Year: 2013

Rare Earth Elements: Stockpile or Markets?

Warren Gibson Economics , , , , , , , , , ,

Quick, what do you know about lanthanum, praseodymium, neodymium, or dysprosium? If you said they are chemical elements, you are right: numbers 57, 59, 60, and 66, to be exact. They and their neighbors on the periodic table, collectively “rare earths,” were once mere curiosities tucked in between barium and tungsten. Now they’re having their day in the sun, thanks to new technology, as did uranium and plutonium when atomic energy was developed. The military may begin stockpiling them.

Good idea or not?

My first encounter with these elements was a project that developed high-tech shock absorbers to protect a replacement camera for the Hubble telescope during the camera’s rough ride to orbit. These devices, called M-Struts, pioneered the use of permanent magnets for shock mitigation. The only material our team found that would provide sufficient magnetic flux density (a measure of the strength of a magnetic field at a given point) was a rare earth alloy, NdFeB (neodymium-iron-boron). This material could only be procured from China.

M-Struts were a one-off project that had no discernible effect on the demand curve for neodymium. But now the demand curve is crowding up against the supply curve largely because of rare earth applications in “green” energy devices such as wind turbines (extra points if you knew that). Continue reading →

Around the Web

Brandon Christensen Current Events, Links
  1. North Korea: the new capitalists
  2. The rise and fall of Market Monetarism
  3. Listen to the fascists sing: a sublime parody
  4. The Caucasus: Another Regional War in the Wings. Don’t forget who is playing here: Russia, Turkey, Armenia, Azerbaijan, and Iran.

 

Pigeonholing Pigs

henrymoore Law , ,

[I thought of three other less offensive titles: Generalizing Gendarmes, Caricaturing Cops, Stereotyping Smokey. But I had already made up my mind.]

As you no doubt know, especially if you are a reader in the LA area, there is a crazed ex-cop on the loose by the name of Christopher Dorner. I think it is only a matter of time before Dorner is caught. We don’t know how that will play out. But it probably won’t be as simple as arresting James Holmes (Aurora, Colorado theater shooter). This piece is not intended to be about that, and so it will gradually move away from it. I bring it up at all only because its writing was prompted, in part, by an argument I had with someone about whether a shooter such as Christopher Dorner, that is, a cop is more dangerous than a shooter who isn’t a cop. I stated that, naval and police training aside, I thought that he was because cops tend to have a mentality of being above the law (I think this is not the result of them becoming police, but rather the reason they become police), which makes them psychologically more capable of calculated brutality than just some civilian who goes nuts. This was back when the story first came out although many important details were already known. His manifesto was one of those details so I knew what he was about and that he probably wasn’t going to be shooting people at random. He has targets. So, in that sense he is less dangerous to most people around him than a random shooter would be.

But probably more dangerous in the context of a manhunt. A shooter with a mission and a plan, even if his plans are in the process of being thwarted, is more dangerous than a guy who has already emptied his clip in a crowded theater or a school and then tries to slip away. The guy that just opens fire at random might kill more people than the guy with a few targets in his sights, but he is no longer in control of the situation. And if he is stopped before he can empty his clip, he might never have really been in control in the first place. If there are any cops or armed civilians around, he will be stopped, often before he can cause as much damage as he otherwise could have, given his arsenal. Continue reading →

Telling the Truth and Tarentino, Liberals, the Secretary of State, and the President

Jacques Delacroix Current Events, Politics , , , , , , ,

I have a liberal friend with whom I have fairly frequent serious discussions. He thinks of himself as a moderate liberal, even a centrist because his owns guns and his guns are dear to him. Yet, he voted for Obama and he can give a spirited defense of every aspect of Obama’s policies and actions. That’s a test, in my book.

He told me once, but only once, that the administration’s program of at-a-distance- assassination-of-the-untried was not a problem for him. He dos not see how assassinating an American citizen, for example, on the presidential say-so, could be a problem, ethical or judicial. He does not discern a slippery slope. That too is a test.

He and I have had repeatedly two bases of disagreement. First, we have different values, of course. Thus, he insists that it’s fine for him to use the vote to take my money by force in order to give it to someone that he, my friend, thinks deserves it more than I do because he, the other guy, does not have health insurance.

I disagree.

Note that this is an actual example of a fundamental value difference because my liberal buddy does not have to go there to achieve the same results. He could try, for example, to convince me to give up some money on the basis of expediency: It’s unpleasant, even messy to have the uninsured dying on my front lawn for lack of medical care. (As they do all the time, of course.) Or, he could persuade me on fellow-human grounds. He does not feel like doing either because, I think, he has no moral qualm about taking my earnings by force for a cause he judges good. That’s a big difference between us. Continue reading →

Global Warming: Be Skeptical

Warren Gibson Current Events, Liberty

I have been teaching advanced high school physics as a substitute teacher recently and enjoying it very much. But I was disturbed by what I saw in the text chapter entitled “Waves, Light and Climate Change.”

First of all, I don’t think a discussion of climate change belongs in an introductory chapter on light and its wave properties. Elementary texts should stick to firmly established science and mention complex, controversial issues as footnotes if at all. The authors thought otherwise – not only did they tack this topic onto the light/wave chapter, they headed the chapter with this alarmist quote:

Quite simply, I think it is no exaggeration to say that climate change is the biggest problem our civilization has ever had to face up to in its 12,000 years, because it requires a collective response.

What does “collective response” mean? Such bland phrases often translate into coercive wealth grabs by politicians. More importantly, the notion that human activity is having or will have a significant deleterious affect on our environment, which is what “climate change” means these days, is not firmly established at all in my view. (I have no expertise in climatology.)

There is a spectrum of viewpoints on global warming, ranging from outright denial at one extreme to hysteria on the other. Neither position is defensible. At one extreme, I was very disappointed to hear Ron Paul, a long-time hero of mine, describe global warming as a massive hoax. It’s not. The other extreme is represented by quotes like this, one of many printed in the margins of the physics text:

We are playing Russian Roulette with our climate … the Earth’s climate system is an angry beast subject to unpredictable responses …

Some facts that are not in dispute:

  1. There are “greenhouse gases” in the atmosphere that block some of the re-radiation of solar energy; that is, light that bounces off the earth’s surface and would otherwise escape into space. This blockage increases atmospheric temperature, other things being equal. Without any greenhouse gases, so much solar energy would be re-radiated that we would freeze to death.
  2. The primary greenhouse gases, in order of their importance are H2O (water vapor), CO2 (carbon dioxide), CH4 (methane) and N2O (nitrous oxide).  Water vapor is self limiting – when its concentration reaches saturation, it rains. So there is no point in to trying to reduce atmospheric water vapor concentration. So if global warming is significant and we want to do something about atmospheric greenhouse gas concentrations, we have to concentrate on CO2.
  3. It is a fact that concentrations of CO2 have increased substantially, from about 280 parts per million in pre-industrial times to about 380 at present. Most of this increase can be attributed to burning of fuels.
  4. The arctic ice sheet has exhibited marked melting in recent years. But some reports have ice increasing in the antarctic.
  5. Solar flares are a major driver of climate change on earth.

Now it gets murky. To begin with, it is very difficult to generate a meaningful average temperature for the entire earth. Temperatures vary widely from place to place and from time to time. Therefore extreme care must be taken in aggregating and interpreting temperature data.

Secondly, computer modeling is a very tricky business. I know; for many years I did computer modeling of systems far simpler that the entire earth’s atmosphere, and there are lots of pitfalls, notwithstanding the sophistication of contemporary methods. In finite element analysis or computational fluid dynamics the analyst lays an imaginary gridwork over the system in question, with independent variables like temperature and pressure at each node point. He makes simplifying assumptions about the behavior of variables between grid points and may end up with hundreds of thousands of simultaneous equations to be solved repeatedly as the virtual clock is stepped forward in time. If the grid is too coarse or the time steps are too large or the assumptions too gross or the starting conditions are inaccurate or the integration algorithms are not robust or the software has bugs – the whole undertaking can go haywire.

Third, increases in temperatures or sea levels must be put in perspective. A small amount of warming – one or two degrees C – would be a benign outcome for almost all of us – perhaps reduced heating costs or shifts in agricultural production. A one foot increase in sea level would be trivial almost everywhere.

But what about the strange weather we’ve been having? Given the media propensity for focusing on disasters, it’s no wonder it seems that way but hurricane intensity, for example, compares with that of past seasons. Recent weather isn’t particularly strange.

We need to think through all sorts of approaches, including geo-engineering, and conduct cost/benefit analyses for each. The end goal – human welfare – must always be kept in sight. I highly recommend Bjørn Lomborg’s thoughtful book, “The Skeptical Environmentalist.” Lomborg is a careful scientist who acknowledges the reality of global warming and pleads for careful examination of all plausible approaches.

Lastly, we must realize that this is a global problem. Anything the U.S. might do to reduce CO2 emissions would be dwarfed by increased CO2 emissions in China, where automobile ownership is surging and new coal-fired power plants are being built. Certainly California’s program, which went into effect this year, will have no noticeable effect on global concentrations, unless it sets an example that the Chinese decide to follow. Even if they do, cap-and-trade schemes such as California’s may not work out as theory says they should. Such has been the record in Europe.

Taking Guns by Executive Order

Jacques Delacroix Current Events, Liberty , ,

I wrote recently about one of the American attitudes and set of beliefs about private ownership of firearms. (“Guns” ; “America and Firearms…“).

I need an addendum in view of current developments.

First, I want to confess that I wouldn’t be all that opposed to banning high-capacity magazine guns and rifles that can be turned into the currently illegal assault weapons, if I thought that would be the end of it. Nevertheless, I would never agree to such ban in the current cultural context. That’s because I think American gun-banning organizations are mostly in bad faith.

Let me put it in more clear words: I suspect they lie all the time. They are not merely after my so-called “assault weapon” (already illegal). If I let them have anything, I think, they will be after my duck shotgun next. Then, they will want the handgun that never leaves my house. Then, they will demand that I turn over the b.b. gun (very small-bore compressed-air rifle) that I use to sting marauding raccoons in the ass. (I do this because they insist in defecating en masse under my grape arbor, near where I sit outdoors in the summer. If they learned to shit on the neighbor’s lawn for example, I would let them be.)

To summarize: Gun control advocating organizations are liberals-led organizations. Not all liberals are liars but liberals leaders almost all are liars. That’s in addition to having no respect for the US Constitution. Continue reading →

Religion and Liberty

Brandon Christensen Current Events, Liberty , , ,

I’m not a religious person. I have an unconventional Mormon background but rejected the faith of my parents for a large number of reasons. I’m not hostile to religion, either. At least, I try not to be (it’s hard sometimes!). I’ve seen first-hand what religious organizations can do for humanity. When I was living in a Ghanaian village of no more than 300 people, I had access to no more than two hospitals in the village. One was run by the Seventh-Day Adventists, and the other I cannot remember (the SDA hospital was closer). It was most likely a Catholic one. Religious organizations representing Islam, Judaism, Christianity and even Buddhism were ever-present in Ghana, and they all provided much-needed skills and supplies to that magnificently socialist state.

I attribute my atheism and my libertarianism to my skeptical nature. If you can prove to me that God does indeed exist, or that paternalism is good for me and my fellow man, then I will turn on a dime. I don’t know very much about anything, after all.

Anyway, religion has been under attack in the West since the Enlightenment. There are both good and bad reasons for this. One of the best reasons is that religious authorities often burned dissidents at the stake for opposing their claims to authority. In much of the world today, especially in some Muslim regions, non-believers are subjected to stonings, beheadings, and torture when the authority of the ecclesiastical class is challenged. However, in today’s Western world, the war on religion is a rather petty affair. Most skeptics don’t want to argue about the existence of God, they simply want to denigrate believers at best, and persecute them at worst. Continue reading →

Gold as Implicit Money

Fred Foldvary Economics , , , , ,

Economics encompasses two realities, the explicit and the implicit. The explicit is visible, obvious, recorded, and quoted. Explicit expenses are paid to others and recorded by accountants. The explicit is also called “nominal,” since that is what is named. For example, nominal interest is what a bank says it is paying, and the money it pays to depositors.

But there is also an implicit realm that is also real. Indeed, the implicit is more real than the explicit. What is explicit is often merely the superficial appearance. But things are often not what they appear to be. The reality beneath is implicit, not visible, not quoted, and not recorded, yet it is the true reality. Economists often use the adjective “economic” to designate the real thing in contrast to the explicit number or the accounting data.

An enterprise has explicit and implicit expenses. The explicit expenses are recorded by bookkeepers and accountants. The implicit expenses are non-recorded opportunity costs, such as what the owner of a business would have earned elsewhere, or what the assets of the firm would yield if sold and converted to bonds. The real cost of oil is not what the buyer pays but also includes the implicit costs of pollution damage not paid for by the customer.

Real interest is the nominal interest minus the inflation rate. Economic profit is accounting profit minus implicit expenses. Real GDP is nominal GDP (in current dollars) adjusted for inflation. Economists deflate prices and include implicit costs to get at the implicit reality. Continue reading →

Around the Web

Brandon Christensen Current Events, Links
  1. Forget Asia: Time to Pivot to Europe
  2. Islam and Constitutionalism
  3. Ever heard of the Serer religion?
  4. India: The Neverending Saga

Gold and Money, II

Warren Gibson Economics, Liberty , , , , , ,

Last [blog post], we examined some propositions about gold as money, drawing from theory and history. [In] this [blog post] we ask whether and how gold might once again serve a monetary function.

Money of any sort, commodity-based or not, derives its value in large part from what economists call a “network effect.” Like a fax machine, whose value depends largely on how many other people have fax machines, we value money because other people value it. We feel confident our money will buy us what we need tomorrow. A strong network effect means that something drastic has to happen before people will give up their familiar form of money.

Something drastic was happening when U.S. Rep. Ron Paul’s Gold Commission was set up in 1979. By the time the commission’s report was issued in 1980, inflation had reached alarming levels: The consumer price index was at 14 percent and rising. The prime rate was over 20 percent, and in 1980 silver exploded to $50 an ounce and gold surpassed $800 (about $2,300 in today’s dollars). Bestselling books urged people to buy gold, silver, diamonds, firearms, and rural hideouts.

We now know that inflation was peaking and that the silver price spike was a fluke caused by a failed attempt to corner the silver market. But none of this was apparent at the time, so it was reasonable to wonder whether our monetary system would survive. What did happen, of course, was that the new Fed chairman, Paul Volcker, stepped on the monetary brakes hard enough to break the back of inflation. Two back-to-back recessions resulted but were followed by a long period of recovery in which both inflation and interest rates dropped steadily. The Gold Commission was largely forgotten, though the U.S. Mint did get into the business of producing gold coins in a big way. Continue reading →

Gold, Interest, and Land

Fred Foldvary Current Events, Economics, Liberty , , , ,

Three seemingly unrelated variables are in fact deeply connected. Gold has been the most widely used money, and in a pure free market, gold would most likely come back as the real money. Free-market banking would mostly use money substitutes such as bank notes and bank deposits, but these could be exchanged for gold at a fixed rate. Free banking would combine price stability with money flexibility.

Interest is ultimately based on time preference, the tendency of most people to prefer present-day goods to future goods, due to our limited lifespan and the uncertainty of the future. In a free market, the rate of pure interest would be based on the interplay of savings and borrowing. Interest is not just income and payment, but has a vital job in the market economy. The job of the interest is to equilibrate or make equal the amounts of savings and borrowing. This also equalizes net savings (subtracting borrowing for consumption) and investment. Investment comes from savings, and the job of the interest rate is to make sure that net savings is invested. Continue reading →

Gold and Money

Warren Gibson Current Events, Economics, Liberty , , , , , , ,

Nothing seems to arouse passions—pro and con—quite like suggestions that gold should once again play a role in our money. “Only gold is money,” says one side. “It’s a barbarous relic,” says the other. Let’s turn down the heat a bit and look into some propositions about gold. That should lead us to some reasonable ideas about whether or how gold might return.

Propositions About Gold

Gold has intrinsic value. Actually, nothing has intrinsic value. The value of any good or service resides in the minds of individuals contemplating the benefits they might derive from it. What gold does have is some rather remarkable physical properties that make it very likely that people will continue to value it highly: luster, corrosion resistance, divisibility, malleability, high thermal and electrical conductivity, and a high degree of scarcity. All the gold ever mined would only fill one large swimming pool, and most of that gold is still recoverable.

Only gold is money. Although gold was once used as money, that is no longer the case. Money is whatever is generally accepted as a medium of exchange in a particular historical setting. Right now, government-issued fiat money, unbacked by any commodity, is the only kind of money we find anywhere in the world, with some possible obscure exceptions.

Perhaps people who say this mean that gold is the only form of money that can ensure stability. That’s what future Federal Reserve Chairman Alan Greenspan thought in 1967, when he wrote “Gold and Economic Freedom” for Ayn Rand’s newsletter. “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation,” he said. When later asked by U.S. Rep. Ron Paul whether he stood by that article, Greenspan said he did. But he weaseled out by saying a return to gold was unnecessary because central banks had learned to produce the same results gold would produce. Continue reading →

“How China Became Capitalist”

Brandon Christensen Current Events, Economics, History, Liberty , ,

That’s the title to this short piece by Nobel laureate Ronald Coase and his co-author Ning Wang published by the Cato Institute. Among the gems:

The presence of two reforms was a defining feature of China’s economic transition. The failure to separate the two is a main source of confusion in understanding China’s reform. The Chinese government has understandably promulgated a state-centered account of reform, projecting itself as an omniscient designer and instigator of reform. The fact that the Chinese Communist Party has survived market reform, still monopolizes political power, and remains active in the economy has helped to sell the statist account of reform. But it was marginal revolutions that brought entrepreneurship and market forces back to China during the first decade of reform when the Chinese government was busy saving the state sector.

Do read the whole thing. The Cato Institute ranks third on my list list of trustworthy think tanks. Hoover and Brookings are two that I think produce university-caliber research. Cato ranks far below Hoover and Brookings in my estimation, but it occupies a lonely third place, as none of the other think tanks out there are even close to Cato’s stature, either.

You can check out Cato’s website here.

The Civilization Bubble

Fred Foldvary Current Events, History , ,

There have been many financial and real estate bubbles during the past few hundred years, and there have been empire bubbles, but never before has there been the global civilization bubble in which we are now in. The bubble will collapse within a few decades. It will be the end of civilization, and will result in world-wide violence, deaths, and chaos.

Empire bubbles can last several hundred years, as for example the Mayan civilization or the Roman Empire. What brings down empires is invasion, bad economic policy, environmental exhaustion, or weakened tyranny. The Soviet Union, for example, was a statist bubble that was brought down by economic decay and weakened tyranny.

Most of the world is now in a global civilization. There are two enemies of this global order. One enemy is terrorist pseudo-religious supremacists. They could bring down the global civilization with electromagnetic bombs that would wipe out the storage and transmission of data that the world’s economy depends on. Very little is being done to protect the global electronic infrastructure from attack, thus the bubble.

The other threat to global civilization is internal, or as scientists say, endogenous. Global civilization is rushing towards an environmental collapse. There are hints of this in the plastic contamination of the oceans, the depletion of fresh water, the destruction of fish and corals, the eradication of forests, and possibly accelerated climate change. What will most likely bring down global civilization is the plundering and poisoning of the natural infrastructure of the earth. Continue reading →

Who Owns the Fed?

Warren Gibson Economics, History, Liberty , , ,

Have you heard? The Federal Reserve System raked in profits of $79.3 billion last year, almost triple what runner-up ExxonMobil made. The Fed’s business model is a snap—just print money—and unlike poor beleaguered Exxon, the Fed has no competition to worry about. This means a gigantic windfall for the big banks because, although they don’t like to admit it, they actually own the Fed.

Or not. These are all half-truths and distortions, all too easy to find on the Internet. Bloggers like to begin with the discovery that commercial banks hold shares of Fed stock and those shares pay an annual dividend. A further discovery that the Fed makes big profits is all it takes to send some of them off on a conspiracy tangent. Because shareholders in a profit-seeking corporation are its owners, so it must be with the Fed, they think. Profiteering, world-government schemes, and who knows what else, must surely follow. As I will show, these half-baked ideas are distractions from the serious issues that surround the Federal Reserve System.

Yes, commercial banks hold shares of stock in their local Federal Reserve branch, but these shares do not confer ownership in any meaningful sense. Ownership is defined as the legal and moral right to use and dispose of some asset. Ownership can be conditional or temporary, as when you lease an apartment and acquire the right to occupy it for a limited time, but not to run a business in it or do major renovations. Your purchase of shares of stock in a public corporation gives you rights to vote in shareholder elections, receive any dividends declared, and sell your shares—but that’s about all. You may not walk into the corporate offices and start giving orders; on the other hand, you may not be held liable for any misdeeds of corporate officers or employees. If you acquire shares in a nonpublic company like Facebook, you accept additional restrictions on when and to whom you may sell your shares.

Member banks receive a fixed 6 percent annual dividend on their Fed stock and enjoy limited voting rights. But there the resemblance to ordinary shares ends. The banks are obliged to acquire shares when they become members of the Fed, and they may not sell their shares or pledge them as collateral. An initial issue of stock was seen as a good way to capitalize the Fed when it began, but there has been no need for additional capital and those shares are no longer significant.

Each branch has a board of directors with six members elected by local member banks and three appointed by the central board of governors. However, board members are not all bankers. Moreover, under a rule recently enacted by Congress, only nonbankers may serve on committees that select Fed bank presidents. This new rule is one way in which the ground has been shifting under the Fed recently; more about this below.

In the beginning the Fed was quite decentralized. A dollar bill in my wallet is imprinted “Federal Reserve Bank of San Francisco,” a remnant of the formerly dispersed power. The headquarters operation was initially a modest one, operating out of an office in the Treasury Department, but it now has its own imposing building, greatly expanded powers, and a correspondingly larger staff. With so much power now centralized, the branches engage mainly in monitoring local conditions and passing recommendations up to the board of governors. They have also become known for differing interests and points of view. The St. Louis Fed, for example, has an excellent collection of data available to the public. The Cleveland Fed is known for innovative research.

The Fed is a nonprofit institution, but that designation means only that profits are not its primary mission. The Red Cross is also a nonprofit, and like the Fed, it does earn a profit during any year in which gross income exceeds expenses. From an accounting point of view, such profits are essentially the same as those earned by firms in competitive markets, but not from an economic point of view. Competitive profits serve the vital function of directing scarce capital resources to the most urgent unmet demands of consumers. The Fed’s profits serve no such function.

Its income consists primarily of interest earned on its securities portfolio. Until recently the portfolio was made up almost entirely of Treasury securities. It has expanded greatly since 2008 to include mortgage-backed securities, loans to such pillars of the financial system as Harley-Davidson, and other assets including direct real-estate holdings. It incurs operating expenses of the usual sort: salaries, buildings, supplies, and more.

Remember that $79.3 billion profit? The 2010 figure, far higher than the $47.4 billion recorded for 2009, did not benefit the Fed’s managers or member bank shareholders because the money was remitted to the Treasury. That’s the law. It happens every year. If any private firm earned that much in a year it would be headline news and a boon to stockholders. For the Fed this is just an interesting statistic.

Who Calls the Tune?

The answer to the question “Who owns the Fed?” is that it’s the wrong question. Instead, we should ask: Who calls the Fed’s tune? That’s not such an easy question, yet it’s the only way to reach an understanding of why the Fed acts as it does and why it has done so much economic damage.

First and foremost, the Fed was created by Congress and can be modified or abolished by Congress. Clearly Congress is the Fed’s most important constituent.

The U.S. president also holds substantial sway over the Fed. He appoints the seven-member board of governors subject to Senate confirmation. The powerful Open Market Committee, which makes monetary policy decisions, consists of those seven plus the president of the New York Fed and four seats that are rotated among the 11 regional presidents.

But even though it exercises ultimate control, Congress has given the Fed a degree of independence that no other federal agency enjoys. Although its profits are swept back to the Treasury, the Fed enjoys a sweet deal that is unavailable to ordinary Federal agencies, which must plead with Congress for an annual appropriation. The Fed spends whatever it wants on operations, constrained only by the necessity to keep up appearances—not to look like fat-cat bankers. Its profit is whatever remains after all expenses have been paid, and, in contrast to ordinary corporate accounting, after dividends have been paid.

The Fed’s vaunted independence is a good thing, the thinking goes, because we don’t want the stewards of our money to be caught up in the swirl of day-to-day politics. But independence trades off against accountability. After all, in a democracy the bureaucracies are supposed to be accountable to Congress. The purse strings are the primary means of accountability among the other agencies, but there are no such strings tying Congress to the Fed.

Such control as commercial banks exert is not so much a function of their nominal stockholdings as it is of their connections through the network of good ol’ boys that weaves through government and “private” financial institutions. The Fed surely looks out for the interests of major private institutions, especially big banks, insurance companies, and securities firms. It does not want big-bank failures or a stock-market crash. It must be cognizant of foreigners who hold $3 trillion in U.S. Treasury debt and are keenly aware of the Fed’s actions and pronouncements.

These incentives have little to do with the Fed’s official dual mandate: stable prices and high employment. That mandate was established by the Employment Act of 1946 and the Humphrey-Hawkins act of 1978. These were times when no one questioned the Keynesian idea that inflation and unemployment always trade off against each other (the Phillips curve) and that monetary and fiscal policy must steer a course between two extremes. If the proponents of the mandate could see the relatively stable prices of recent years coupled with high unemployment, they would call for major Fed “easing.” If they then found out how much easing we have already had and the consequent monstrous increases in debt, they would surely be speechless.

Swift Changes

Some congressmen are calling for reassessing the dual mandate. This is just one way in which things are changing fast for the Fed. This once-staid institution is under increasing attack and is finding it necessary to defend itself, as when Chairman Ben Bernanke came out of his cloister to appear on 60 Minutes, a decision he may regret given the reaction to his astonishing claim that further “quantitative easing” will not increase the money supply.

New rooms are being added to the Fed mansion even as the sand shifts under it. Congress has given it extensive new powers unrelated to monetary policy, most notably a new consumer protection agency. The idea is that the Fed’s independence will ward off regulatory capture, something that always seems to happen to ordinary regulatory agencies. We shall see.

Rep. Ron Paul is the Fed’s most prominent critic. Last year his bill to require an audit of the Fed garnered a great many cosigners in the House. He reintroduced it at the start of the 2011 session, this time with his son Rand Paul on hand in the Senate to file the same bill there.

But in some ways the Fed is already quite transparent. Its website has extensive reports, updated regularly and more detailed than any releases from commercial banks or private corporations. And while deliberations of the powerful Open Market Committee are secret, detailed minutes are now made available shortly after each meeting.

In other ways it is quite secretive. For example, the Fed refused to disclose the names of banks that got loans during April and May 2008, denying Freedom of Information Act (FOIA) requests filed by Bloomberg and Fox News. Responding to lawsuits, the Fed did not claim it was a private institution and therefore exempt. Instead it cited potential harm to the banks that had borrowed, but the court sensibly ruled against a “test that permits an agency to deny disclosure because the agency thinks it best to do so. . . .” The information was released.

“End the Fed” has become a rallying cry for Ron Paul and his supporters. His little book by that name will not earn any academic awards, but as a mass-market polemic it does a good job of making his case without conspiracy theories or private-ownership sideshows. There is, however, room for honest debate about fractional-reserve banking, which he opposes.

About the Fed, though, Ron Paul is right. Whatever good intentions its managers may have, the Fed, like all central banks, exists ultimately as an enabler of ever bigger government. My colleague Jeffrey Rogers Hummel may be right when he says the Fed is becoming the central planner of the U.S. economy. But when we argue for replacing the Fed with market institutions, we must take the time and effort to get our facts straight and to expose the complex network of special interests that supports the Fed. Wrongheaded and simplistic arguments only hinder the cause.

[Editor’s note: this essay first appeared in the Freeman on April 21 2011]