Book Review: Who Needs the Fed? by John Tamny
May 29, 2016
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.