John Tamny - Who Needs the Fed?: What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America’s Central Bank

2016 by John Tamny

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of Encounter Books, 900 Broadway, Suite 601, New York, New York, 10003.

First American edition published in 2016 by Encounter Books, an activity of Encounter for Culture and Education, Inc., a nonprofit, tax exempt corporation.

Encounter Books website address: www.encounterbooks.com

FIRST AMERICAN EDITION

LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA

Names: Tamny, John, author.

Title: Who needs the Fed?: what Taylor Swift, Uber, and robots tell us about money, credit, and why we should abolish Americas central bank / by John Tamny.

Description: New York: Encounter Books, 2016. | Includes bibliographical references and index.

Identifiers: LCCN 2015045934 (print) | LCCN 2016014394 (ebook) | ISBN 9781594038327 (ebook)

Subjects: LCSH: Federal Reserve banks. | Banks and banking, CentralUnited States. | Credit. | BISAC: BUSINESS & ECONOMICS / Economics / Macroeconomics. | ART / Popular Culture. | LAW / Banking. | BUSINESS & ECONOMICS / Education.

Classification: LCC HG2563 .T36 2016 (print) | LCC HG2563 (ebook) | DDC 332.1/10973dc 3

LC record available at http://lccn.loc.gov/2015045934

To my parents, Peter and Nancy, for always believing in me.

To my wife, Kendall, for constantly inspiring me.

To Hall McAdams, whose teachings made this book possible.

Table of Contents

CONTENTS

by Rob Arnott

Rob Arnott

AS YOU READ this volume, prepare to be surprised. John Tamny makes many controversial and provocative claims that run contrary to the prevailing views of the academic economics community and of the policy elite. Indeed, many of his claims will provoke anger among the guardians of the status quo. Readers should consciously set aside their commitment to mainstream economic thinking and read the book with an open mind. You may not come away agreeing with everything Tamny says, but you willmost assuredlyleave aware of a very new perspective on some very old topics. Your gray matter will be stimulated!

The field of economics was originally called political economy, because policy choices have a profound impact on macroeconomic growth. With this latest volume, Tamny encourages us to take a fresh look at money and credit. He writes, as always, with clarity and insight, and skewers conventional economic thinking with great gusto. In so doing, he shows us that economics is no arcane field best left to the experts. The most important aspects of political economy can be understood by anyone with a healthy dose of curiosity and common sense. In their clarity and depth of insight, Tamnys writings remind me of Jude Wanniskis The Way the World Works. This type of critical thinking forces us to reexamine the prevalent economic theory in both academia and politics.

This is no heavy-handed tome on the evils of central banks. There are no polemics here. Through a series of insightfulyet controversialobservations of the modern U.S. economy, Tamny leaves us with some powerful and important observations about the workings of our modern economy, particularly as they relate to credit. In this slender volume, Tamny reexamines the role of todays Federal Reserve, the supposed price setter of credit, in shepherding (or not) our countrys economy. He expertly challenges the notion that the Fed can and does stimulate the economy, not with formulas and finance theory but with compelling logic. He explores whether the Fed is truly necessary, as conventional wisdom suggests it is. The reader is likewise challenged to view money and credit from an entirely new perspective.

When we think about credit, it is natural to think first of our own credit. When we want to buy a house or a car, or start a business, a lender will want to see evidence that we have (a) the future resources to repay the loan and (b) a history of repaying past credit on time. In Who Needs the Fed?, Tamny points out that credit is not just dollars and cents; it is access to real resources. This approach hearkens back to that of John Stuart Mill and the notion that money is a veil: It has no meaning except as a means of exchanging goods and services, both across the economy and across time. With money, I can exchange my investment research ideas for groceries or for an auto mechanics skill in fixing my car, either now or in the distant future. Credit gives us access to goods and services today, paid out of future income (in other words, paid from our own commitment to deliver future goods and services to others).

Should the federal government have a role in setting the price of credit? Investors and the business media all over the world parse every tea leaf between the lines of Fed statements, looking for some hint about future policy direction, usually as it relates to prospective easing or tightening of credit in the marketplace. But in reality is credit being eased or tightened by the Fed, or by the marketplace? More fundamentally, can the federal government set the price of creditdefined broadly, not just in the fed funds rateeven if it wished to do so? Put another way, when we apply for a loan, are we basing our decision on the latest quarter-point move in the fed funds rate? Is the bank or other lender basing their rate on Fed policy? Tamny presents thought-provoking examples of credit transactions, ranging from Hollywood to Silicon Valley, from hedge fund managers to football coaches, that provide an iconoclastic perspective on the Feds effectiveness in doing that which it is purported, nearly unanimously, to do so well: managing the cost of capital.

Taking it a step further, Tamny asserts that, contrary to modern economic theory (but in line with common sense), the Feds actions potentially have the opposite of their intended effect. If the Fed is easing credit, it stands to reason that it is redirecting credit away from where the free market would have desired. If that is the case, then the attempted easing can lead to a suboptimal allocation of credit, which is to say, a suboptimal allocation of real resources. Is this strategy pro-growth? Hardly!

In the 1970s in the United States, with an electorate upset over the high price of gasoline, the government thought it sensible to give its citizenry a break by imposing wage and price controls. On the face of it, this seemed logicalpaying less for gas would give drivers a break, spurring renewed economic growth with the money left in their pockets. However, price controls