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In a time when it seems like central banks call the tune that everyone has to
dance to, a book named Who
Needs the Fed? (2016) is a deliberate provocation. Like his earlier book
Popular Economics (2015), John Tamny takes on the potentially arcane issues
of money, credit and banking with the help of contemporary tales of business
adventure. The result is both accessible and sophisticated – more
sophisticated than most academic work, whose obtuse mathematics actually
amount to clumsy oversimplifications. It contributes to a growing consensus
that the Federal Reserve’s ever-increasing contortions are silly and
unproductive; and that we should return to the old American ideal of stable,
neutral money.
The Federal Reserve was created in 1913. The United States did pretty well
before then, becoming already the wealthiest country in the world at the
time. Former Congressman Ron Paul, in books like End
the Fed (2010), has argued that we would be better off without it. Tamny
comes to a similar conclusion, but by a little different path: that the
Federal Reserve is, actually, somewhat irrelevant.
In the first section of the book, “Credit,” Tamny looks at the real world of
capital investment and business, and finds the Federal Reserve, or commercial
bank “money multipliers” nowhere to be found. Tamny uses the term “credit” in
the widest possible definition to mean capital of any sort, including venture
equity in the Hollywood film industry, and even the “crony capital” that got
Benjamin Bernanke a post-Fed job at hedge fund Citadel. However, even in the
case of bank lending – he uses an example involving California’s Security
Pacific Bank and a Los Angeles hotel revival headed by the young Donald Trump
– the process is driven by the glamour and persuasiveness of The Donald, the
business opportunity presented by a particular local hotel, and the savvy and
experience of the bankers. The Federal Reserve was not invited to the
meeting. More specific examples come from the world of sports, Hollywood
filmmaking, Silicon Valley, and the wildcatters of the oil patch.
There’s a connecting theme here: the real economy is much, much different
than the absurd simplifications of the Federal Reserve’s monetarist
economists, who think that “managing the economy” can be done simply by
tweaking one variable in their one-variable models. That’s why it doesn’t
work. In recession after recession, we hear that the Federal Reserve is
“pushing on a string,” or that the “transmission mechanism is broken.” Tamny
suggests – if I read him right – that there is no string, and no transmission
mechanism. Rather, it goes the other way: investment comes from real
on-the-ground opportunities seized by the special kind of person that can
carry an idea to profitable reality. Added together, these become the
aggregate statistics of economic prosperity.
One example is at the level of cities: increasing the “money supply” in
Washington doesn’t increase the “money supply” – capital investment – in
decrepit Detroit or Baltimore. Capital will flee these places no matter what
the Fed does. Or, capital may return to these once-great cities, but only if
they can get their own houses in order, and create an attractive place for
business.
The banking system itself is becoming irrelevant: in 2014, Tamny notes, 85%
of all lending took place outside of banks. In Jimmy
Stewart Is Dead: Ending the World’s Ongoing Financial Plague with Limited
Purpose Banking (2011), economist Laurence Kotlikoff suggested a reform
of banking that would eliminate its inherent leverage – in effect, rendering
banks similar to a bond mutual fund. Tamny suggests that we are already most
of the way there.
Tamny loves to tweak the noses even of his political allies. In one section,
he suggests that the “supply siders’” favorite tune, perfected in the
eighties and nineties, is getting a little stale. The notion that tax reform
would lead to increasing tax revenue worked. The problem, as Tamny sees it,
is that it worked a little too well, giving the government even more money to
waste, or use as bribes to centralize power. Basically, he argues that it is
time for tax reform that not only keeps tax revenue/GDP stable, but reduces
it considerably. I think this reflects the political moment we are in – a
time when the post-World War II arrangement is becoming decrepit, and new
proposals are forming. One solution on offer is mid-twentieth-century
European-style socialism represented by Bernie Sanders – a proposal that is
making a serious challenge to the Democratic status quo. On the Republican
side of the aisle, Tamny and others are setting the stage for more of a Hong
Kong solution, where total government revenue/GDP is around 15%, down from
around 28% today. We saw this in the Republican presidential primaries, where
tax reform proposals became a game of “can you top this?”
Tamny concludes that putting all ones hopes for prosperity on the Federal
Reserve, and its supposed control over the banking system, is wildly
mistaken. The real gains are to be had in creating an environment where
capital can thrive – not the abstract “capital” of macroeconomic equations,
but the real capital of investors and entrepreneurs exploring the nascent
edge of evolving business. In terms of policy, it means tax reforms,
regulatory reforms, and the kind of things that might make Baltimore a
boomtown once again.
It also means a currency that is a stable foundation for business, not the
rough seas of Federal Reserve foolishness. Like Ron Paul, Steve
Forbes and George
Gilder, Tamny recommends the system that the U.S. used over nearly two
centuries before 1971: the gold standard.
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