Milton Friedman Would Have Supported QE2; Japan Scenario Unnecessary

The debate over what Milton Friedman would say about QE2 can now be closed. Below is a Q&A with Milton Friedman following a speech he delivered in 2000. In this excerpted exchange with David Laidler, we learn that Friedman's prescription for Japan at that time is almost identical to what the Fed is doing now with QE2:

David Laidler: Many commentators are claiming that, in Japan, with short interest rates essentially at zero, monetary policy is as expansionary as it can get, but has had no stimulative effect on the economy. Do you have a view on this issue?

Milton Friedman: Yes, indeed. As far as Japan is concerned, the situation is very clear. And it’s a good example. I’m glad you brought it up, because it shows how unreliable interest rates can be as an indicator of appropriate monetary policy.

During the 1970s, you had the bubble period. Monetary growth was very high. There was a so-called speculative bubble in the stock market. In 1989, the Bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for a while. The stock market broke. The economy went into a recession, and it’s been in a state of quasi recession ever since. Monetary growth has been too low. Now, the Bank of Japan’s argument is, “Oh well, we’ve got the interest rate down to zero; what more can we do?”

It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.

The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy.Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity.

So Milton Friedman said in 2000 that the Bank of Japan should do what the Federal Reserve would be doing 10 years later! In fact, if names, dates, and places were changed in the above excerpt one could get a 2010 Ben Bernanke Q&A. Friedman's belief that a zero policy interest rate could be contratctionary and thus required the central bank to buy long-term securities shows that he understood unconventional monetary policy long before it was vogue. He truly was a great economist.

Note, though, that his emphasis is still on expanding the monetary base as much as needed to start and maintain an economic expansion. This implies he saw an excess money demand problem in Japan, just as there is one today in the United States. He understood, though, the need to expand the monetary base through purchases of long-term securities rather than short-term ones. This is because short-term securities are close to a perfect substitute for the monetary base at a zero percent policy rate. Swapping perfect substitutes does not change anything in one's portfolio of assets and therefore has no effect on spending. Thus, Friedman saw the need for purchasing long-term securities, which are not perfect substitutes with the monetary base.

Although Milton Friedman probably would have preferred a rule-based approach to QE2, this excerpt is the smoking gun that ends all debate on whether he would have supported QE2. The case is closed.

Federalist 51 – Balance of Power

Madison’s general discussion of balance of power as it is addressed in the proposed Constitution reflects his views on securing liberties for individuals and minority segments while limiting the power of government and seeing that it derives its power from the people and is responsive to the collective needs.

He describes the purpose of government as ‘justice.’ And states that, ‘if men were angels, government would be unnecessary.’

It is impressive to see with 20-20 hindsight how well we have been served by the US Constitution, and although it has been amended from time to time, the bulk of the framework remains intact.

Madison begins by asking how power is to be partitioned in the government. He answers, “by so contriving the interior structure of the government as that its several constituent parts may by their mutual relations, be the means of keeping each other in their proper places.”

He goes on to argue that the branches of government should be designed to have a ‘will of their own.’ “…and consequently should be so constituted that the members of each should have as little agency as possible in the appointment of the members of the others.”

He goes on to say that if this principle were rigorously adhered to all appointments would be made by the people. He then goes on to offer a specific example, selection of federal judges, which because of the specialized qualifications required the best mode of choice should be the one that best ‘secures these qualifications.’ Further as the federal bench appointments are appointments for life it will, ‘soon destroy all sense of dependence on the authority conferring them.’ Meaning that the judges will not be beholden to the body that appointed them and that there is less cause for concern that they will behave in a biased manner once appointed.

He specifically states that the separate branches and departments of government should be constituted so that, ‘each department has the necessary constitutional means and personal motives to resist encroachments of the others.’

“Ambition must be made to counterattack ambition.”

“If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary.”

“But what is government itself but the greatest of all reflections on human nature.”

“..you must first enable the government to control the governed; and in the next place oblige it to control itself.”

Always concerned about a tyranny of the majority, he writes, “A dependence on the people is, no doubt, the primary control on the government; but experience has taught mankind the necessity of auxiliary precautions.”

Regarding the apparent dominant role of the legislative branch, he writes, “The remedy for inconveniency is to dived the legislature into different branches; and to render them, by different modes of election and different principles of action, as little connected with each other as the nature of their common functions and their common dependence on the society will admit.”

Specifically in defense of the proposed American constitution, he argues, “ In the compound republic of America, the power surrendered by the people is first divided between two distinct governments, and then the portion allotted to each subdivided among distinct and separate departments. Hence a double security arises to the rights of the people. The different governments will control each other; at the same time that each will be controlled by itself.”

On protecting the rights of a minority interest, “…the society itself will be broken into so many parts, interests, and classes of citizens, that the rights of individuals, or of the minority, will be in little danger from interested combinations of the majority. In a free government the security for civil rights must be the same as that for religious rights.”

So Madison reaffirms his long standing belief that religious freedom is an essential ingredient in the American model. He is essentially arguing in favor a diverse pluralistic society. He might well have been pleased to see how diverse the United States has become two hundred years later.

He sums up in a philosophic tone, “Justice is the end of government. It is the end of civil society. It ever had been and ever will be pursued until it be obtained, or until liberty be lost in the pursuit.”

He goes on to argue that it individual states were broken off from the Confederation that they would suffer internal factions that the people would soon call for some third power to intercede on their behalf.

Madison believed that the larger the society the more capable it would be of self-governing, and that the proposed constitution offered a “judicious modification and mixture of the federal principle.”

Federalist 10 – Factions

In Federalist 10, Madison argues in favor a republican structure as the only antidote to factions unavoidably created by the differing interests of men. He defines factions as ‘a number of citizens actuated by some common purpose or interest, adverse to the rights of others, or the aggregate interests of the community.’

He finds that factions are inherent to societies of men, “The latent causes of faction are thus sown into the nature of man.”

He finds that they often arise from opinions regarding religion, government and property.

“Those who hold and those who are without property have ever formed distinct interests in society. Those who are creditors, and those who are debtors, fall under a like discrimination. A landed interest, a manufacturing interest, a mercantile interest, a moneyed interest, with many lesser creditors, grow up of necessity in civilized nations, and divide them into different classes, accentuated by different sentiments and views.”

He deduces that there only two methods of curing the mischiefs of faction, ‘the one by removing its causes; the other, by controlling its effects.’

He further deduced that removing the causes of factions can in turn only be accomplished by two methods, “the one, by destroying the liberty which is essential to its existence; the other, by giving to every citizen the same opinions, the same passions, and the same interests.”

The concept of abolishing liberty is without merit; it belies the purpose of government. It is “worse than the disease.” Likewise the “second expedient is as impractical as the first is unwise.”

Consequently, since the causes of factions cannot be removed, Madison argues, controlling the effects of factions is the only possible remedy.

“If a faction consists of less than a majority, relief is supplied by the republican principle which enables the majority to defeat its sinister views by regular vote.”

How then is the minority to be protected from a majority faction? Either by diluting passions or interests such than no majority faction forms, or by setting up an obstacle to the majority faction’s ‘schemes of oppression.’

So, Madison finds that the larger a society is the less likely it is to have majority factions to contend with. The larger the society, the more likely that there are numerous smaller factions. In the second case, where a majority faction already exists, only a republican government can protect the minority.

On why republicanism is superior to direct democracy, he offers, “…to refine and enlarge the public views, by passing them through the medium of a chosen body of citizens, whose wisdom may best discern the true interest of their country, and whose patriotism and love of justice will be least likely to sacrifice it to temporary or partial considerations. …it may well happen that the public voice, pronounced by the representatives of the people, will be more consonant to the public good than if pronounced by the people themselves.”

Madison argues that the larger a society was the better it would function as a republic, likewise the union of states would be better prepared to counter a faction than if the states operated independently in all respects. He offers specific examples,

“The influence of factious leaders may kindle a flame within their particular States, but will be unable to spread a general conflagration through the other States. A religious sect may degenerate into a political faction in a part of the Confederacy; but the variety of sects dispersed over the entire face of it must secure the national councils against any danger from that source. A rage for paper money, for an abolition of debts, for an equal division of property, or for any other improper or wicked project, will be less apt to pervade the whole body of the Union than a particular member of it; in the same proportion as such a malady is more likely to taint a particular county or district, than an entire State.”

But don't worry they can run everything else.

You Can Stop Paying for Al Gore's Mistake

In Greece earlier this month, Al Gore made a startling admission: "First-generation ethanol, I think, was a mistake." Unfortunately, Americans have Gore to thank for ethanol subsidies. In 1994, then-Vice Presiden
Gore ended a 50-50 tie in the Senate by voting in favor of an ethanol tax credit that added almost $5 billion to the federal deficit last year. And that number doesn't factor the many ways in which corn-based ethanol mandates drive up the price of food and livestock feed.

Sure, he meant well, but as Reuters reported, Gore also said, "One of the reasons I made that mistake is that I paid particular attention to the farmers in my home state of Tennessee and I had a certain fondness for the farmers in the state of Iowa because I was about to run for president."

In sum, Gore demonstrated that politicians are lousy at figuring out which alternative fuels make the most sense. Now even enviros like Friends of the Earth have come to believe that "large-scale agro-fuels" are "ecologically unsustainable and inefficient." That's a polite way of saying that producers need to burn through a boatload of fossil fuels to make ethanol.


Gore also showed that most D.C. politicians can't be trusted to put America's interests before those of Iowa farmers. But there is one pursuit in which homo electus excels: spending other people's money.


Beware politicians when they promise you "the jobs of the future." Last week, the Washington Post ran a story about a federal grant program in Florida designed to retrain the unemployed for jobs in the growing clean-energy sector. Except clean tech isn't growing as promised. Officials told the Post that three-quarters of their first 100 graduates haven't had a single job offer.

In May, President Obama came to a Fremont, Calif., solar plant where he announced, "The true engine of economic growth will always be companies like Solyndra." This month, Solyndra announced it was canceling its expansion plans. The announcement came after voters rewarded the green lobby by defeating Proposition 23 -- which would have postponed California's landmark greenhouse gas reduction law AB32 -- because voters bought the green-jobs promise.

WHY SHOULD SOCIAL SECURITY AND MEDICARE FOOT THE BILL?

Why should Social Security and Medicare foot the bill for irresponsible and crooked Wall Street bankers greed, an unnecessary war and unfunded drug program and fiscal irresponsibility by Washington.
We need to cut military spending, and cut " foreign aid." The very people who want to slash Social Security and Medicare are shouting for more unpaid Bush tax cuts for millionaires.
Are we that crazy we want people to work till their 70, really!
Now having said that we can look at means testing for Social Security, and here is one I just learned. Some of these millionaires on their second wives (trophy wives) and are on Social Security over 65 years of age their children under the age of 18 are eligible and get up to half of their Daddy's Social Security till they are 18. Whether they are his biological father or his step children.
That just seems wrong to me ! If those old guys want to trade in their first wives for young trophy wives isn't that reward enough!!!!!

Please Defend Jon Kyl

1) START Treaty?

2) First Senator to break earmark agreement after 3 business days to help local indians?

3) Boy, I'd really like to hear his opinions about Wikileaks!

Just embarrassing.

Ronnie The Hero Reagan

Everybody's Hero Ronald Reagan (I still don't understand that phenomenon) I lived thru that idiotic period of lowering and then raising taxes, cutting goverment services putting sick people on the street to fend for themselves instead of getting needed medical help, and then in the end making government bigger that when it started under his administration, it's the truth look it up.
While he played the role of the nation's kindly grandfather, his operatives divided the American people, using "wedge issues" to deepen grievances especially of white men who were encouraged to see themselves as victims of "reverse discrimination" and "political correctness."

Yet even as working-class white men were rallying to the Republican banner (as so-called "Reagan Democrats"), their economic interests were being savaged. Unions were broken and marginalized; "free trade" policies shipped manufacturing jobs abroad; old neighborhoods were decaying; drug use among the young was soaring.

Meanwhile, unprecedented greed was unleashed on Wall Street, fraying old-fashioned bonds between company owners and employees.

Before Reagan, corporate CEOs earned less than 50 times the salary of an average worker. By the end of the Reagan-Bush-I administrations in 1993, the average CEO salary was more than 100 times that of a typical worker. (At the end of the Bush-II administration, that CEO-salary figure was more than 250 times that of an average worker.)

When it came to cutting back on America's energy use, Reagan's message could be boiled down to the old reggae lyric, "Don't worry, be happy." Rather than pressing Detroit to build smaller, fuel-efficient cars, Reagan made clear that the auto industry could manufacture gas-guzzlers without much nagging from Washington.

The same with the environment. Reagan intentionally staffed the Environmental Protection Agency and the Interior Department with officials who were hostile toward regulation aimed at protecting the environment. George W. Bush didn't invent Republican hostility toward scientific warnings of environmental calamities; he was just picking up where Reagan left off.

Reagan pushed for deregulation of industries, including banking; he slashed income taxes for the wealthiest Americans in an experiment known as "supply side" economics, which held falsely that cutting rates for the rich would increase revenues and eliminate the federal deficit.

Over the years, "supply side" would evolve into a secular religion for many on the Right, but Reagan's budget director David Stockman once blurted out the truth, that it would lead to red ink "as far as the eye could see."

N Korea and the Prospect of a "Two for One" Victory

The issue of nuclear proliferation trumps all others. If this matter is not handled correctly, it can literally have "Fall of Rome" consequences in our lifetimes. The Obama administration has been aggressive in it's approach to Pyongyang and our provocative posture is beginning to bear fruit. The North Koreans use brinksmanship all too often and it is time that their bluff is called. For the first time in forty years, the South is uniting behind a militant policy towards their belligerent neighbor.

Lets push harder - right now - in an effort to humiliate Kim Jong Il and his heir apparent son. They will have the option of escalating - a point beyond which they utterly lose the whole game - or backing down and losing the confidence of the Peoples Army and the Central Committee. Finally, China will understand that their ongoing support of Pyongyang is simply too expensive. The stakes are too high to let this tiny regime continue to thwart the will of the international community and stir up the possibly of nuclear weapons programs in Tokyo and Taipei.

What if they escalate? What do we do then? We have sufficient, massive airpower to quickly punish the North Koreans. It would be bloody, indeed, however their wad would be exhausted early on and artillery damage to Seoul would likely be far less than has been feared. The upside of such a war would be the end of the North Korean nuclear threat. We would have nipped it in the bud at great expense, however, at a tiny fraction of the potential cost in the years ahead.

Would they go nuclear? Thats highly doubtful. In fact, the evidence suggests they do not have a reliably deliverable bomb. If our shock and awe was properly targeted, we could take this possibly entirely off the table at the onset of hostilities. Obviously, they would know that going nuclear meant certain suicide - the US would be in a position to answer quickly and finally.

The "Two for One" nature of the victory is obvious. North Korea's success to date has emboldened the Iranians. Teheran would pay close attention to the events in Korea. If Pyongyang's nuclear production is shut down, Iran's would soon follow. There would be a new proliferation paradigm in place and it would not be hospitable to new nuclear states. Quite the opposite.

wacky, wacky, New Republic. Terry must be in love.

 “You’ve Got Them All Wrong, Mr. President,”  the only true independents are white working-class men and women (actually, more the latter than the former) who “are susceptible to populist appeals” against “special interests” that “can include business as well as government. 

One of the main reasons white Americans who lack a college education and make only a modest income now tilt toward Republicans and their right-wing populist talk: Few belong to an institution that counters those opinions.

During the campaign, an unemployed Ohio steelworker told The New York Times, “We heard everything was going to change, but there hasn’t been much change and the unemployment is still bad and the area we live in is still really depressed.” Yes, Obama should have made a better attempt to explain to people like this steelworker how the financial crisis occurred and how health care reform will help to create a more decent, as well as more efficient, society. Social Justice!  

But, if that unemployed Ohioan belonged to a vibrant, powerful labor union, he might be able to see himself as a maker of change, instead of its victim—and thus absorb Obama’s message differently. White men and women who do belong to unions are still far more likely to support progressive ideas on a variety of issues and to vote for Democrats than are their non-union counterparts. 

BAXTER HELP NEEDED

Baxter my Republicans friends beat me up all the time with the retort" You never got a Job from a poor man", I need a snappy comeback!! The whole thing sounds like a class warfare to me but I am unable to comeback with anything to answer them.
I realize I got a job because I was qualified and fulfilled the requirements of the job opening, but somehow the point they are trying to make is jobs are created by the rich in this country so please let them continue to be rich! help help!!!

That Darn George Bush

Obama is victim of Bush's failed promises
Greener Pastures Column -- 5/ 15/10



Barack Obama is setting a record-setting number of records during his first year in office.
Largest budget ever. Largest deficit ever. Largest number of broken promises ever. Most self-serving speeches ever. Largest number of agenda-setting failures ever. Fastest dive in popularity ever.

Wow! Talk about change.

Just one year ago, fresh from his inauguration celebrations, President Obama was flying high. After one of the nation's most inspiring political campaigns, the election of America 's first black president had captured the hopes and dreams of millions. To his devout followers, it was inconceivable that a year later his administration would be gripped in self-imposed crisis.

Of course, they don't see it as self-imposed. It's all George Bush's fault.

George Bush, who doesn't have a vote in congress and who no longer occupies the White House, is to blame for it all.

He broke Obama's promise to put all bills on the White House web site for five days before signing them.

He broke Obama's promise to have the congressional health care negotiations broadcast live on C-SPAN.

He broke Obama's promise to end earmarks.

He broke Obama's promise to keep unemployment from rising above 8 percent.

He broke Obama's promise to close the detention center at Guantanamo in the first year.

He broke Obama's promise to make peace with direct, no precondition talks with America 's most hate-filled enemies during his first year in office, ushering in a new era of global cooperation.

He broke Obama's promise to end the hiring of former lobbyists into high White House jobs.

He broke Obama's promise to end no-compete contracts with the government.

He broke Obama's promise to disclose the names of all attendees at closed White House meetings.

He broke Obama's promise for a new era of bipartisan cooperation in all matters.

He broke Obama's promise to have chosen a home church to attend Sunday services with his family by Easter of last year.

Yes, it's all George Bush's fault. President Obama is nothing more than a puppet in the never-ending failed Bush administration.
If only George Bush wasn't still in charge, all of President Obama's problems would be solved. His promises would have been kept, the economy would be back on track, Iran would have stopped its work on developing a nuclear bomb and would be negotiating a peace treaty with Israel . North Korea would have ended its tyrannical regime, and integrity would have been restored to the federal government.

Oh, and did I mention what it would be like if the Democrats, under the leadership of Nancy Pelosi and Harry Reid, didn't have the heavy yoke of George Bush around their necks? There would be no ear marks, no closed-door drafting of bills, no increase in deficit spending, no special-interest influence (unions), no vote buying (Nebraska, Louisiana).

If only George Bush wasn't still in charge, we'd have real change by now.

All the broken promises, all the failed legislation and delay (health care reform, immigration reform) is not President Obama's fault or the fault of the Democrat-controlled Congress. It's all George Bush's fault.

Take for example the decision of Eric Holder, the president's attorney general, to hold terrorists' trials in New York City . Or his decision to try the Christmas Day underpants bomber as a civilian.

Two disastrous decisions.

Certainly those were bad judgments based on poor advice from George Bush.

Need more proof?

You might recall that when Scott Brown won the election to the U.S. Senate from Massachusetts , capturing "the Ted Kennedy seat", President Obama said that Brown's victory was the result of the same voter anger that propelled Obama into office in 2008. People were still angry about George Bush and the policies of the past 10 years. And they wanted change.

Yes, according to the president, the voter rebellion in Massachusetts was George Bush's fault.

Therefore, in retaliation, they elected a Republican to the Ted Kennedy seat, ending a half-century of domination by Democrats. It is all George Bush's fault.

Will the failed administration of George Bush ever end, and the time for hope and change ever arrive?

Will President Obama ever accept responsibility for something... - anything?

(Chuck Green is a veteran Colorado journalist and former editor-in-chief of The Denver Post.)

George Schultz on Fareed Zakaria GPS

For those that missed it - I highly recommend today's GPS with guest George Schultz (4 minute mark to 24). Though he and I do not see things the same with respect to economic policy, his comments on diplomacy and geopolitics were spot on. I will be buying his new book, "Ideas and Action."

He was one of the good guys in the Reagan administration. His expert hand on the ship of State Department was very valuable to the Gipper. He sees things with a long view.

He offered many insightful thoughts on diplomacy and likened it to gardening. Our relationships with other nations can't be addressed in fits and starts. The relationships need constant care and maintenance. We cannot hope to go it alone in the 21st century.

Hayek - Will - Paul

Jim:

I remember reading Hayek's, "The Road to Serfdom" in college. It is an attack on soviet style central planning, which no one I know is in favor of.

(Of course now if you Google "Hayek" all you get is pictures of Selma Hayek's breasts -- which is actually more interesting than the book, and probably better for the economy overall.)

By the way Jim, George Will's erudite arguments never follow: They never run A-B-C-D-E, always C-A-D#-E.

Example:

1) It turns out that recessions are good; they cull out weak competitors.

2) Recent speculative bubbles, caused by poor oversight, have resulted in a colossal recession and high unemployment.

3) Ultimately this recession may put the economy on the right track. There is no reason to be unduly concerned about temporary high rates of unemployment which will be sorted out by market forces.

4) We should take this opportunity to cut taxes on the rich, because there is not an insurmountable problem, and all taxes are a drag on the economy.

(If you listen closely and give it the right cadence, you can almost hear George Will's voice.)

You can't push a string. You can either stimulate the economy now or enjoy a 10-year economic depression. I guess some people would prefer a depression to a second term for Obama.

Ron Paul, was smart enough to understand the Libertarian argument and stay on track. His Tea Party offspring are spouting gibberish.

More Evidence of Bush Failure

http://economix.blogs.nytimes.com/2010/11/18/were-the-bush-tax-cuts-good-for-growth/?hp

Depends on who is tinkering. As usual, Will says it all, much better that Jim G.

This lame-duck Congress - its mandate exhausted, many of its members repudiated - should merely fund the government for a few months at current spending levels with a "continuing resolution," then apologize for almost everything else it has done and depart. If, however, the 111th Congress wants to make amends, it should repeal something the 95th did.
In 1977, Congress gave the Federal Reserve a "dual mandate." Although the central bank is a creature of Congress, it is, in trying to fulfill this mandate, becoming a fourth branch of government.
The Fed's large, and sufficient, original mission was to maintain price stability - to preserve the currency as a store of value. "Mission creep" usually results from a metabolic urge of government agencies. The Fed, however, had institutional imperialism thrust upon it when Congress - forgetting, not for the first or last time, its core functions - directed the Fed "to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates." The last two goals are really one. In the pursuit of the first, which requires the Fed to attempt to manage short-term economic growth, the Fed has started printing $600 billion - this is the meaning of what is called, with calculated opacity, "quantitative easing."
Those running the Fed, says Rep. Paul Ryan (R-Wis.) dryly, "are really putting the fiat in fiat money" - money backed by nothing but trust in the judgment and good faith of the government creating it. The Fed is doing what the executive branch wants done but that the legislative branch will not do - creating another stimulus.
By seeming to do the president's bidding, the Fed stumbled into a diplomatic thicket. While the president was impotently accusing China of keeping the value of its currency low in order to facilitate exports, many nations were construing America's quantitative easing as similarly motivated currency manipulation. The primary purpose of quantitative easing might be to force down the yields of government bonds in order to induce investors to invest in corporate bonds and stocks. But when a predictable result of the policy is to devalue the dollar, it is a pointless parsing of words for Treasury Secretary Timothy Geithner, who serves a president who has vowed to double U.S. exports in five years, to say that America will never weaken its currency "as a tool to gain competitive advantage."


In a 2007 speech, Frederic S. Mishkin, then of the Fed's Board of Governors, lauded the dual mandate as "consistent with" the Fed's "ultimate purpose of fostering economic prosperity and social welfare." Note how easily the mandate to "maximize employment" becomes the grandiose, and certainly political, function of promoting, and therefore defining, "social welfare."  Sounds like the commerce cause to me.

Mishkin said "the rationale for maximizing employment is fairly obvious": "The alternative situation - high unemployment - is associated with human misery, including lower living standards and increases in poverty as well as social pathologies such as loss of self-esteem, a higher incidence of divorce, increased rates of violent crime, and even suicide." Obviously, some of the central bank's governors have been encouraged by Congress to think of themselves as more than mere bankers - as wizards of social control, even regulating society's reservoirs of self-esteem.

The Fed cannot perform such a fundamentally political function and forever remain insulated from politics. Only repeal of the dual mandate can rescue the Fed from the ruinous - immediately to its reputation; eventually to its independence - role as the savior of the economy, or of any distressed sector (e.g., housing) that clamors for lower interest rates. Ryan has introduced repeal legislation before and will do so again in January.

Fed Chairman Ben Bernanke has wistfully imagined a day when economists might get "themselves thought of as humble, competent people on a level with dentists." But that day will not dawn as long as the dual mandate makes it almost mandatory for him to vow that the Fed "can assist keeping employment close to its maximum level through adroit policies." Even defining "maximum employment" is a political as well as technical act.

Ryan, incoming chairman of the House Budget Committee, says the Fed thinks it can adroitly "put the cruise missile through the goal posts." But how adroit can Fed management of the economy be? No complex economy can be both managed and efficient, meaning dynamic. To think otherwise is what Friedrich Hayek called "the fatal conceit." That conceit can be fatal to the Fed's independence.