Dusk

End the Fed?

Despite being a long-time libertarian I normally think of a Ron Paul as a wacko, mainly because of his vocal resistance to the existence of the Federal Reserve. In all of my economics classes, the Federal Reserve was referred to in the highest regard, like some kind of holy Tabernacle, monitoring and guarding the nation's monetary lifeblood. My two year of experience inside the Fed was consistent with that notion in that the organization had high morale and a strong culture of honest inquiry and good-faith management. Today, however, I woke up realizing that Paul might actually be on to something.

My initial support of the Fed was nothing profound. The textbook argument is that the Fed was created to end banking panics, prompted by the Panic of 1907. After a few rough years, including the Great Depression, the Fed finally figured out how to do its thing and acted as a fantastic stabilizer right up to the present. The Fed is Fantastic!

But not so fast. Since when is the Fed the best solution for banking panics? Consider how banking panics used to start. A bank opens for business. A bunch of people put money in the bank. For illustration just suppose they all put their money in checking accounts, or "demand deposits" that they can come collect anytime. Then the bank starts using some of that money to make loans and charges interest, and gives some of that interest back to the people with checking accounts. Everyone is happy. Then there comes a time when a lot of people try to take their money out of the bank all at once. Since much of the money is out on loan, the bank can't give everyone their money back. People flip out. The bank goes out of business. People lose their money. Nobody is happy (except maybe for a few lucky people who had taken out a loan and now don't need to pay it back??).

A small group of weird extremist libertarian types argues that the best solution to banking panics is not the Fed but rather the outlawing of fractional reserve banking (fracking?). They call fractional reserve banking wrong, immoral, and fraudulent. This use of morality language threw me off at first, because it sounded sensationalist and made me suspicious that they were just railing instead of providing a good alternative. On closer examination, I think they could have a useful policy proposal.

Their alternative to the Fed is outlawing fractional reserve banking. What does that mean? In my little description of banking panics above, fractional reserve banking is the part where the bank makes loans using the money from customers' checking accounts. If all demand deposits are fully backed in the banks vaults, with nothing lent out, there is no possibility for a run on the bank. The system is perfectly stable. Starting from this perspective, the idea that the bank would lend out your demand deposits does start to sound a bit fraudulent. Maybe we accept fractional reserve banking because it has been around ever since the start of banking. Outlawing it is a rather novel concept for policymakers.

The obvious big problem is then how can I get a loan for a house (or whatever) if the bank can't lend me the money of its depositors? Well, you could still get a loan from a bank, but things would just work a little differently on the depositors' end of things. Since the bank would be earning no interest income on demand deposits, depositors would likely have to pay a tiny fee for the service of the bank storing their money on the record books or in the vault. The pool of money from which loans are made would come from depositors who buy CDs or bonds or similar instruments that involve actually giving up their money until the borrowers pay it back. In this new system, the bank, instead of being thought as a source of loans, becomes more like a middle-man for loans, helping to match up borrowers with lenders and taking a commission on the interest and/or perhaps selling some insurance on the credit risks.

Benefits of replacing the Fed with this pared-down banking system include

• extreme stability in the banking sector that is ...
  
• ... achieved with only as much governance as is required to prosecute "fraudulent" lending, which I'm guess would cost a lot less than our multi-billion dollar Federal Reserve banking operation,
• the end of inflation.
  

Costs of replacing the Fed include

• enormous transition costs,
  
• possible losses associated with the arguments in favor of fractional reserve banking found on wikipedia. These arguments are a bit vague, especially in that the purported benefits are not quantified.

I'd love to hear from a real expert on this topic. Is Ron Paul not wacko after all?

Christmas pruning

My oppressive neighborhood

On my walk to work today I was feeling oppressed. I was thinking about how to handle my victimization by whatever neighborhood bandits had yet again left great gobs of long silver-gray doll-hair stuffed up the tailpipe of my car. That's not the reason I was walking, but I figured sooner or later they might get good enough at packing hair up my car's a-hole that it could become inoperably constipated.

I pondered that the cops probably wouldn't help. You would have to set a video camera to catch the weasel, and that's costly. I figured that in the worst case, I can't have a car anymore, and maybe I can live with that. I lamented that I haven't gotten to know my neighbors. I could confront them about their villainous children, but that might not go over well if they already see me as the weird nut who could use a little cracking from their kids. To make much progress with the neighbors I would have to buy a wii and invite them over for fellowship over snacks, Nintendo, and heroine injections. The task ahead of me was daunting.

As usual, Google came to the rescue. A search for "tail pipe hair" took me directly to a discussion from Click and Clack, the Car-talk brothers, explaining that honda mufflers are known to sprout gray hair in their old age.

Wikileaks: a fountain of hope or a stream of pee?

I have been pondering the meaning of the Lweaks (silent W). Is the Wikileaks program of lweaking just about anything good or bad for me? If I ever get around to voting in a national election, will I support politicians who want to kill Lweaks, or will I continue to support people like Ron Paul, who say that Assuange's lweaking all over the place is just good journalism?

A Richard N. Haass (Newsweek, Dec. 13, 2010) states

[Lweaked info] comes at a steep cost ... foreign officials will be less inclined to provide candid assessments to their U.S. counterparts, thereby depriving U.S. officials of valuable insights. American diplomats will be less willing to put on paper their candid assessements, thereby depriving policymakers in Washington of the local information they need most. ... [Lweaking] will make U.S. government officials even more wary of sharing information [internally] ... It was precisely this reticence to share intelligence across departmental lines that helped make the U.S. vulnerable on 9/11.

I am rather baffled by the issues at stake. Here are a few observations to stew upon:

1. Stability promotes economic growth. Lweaks may prompt instability, and in worst case scenario may trigger nuclear holocaust between rouge states and the rouge West.
2. If lweaking triggers societal upheaval, the new arrangements/governments that arise from the chaos could be more stable than what we have now. If the chaos from invading Iraq was the natural result of "stirring up a hornets nest" (we have to deal with the hornets sooner or latter), lweaking could be a way of speeding up progress, and speeding up the pain the begets that gain.
   
3. Lweaking is democratic in some sense. In the purest ideal of democracy, the whole world has access to all information on every relevant issue and may provide input to decisions.
4. While causing instability now, if it becomes an accepted or expected element of society, organizations may have less overall capacity for holding secrets.
5. A lack of secrecy will have difficult-to-predict effects.
6. Limiting secrecy may help to prevent corruption.
7. Limiting secrecy may make it hard for organizations to function. Suppose you have to pay more to find quality business or political leaders because humans don't like having their every move scrutinized and critized?
8. Supposing that governments now are pretty good in the big picture -- as compared to what society humans are capable of sustaining -- lweaking could raise the cost of government by provoking huge spending on information control systems.

In summary, I have no freaking idea what to make of it all, although my default position as a libertarian is that I don't want anyone messing with Lweaks unless they have a firm argument for doing so.

Back in college I once did a bit of lweaking myself. A faculty member handed me the minutes from a meeting in which the university president presented the university radio-station committee with the information that a university donor would withhold massive annual contributions if the university did not immediately discontinue a controversial news program. Given that this was a deeply Christian university that was supposedly acting out the will of God rather than bowing down to donors, it was potentially embarrassing to the president that he had even brought up the donor issue. Eager to be a good journalist, I published the relevant section of the minutes verbatim in the school newspaper. The faculty member got a firm reprimand from the administration, but I got off without so much as a rape charge.

There is an odd twist. The controversial news program was Democracy Now, headed by Amy Goodman, who I interviewed for the school paper when she diverted her book tour to come speak in my college town during the uproar over the possibility that donors would get her program taken off the local radio. Goodman is now featured prominently on the Wikileaks site.

Shredded trees

I was about to pay several hundred dollars to have a big load of mulch delivered to the funny farm. I was about to buy a truck so that I could go get my own mulch. I was biking to work this morning and heard a roar of tree chippers from a side street. I almost didn't stop. What are the chances they would have the time to drive one of those behemoths a mile away to drop a load of chips on a puny yard I thought. There were four of them, each truck with a cherry-picker and a couple guys with saws. Everyone was sawing at once on this densely populated city street, like the screen set for a Pittsburgh wood-chipping massacre. I stopped at the first guy wearing a hard hat and said "do you sell your wood chips?" He said throw my bike in the back of his pickup and we got in. He yelled to one of his guys to hurry get the tow trucks over, we got to move all them parked cars before we do the next street. I showed him to my place. All the way he chatted on his phone with a guy he kept referring to as brutha. He promised me some chips and gave me his business card in case I ever want more. I will want more most def.