Here’s the question I put to Sen. Jim DeMint during a brief telephone interview last night:

Chances are pretty good that Illinois, California, and New Jersey, and maybe a dozen or more other states, are going to go broke — because they cannot meet their pension expenses. All told, the states are about $3 trillion short, and they’re going to come looking to Congress for a bailout. Are you going to write that check, or are you going to let them hang and watch the municipal-bond market collapse? Which angry mob do you want to face?

Senator DeMint did not exactly say, “We’re going to let the municipal-bond market collapse,” but it sure sounded a lot like that. Republicans have a three-part plan for the states’ fiscal crises:

First, create a legal process to allow states to renegotiate debts and union contracts in something akin to bankruptcy.

Second, forbid a congressional bailout of the states.

Third, forbid the Fed to buy states’ debt as part of a freelance Ben Bernanke bailout.

In other words, prepare a site for crash-landing state finances and then forcibly guide them to it.

That third part is interesting, no? Republicans are looking askew at the Fed’s new career as at-large bailout-maker.

The Republicans’ plan looks pretty ugly, but I do not see any plausible alternatives. And I see one big opportunity: This is the chance to pry the parasitic government-employee unions off the body politic. They have bankrupted the states, and the resulting crisis gives us the means and the opportunity to put an end to their plunder. When those contracts get renegotiated, Republicans should insist that they address more than pensions.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, just published by Regnery. You can buy an autographed copy through National Review Online here.

So says Dallas Fed chief Richard Fisher. That’s not the half of it, Sunshine.

As the Financial Times puts it:

The Federal Reserve’s revelations underscore the might of unelected central bankers. The Treasury’s Tarp rescue fund, at $700bn, was considered so audacious that Congress at first refused to authorise it. But the Fed doled out no less than $3,300bn in loans to banks and companies without a congressional say-so.

Three-point-three-trillion dollars in loans, basically no oversight.

I’ve long been wary of the Ron Paul/“Audit the Fed”  gang’s critique of the central bank, not because the Fed is so great, but because the mostly likely alternative — getting Congress  heavily involved in day-to-day monetary-policy  operations — seems to be very likely to be much, much worse, probably destructive, and possibly catastrophic. You may not like Ben Bernanke, but do you want Nancy Pelosi calling the shots? Barney Frank? Charles Schumer? Pick the congressional Democrat you’d rather have had in charge of monetary policy since 2006. Don’t worry, I’ll wait. (Heck, pick the congressional Republican you’d have wanted running the show during the 2008 crisis. Nobody leaps to mind. Candidate McCain’s performance in those dark days was wince-inducing.)

That being written, I don’t think we can have the central bank making multi-trillion-dollar loans to ailing banks and troubled non-financial firms without prior notice. Reforming the Fed is a can of worms that I am not particularly eager to see opened up at this moment, because the ranks of would-be reformers contain very few people that I would trust to do the job. (Approximately zero, in fact.) But it looks like it has to be done.

– Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, to be published in January.

We’ve got goldbugs at the World Bank!

The soaring price of gold reflects international unease about the strength of large developed economies that must be taken seriously by the Group of 20 leading nations, according to Robert Zoellick, president of the World Bank.

Mr Zoellick on Wednesday said the increasing use of gold as a monetary asset was an “elephant in the room” that was being ignored by policymakers in the debate over how to correct global trade and fiscal imbalances.

. . .  Mr Zoellick dismissed criticism of his proposal in Monday’s Financial Times for a new international monetary system involving multiple reserve currencies and including a role for gold as a reference point for market expectations of inflation and future currency values.

He said critics had misunderstood his proposal as a call for a return to the gold standard – the framework of fixed exchange rates backed by gold which was replaced after the second world war by the Bretton Woods system of fixed but adjustable exchange rates.

Looked at another way, the price of gold is not soaring; the price of dollars, yen, and euros is tanking. (And not just in terms of gold.) Monetary-policy authorities are in a race to the bottom, devaluing national currencies in response to weak growth: Every country thinks it can be China and export its way out of making hard economic decisions. All you need to make that model work is an impoverished population, a government-dominated economy, and a for-profit police state. Super.

Count me as against a new Bretton Woods, even one incorporating some sort of gold-derived controls, and in favor of the free-market alternative to international monetary-policy shenanigans: privatizing money.

Conservatives usually are fans of privatization and foes of government price-fixing. We do not like government-monopoly schools or government-monopoly health-care systems. So why do we assume that we must always have government price-fixing and government-monopoly supply-management in the most fundamental commodity of all: money?

We want money to do a couple of things: The first is facilitating exchange, the second is providing a relatively stable store of wealth. The dollar excels at the first but not at the second: What other asset do you hold expecting an annual loss of around 3 percent, forever? None, is my guess. You’re telling me we cannot come up with a non-government alternative for that relatively straightforward task?

Technology and financial innovation are going to catch up with, and surpass, the state’s monopoly on money; if I had to guess, I would predict that it will happen in the near future, though not in the United States, where private-currency innovators are preposterously prosecuted  as counterfeiters. My bet would be on a far-sighted innovator based in a market-minded financial upstart like Singapore or South Korea. But why not here? We have 900 kinds of shampoo and one kind of currency — government monopoly money. In what other marketplace does a government monopoly provide the best value?

I don’t get the gold fetish, and I suspect that a currency tied to a single commodity or metal would not be the most stable option. But a currency based on a market-basket of commodities (gold, crude — take your pick, and the more the merrier) could provide a very stable store of value with a basis in something more concrete than the acumen of Ben Bernanke and his fellow committee members, smart guys though they are.

Am I crazy? Let me know in the comments.

– Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, to be published in January.

Here’s a headline that should disturb your sleep:

Fed’s Printing Press to Fund Deficit for 6 Months

Printing money at the Fed, printing bonds at the Treasury. Very cozy.

To find a buyer of all the government debt he’s printing, Treasury Secretary Tim Geinthner doesn’t need to travel to China, just walk a mile over to the Federal Reserve building.

With the Federal Reserve set to print $600 billion in order to buy Treasury securities, it is essentially funding the $1.2 trillion deficit for the next six months, according to Ed Yardeni, President of Yardeni Research. It’s even more if you count the reinvestment of proceeds from its mortgage-backed securities portfolio.

“You essentially have the world’s largest hedge fund down the street from the world’s largest prime brokerage,” said Yardeni, who has held positions at both the Federal Reserve and the U.S. Treasury. “I think that QE-2.0 is a very bad idea because it increases the odds of a trifecta of bubbles in stocks, bonds, and commodities.”

Bubbles are what you have when you forgo real productive investments. Here’s some totally, completely unrelated news:

Dollar dives:

The dollar fell against its higher- yielding peers after the Federal Reserve said it will buy an additional $600 billion of Treasuries to boost the U.S. economy.

Stock market hits record high — in India:

India’s benchmark Sensex index has closed at a record high, after the Federal Reserve’s decision to buy US$600 billion in government bonds to shore up the shaky U.S. recovery drove a surge of foreign investment into the world’s second-fastest growing major economy.

The benchmark Sensex index closed up 2.1 percent, at 20,893.6 points, just topping a January 2008 closing high of 20,873.33, according to Bombay Stock Exchange data. The index touched an intraday high of 20,917.0, just 290 points of its January 10, 2008 all-time intraday high.

“It’s the Fed’s quantitative easing,” said Nandan Chakraborty, head of research at Mumbai’s Enam Securities. “It’s great for India.”

Gold hits new record high on inflation concerns:

Gold prices set a fresh record Thursday as investors flocked to the safety of the precious metal amid escalating inflation and currency worries.

. . . The Federal Reserve’s $600 billion monetary stimulus, announced Wednesday afternoon, helped jump start gold’s rally Thursday. The program aims to stimulate the economy by expanding the money supply, but market participants are concerned the excess liquidity will drive up inflation and depreciate the dollar without generating growth.

If this keeps up, the conspiracy kooks are going to stop sending me “proof” that President Obama was born in Kenya and start whispering about his secret life in Zimbabwe.

– Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, to be published in January.

So the price for the Fed’s next round of pump-priming turns out to be: $600 billion.

Here’s the rationale:

Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak.

It’s not entirely clear how this new round of quantitative easing will actually do much to address any of that. If businesses aren’t investing when interest rates are almost zero, then they probably aren’t going to invest a lot more when interest rates are even closer to zero. If credit is tight when interest rates are basically zero, credit probably will be tight when interest rates are even closer to zero. And none of this is going to address that “lower housing wealth” — which, of course, it shouldn’t: Continued efforts to prop up housing prices or to reinflate the housing bubble are part of the problem.

The Fed is, practically speaking, out of arrows in its quiver. This is really Congress’s problem now — it will take congressional action to clear away the barriers to saving, investing, and production that are preventing a robust recovery. Unfortunately, one of those barriers is … Congress. That new Republican majority in the House has an enormous task in front of it, and I am not entirely convinced its members are up  to it.

UPDATE: Business Insider points out that $600 billion isn’t really the whole show. The Fed will also be reinvesting proceeds from other securities in its portfolio, driving the real number up to nearly $1 trillion.

– Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, to be published in January.