Rand Paul traveled to Des Moines, Iowa, recently and delivered a sure-fire applause line. “Anybody here want to audit the Fed?” the Kentucky senator asked. “Anybody feel that the Fed’s out to get us?”

He followed it up with an op-ed comparing the Federal Reserve to Lehman Brothers and calling it essentially bankrupt. The bash-the-Fed routine, perfected by Paul’s father, former Texas congressman Ron Paul, is political gold with libertarian voters suspicious of all federal authority, especially a central bank with a $4.5 trillion balance sheet.


But Paul could face a significant challenge if he emerges from Iowa with a legitimate shot at the Republican nomination. Because experts say he gets many of his arguments about the Fed flat wrong. And the establishment wing of the GOP — backed by piles of Wall Street money — views Paul’s approach to the Fed as 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, a scholar at the conservative 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.”

The case against Paul’s case against the Fed is fairly straightforward.

In his op-ed, Paul claimed that “[t]he Fed has $4.5 trillion in liabilities and only 57 billion dollars in equity. It is leveraged at 80:1, nearly three times greater than Lehman Brothers when it failed.”

In fact, the Fed has $4.5 trillion in assets, mostly Treasury bonds and mortgage-backed securities guaranteed by the Federal government. It has only $57 billion in equity because it sends most of its profits to the U.S. Treasury, a total of around $500 billion over the past decade.

And it actually has no “leverage” in the traditional sense of the word because it does not borrow money like Lehman Brothers did before it went bankrupt. Instead, the Fed creates money, as all central banks do.

“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.”

In other words, the chances of the Fed blowing up like Lehman are nil.

The calculus for Paul is whether his rantings against the Fed — and his push in Congress to “audit” the institution — could come back to bite him should he catch fire in 2016. On many issues, Paul has fought to show that he’s a different, more moderate politician than his isolationism-leaning, iconoclastic father — he’s not even planning to campaign with Ron Paul.

But the Paul camp views the “audit the Fed” campaign as a low-stakes way to remind the voters who propelled his father’s previous presidential bids that the younger Paul is on their side, too.

And some Iowa political operatives say that while the push may raise concerns with the business community down the road, the issue is sufficiently obscure that Paul is not in serious danger of alienating anyone over it at this point.

“Audit the Fed is an issue that plays to our base voters,” said Steve Grubbs, a top Paul strategist in Iowa. “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.”

He added 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.” Ron Paul won 21 percent of the vote in the 2012 Iowa caucuses.

Paul’s legislation, which now stands its best chance ever of passing in a GOP-controlled Congress, also appears to ignore the multiple levels of audit the bank currently faces. The bank’s finances are already subject to audit by the Government Accountability Office, the Fed’s inspector general and outside audit firms, most recently Deloitte & Touche. Those interested in what’s on the Fed’s balance sheet can find out, down to the individual bond, on the website of the New York Federal Reserve.

Critics of the bill say it is aimed much more directly at repealing a 1978 law establishing Fed independence on monetary policy decisions. Paul’s bill, though vaguely written, would likely allow the GAO to investigate monetary policy actions and report back to Congress immediately.

That alarms even many conservatives at the Fed who say the central bank’s insulation from short-term political pressure is essential to its ability to function, especially in times of crisis like the nation faced in 2008 and 2009.

“The operations and finances of the board of governors and the 12 Federal Reserve banks are already audited up the wazoo,” Dallas Fed president Richard Fisher, a noted conservative, thundered in a recent speech in New York. He added that the Fed already releases minutes of its policy meetings shortly after they are held, while Chair Janet Yellen faces regular news conferences and Capitol Hill questioning.

“Having proven themselves unable to cobble together with colleagues a working fiscal policy,” Fisher added of “audit the Fed” proponents in Congress, “they simply find it convenient to create a boogeyman out of an entity that does its job efficiently.”

Another element of the case against Rand Paul’s view of the Fed is that his critiques of its policies threatening runaway inflation and crushing the dollar have been wrong. “If people are prepared to carry money to the grocery store in a wheel barrel, that may be coming,” Paul warned on the Glenn Beck radio show in 2011. “What I worry about is the Weimar Republic, I worry about 1923 in Germany. When they destroyed the currency, they elected Hitler. I don’t want something like that to happen in our country.”

Instead, in the ensuing years, inflation declined and the dollar strengthened to the point that it is actually damaging to U.S. exporters. And academic research shows that the more political pressure a central bank faces, the more inflation rises, the thing Paul says he worries about the most.

Aside from boosting his cred among libertarian voters, Paul is also using the anti-Fed campaign to raise small-dollar donations online.

A “moneybomb” drive accompanying Paul’s recent Iowa speech has raised about $90,000 so far (short of the initial $150,000 goal that the team was supposed to hit by Feb. 9, it appears, though representatives for the senator wouldn’t confirm any details about the initiative, including the total money raised by the effort). They also did not respond to a request for comment on the substance of Fed experts’ critiques, instead directing those questions to a pro-audit writer.

Matt Strawn, a former chairman of the Iowa GOP, said that so far, the only people in the state who are deeply attuned to this issue are the libertarian-oriented Republicans Paul is trying to excite.

“At this point, I don’t see other Iowa Republicans following the issue close enough where that would be a liability,” Strawn said. “It seems to be a safe issue that allows him to play to the home team without liability with the broader electorate.”

While the issue may never hurt him with Iowa Republicans, it certainly will with Wall Street Republicans who are lining up heavily behind former Florida Gov. Jeb Bush’s campaign.

The thinking in these circles is that should Paul emerge as a viable threat to get the nomination, an even larger outpouring of money and organizational muscle will be deployed to stop him, in large part out of fear of what a President Paul might do to the Fed.

“If he comes out of Iowa or begins to emerge with any kind of strength, I think you will see the GOP establishment go on red alert because they are going to view him as a dangerous person,” said one financial services industry executive who did not want to be quoted on record criticizing Paul. “The Fed is the pre-eminent central bank on the planet and no one wants to put that at risk.”

Fear of Paul emerging as a potential nominee is part of what is driving the gush of Wall Street money to Bush, and to some extent to Govs. Chris Christie of New Jersey and Scott Walker of Wisconsin.

“He seems to be moving to the position of abolishing or severely limiting the actions of the Fed,” said Pethokoukis. “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.”