At the beginning of the month, I wondered if one of the lessons of the current crisis isn’t that we need to reconsider if opposition to international capital controls has really been such a hot idea. If even a real right-winger like Megan McArdle is contemplating this position, I think I’m going to take up the banner. Kevin Drum suggests that this might be accomplished by means of a modest tax.

I find this idea appealing, much as I think idea of a small financial transactions tax is a good idea. In both cases, the thinking is that a modest tax should leave “real” long-term investments more-or-less unmolested. Thus savers in Germany and Japan can still have their money directed into profitable investment opportunities in Arizona and Shenzhen. But it would put a real crimp in short-term speculation and more generally slow things down.

A good example of the stuff I was talking about in my Animal Spirits review is this 2006 speech by Ben Bernanke on the subject of risk management in the financial sector. Bernanke began with the observation that “banks have invested in risk management for the good economic reason that their shareholders and creditors demand it.” And then he concluded:

The ongoing work on this framework has already led large, complex banking organizations to improve their systems for identifying, measuring, and managing their risks. Indeed, banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks. The banking agencies will continue to promote supervisory approaches that complement and support banks’ own efforts to enhance their risk-management capabilities.

What’s striking about this isn’t just it’s total wrongness in hindsight. It’s the nature of the logic Bernanke employs. Basically, Bernanke just assumes that everything is working well. If bank managers are doing a bunch of stuff in the field of risk-management, it must be the case that risk-management is improving. After all, it’s in the interests of creditors and shareholders for risk to be managed well, so that must be what’s happening. There’s no need to assess, in detail, whether or not things are actually improving. And there’s no consideration of the possibility that shareholders don’t really care, and bondholders are assuming (rightly, as it turns out) that loans to major financial institutions come with an implicit federal guarantee so managers are just mucking around to boost short-term profits and aren’t really inquiring too closely into the details.

In retrospect, though, that’s exactly what was happening. But a combination of financial industry political clout and strong neo-classical ideology made it impossible for the key policy player to see it. And not only did he not see it, he specifically gave his seal of approval to the casino.

Michele Bachmann was recently on Glenn Beck’s radio show, so that two of the right-wing’s most prominent nutters could talk, inaccurately, about currency issues:

BACHMANN: Let me tell you, there’s something that’s happening this week in Congress that could be the eventual unravelling for our freedom, and it’s this. I had asked the Treasury Secretary and Ben Bernanke, the Federal Reserve Chair, if they would categorically denounce–

BECK: I know.

BACHMANN: –taking the United States off of the dollar and putting us on an international global currency. Because as you know, Russia, China, Brazil, India, South Africa, many national have lined up now and called for an international currency, a One World currency. And they want to get off the dollar as the reserve currency.

BECK: Most people don’t understand what that means.

Here, for once, Beck is on the money. As we’ll shortly see, neither he nor Bachmann understands what that means:

BACHMANN: What that means is that all of the countries of the world would have a single currency. We would give up the dollar as our currency and we would just go with a One World currency. And now for the first time, we’re seeing major countires like China, India, Russia, countries like that, calling for a one world currency and they want this discussion to occur at the G20. So I asked both the Treasury Secretary and the Federal Reserve chair if they would categorically denounce this. The reason why is because if we give up the dollar as our standard, and co-mingle the value of the dollar with the value of coinage in Zimbabwe, that dilutes our money supply. We lose country over our economy. And economic liberty is inextricably entwined with political liberty. Once you lose your economic freedom, you lose your political freedom. And then we are no more, as an exceptional nation, as we always have been. So this is imperative.

This falsehoods here are coming so fast and loose that it’s hard to know where to start here. But to get to the main point, most countries hold “reserves” of various kinds—foreign currency and gold. Most countries, right now, primarily hold dollars. Euros are also popular, and Yen and British Pounds somewhat less so. The United States of America does not, obviously, hold any dollars in our reserves. We actually have quite a lot of gold. And different countries vary their practices in this regard. But most countries mostly hold their reserves in dollars. So the dollar is, in effect, the “global reserve currency.” The IMF also issues something called Special Drawing Rights that countries can use as a reserve asset. SDRs work as a kind of meta-currency, with their value based on a basket of major world currencies. A Chinese official suggested that it might be good for the world to tilt away from such a heavy reliance on dollars as the reserve currency of choice, since this leaves countries exposed to policy decisions in the United States, and toward something more SDR-like that would be balanced between dollars and euros and yen and pounds and so forth.

This has nothing to do with replacing the dollars in your bank account—or Michele Bachmann’s—with a new currency. Nor would it be the creation of a One World Currency. And to be clear, while the United States could prevent the IMF from formally creating any kind of new internationalized reserve currency, there’s nothing we can do to stop foreign countries from weighting their reserve baskets away from dollars. It’s just not up to us.

At any rate, my colleague Ali Frick found this remarkable exchange and has the audio for your pleasure:

Keep in mind that these aren’t just two weirdos hiding out in a cabin somewhere. Beck has a show on a major cable news network and Bachmann has a seat in congress.