Who Needs the Fed?. John Tamny

      

      © 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 America’s 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, Central—United 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 332.1/10973—dc 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.

      CONTENTS

Foreword by Rob Arnott

Acknowledgments

Introduction

PART ONE: CREDIT

ONE The Rate Setters at the Fed Should Attend More Taylor Swift Concerts

TWO Jim Harbaugh, Urban Meyer, and Pete Carroll Would Never Need an Easy Fed

THREE In Hollywood, the Traffic Lights Are Almost Always Red

FOUR In Silicon Valley Your Failures Are Your Credit

FIVE Did You Hear the One about Donald Trump Walking into a Bank?

SIX Ben Bernanke’s Crony Credit

      SEVEN What the Supply-Siders and Hillary Clinton Sadly Have in Common

      EIGHT Why “Senator Warren Buffett” Would Be a Credit-Destroying Investor

      NINE The Credit Implications of the Fracking Boom

      TEN Conclusion: Sorry Keynesians and Supply-Siders, Government Is Always a Credit-Shrinking Tax

      PART TWO: BANKING

      ELEVEN NetJets Doesn’t Multiply Airplanes, and Banks Don’t Multiply Money and Credit

      TWELVE Good Businesses Never Run Out of Money, and Neither Do Well-Run Banks

      THIRTEEN Do We Even Need Banks?

      FOURTEEN The Housing Boom Was Not a Consequence of “Easy Credit”

      FIFTEEN Conclusion: Why Washington and Wall Street Are Better Off Living Apart

      PART THREE: THE FED

      SIXTEEN Baltimore and the Money Supply Myth

      SEVENTEEN Quantitative Easing Didn’t Stimulate the Economy, Nor Did It Create a Stock-Market Boom

      EIGHTEEN The Fed Has a Theory, and It Is 100 Percent Bogus

      NINETEEN Do We Really Need the Fed?

      TWENTY End the Fed? For Sure, But Don’t Expect Nirvana

      TWENTY-ONE Conclusion: The Robot Will Be the Biggest Job Creator in World History

      Notes

      Index

       FOREWORD

      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 will—most assuredly—leave 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, Tamny’s writings remind me of Jude Wanniski’s 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 insightful—yet controversial—observations 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 today’s Federal Reserve, the supposed price setter of credit, in shepherding (or not) our country’s 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 mechanic’s 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