and potential liquidity crunch, since then he has expanded the monetary base at an excessive rate.

Even worse, Bernanke used his discretionary power to pick and choose which Wall Street firms he would bail out, not only with loans but also by buying their worthless mortgage-backed securities. The Fed should not be in the business of picking economic winners and losers.

Congress deserves much of the blame. It has been gradually turning the Federal Reserve into a regulatory agency responsible even for enforcing such political measures as the Community Reinvestment Act.

The Federal Reserve has important roles to play. It should be required to maintain a money supply that is sufficient to finance growing transactions. It should defend the U.S. economy from the predations of foreign central banks. It should be bound by rules which require it to do these things. But it should not have the discretionary authority to pick winners and losers, nor should it have the authority to invent rules for banks to follow.

Santorum may just have the economic common sense needed to institute the required reforms.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.