At the start of campaign 2008 the idea that monetary policy would be part of the debate was quite a long shot. Despite Ron Paul’s talk about the dollar, inflation and the need for the gold standard, this topic was not likely to be embraced by debate questioners or other candidates.

We like to look at candidates who are questioned on business programs, as Paul was on the Kudlow show (described here), because the setting lends itself to getting the information we need to think about market impacts and stocks. Since Kudlow’s interview was brief and very respectful, we did not get the full picture. This post provides some additional perspective.

Interpreting Ron Paul’s Answers about the Fed

We were uncomfortable with Rep. Paul’s comments about the size of the transactions, but he might have been meant to cite the total of all central bank actions, not just the Fed. More important was his statement that the Fed was doing something unusual and actually buying mortgage securities.

It turns out that some other news sources gave the Fed intervention, a typical action in somewhat larger size the normal, the same twist as did Rep. Paul. Calculated Risk, a useful blog with an emphasis on housing issues, explains the matter further. The explanation makes clear that while legal title technically changes hands, it is only collateral for a three-day loan. On the same Kudlow program, former Fed Governor Lawrence Lindsey, whom we regard as an excellent, factual, and unbiased source of information, explained that the Fed gives a significant discount to securities like mortgage paper. These are the facts as they would be understood by market professionals. Most of these observers would be alarmed at the notion that the Fed should stand back and observe the current situation instead of maintaining their announced rate targets.

But what about the people?

John Fout’s recent assessment of his chances points out the broad appeal Rep. Paul enjoys among many voters who may participate in GOP primaries. He highlights the potential for bringing together disparate elements of the party, while remaining cognizant of the current poll standings.

Fout also cites another excellent article describing the issues surrounding Paul’s plans for the Federal Reserve.
While few voters are likely to understand the problems in economic terms, it is clear that the symbolism has a strong appeal to some.

To see this in action, readers may wish to view two video segments, highlighted below, showing Rep. Paul’s recent questioning of Fed Chair Bernanke. In the videos he is doing what every committee member tries to accomplish. He takes some time to state his own views and concerns, excellent for later media coverage and sound bites. He concludes with a question that seems to draw support from Bernanke. There is nothing wrong with this approach, but we should understand the dynamics of what we are seeing. Bernanke is not going to debate Paul’s basic position. Since few actually watched the hearings (we did) it is instructive to see for yourself.

Conclusion

What candidates say may sound different in settings where they can control the process from what we see when they are responding to good questions with probing follow-ups. Finding the stock implications from this will be challenging. Both supporters and opponents of Ron Paul are invited to discuss the stock market implications in our Candidate Portfolio Forum.

We hope to continue the series as more candidates are featured on CNBC.