Book Review: Who Needs The Fed? by John Tamny

"Credit equals resource access." p. 2

In a triumphant sequel to his essential book Popular Economics, John Tamny has written a treatise on money and credit entitled Who Needs the Fed? What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books).

Ever the original thinker, Tamny offers a view of credit that is a clear challenge to the conventional wisdom. Tamny states emphatically that credit is simply access to real economic resources, such as tractors, computers, airplanes, and labor. Credit cannot be created out of thin air by central banks or governments. The latter point may make heads explode on both the left and the right.

In Part One, Tamny focuses on his view of credit in a most effective way by offering numerous interesting examples from the world of popular culture (Taylor Swift, Hollywood), sports (college football coaches), and politics (Hillary Clinton, Donald Trump). His method is unique in that he has made explaining economics this way a feature of his writing. Using no higher math or statistics, it's what made Popular Economics a classic in the image of Henry Hazlitt's Economics in One Lesson. And this style is what animates his regular commentary on Forbes Opinion and Real Clear Markets.

These examples provide the reader with easy to understand narratives of how credit is actually created in the real world.

Tamny rightfully mocks the Federal Reserve's attempt to deem credit cheap by manipulating interest rates. The Fed ignores the fact that by setting interest rates at an artificially low level, fewer savers will offer up their surplus resources to be lent to those in need of funds for immediate consumptive needs. The end result is not an abundance of credit, but rather its scarcity.

Like the manipulation of other prices by government such as wages or apartment rents, bureaucrats believe they can divine proper prices in a dynamic marketplace where supply and demand conditions are shifting constantly. The hubris is staggering.

Supply-siders do not escape criticism in Chapter 7. Although he considers himself a supply-sider, Tamny believes it's time to ditch the Laffer Curve and focus on finding the income tax rate that actually results in less revenues for the government to raise and then subsequently waste. The reason is simple. The government has no resources of its own. It must extract those resources from the private sector. There is simply no way a politician or bureaucrat, undisciplined by the market, can invest better than someone in the accountable private sector.

Part Two of the book deals with banking and contains the most fascinating chapter of the entire book. In Chapter 11, Tamny takes on the Austrian School's belief in fractional-reserve banking and the notion that money can be "multiplied". This requires the reader to keep an open mind and think through the author's logic and the examples provided. It may take awhile for many to come around to his viewpoint, if at all, but it cannot be denied that Tamny has thought through these issues methodically and logically.

Chapters dealing with the declining importance of the banking industry as a source of credit and the real reason behind the housing boom during the decade of the 2000's smash conventional thinking.

Part Three deals with the Fed and how its impact on the economy is overstated. Tamny shatters the widely believed myth that the Fed controls the supply of money. Production is the source of money; it is an effect of productive economic activity. And since the Fed cannot plan production, it will never have the ability the control the money supply.

I particularly enjoyed the vivid example of Baltimore. This economically depressed city would presumably benefit from the Fed's attempts to inject money into its local banks in an effort to stimulate economic activity. But no sooner would the money arrive it would get loaned out by the banks to businesses and consumers outside of the city. As Tamny makes clear, money migrates to the productive. 

The author helpfully reminds us that economic growth and prosperity cannot come from government. Government spending isn't stimulative, simply because politicians can only spend what they extract from the real economy first. Real economic advancement results from entrepreneurial ideas being matched with savings. Economic "stimulus" provided by government is a cruel hoax.

The Fed's manipulation of interest rates is another distortion of markets that is anti-credit creation. As Tamny points out, the Fed's imposition of artificially low interest rates on the way to supposedly easy credit would have to have been one of the few instances in global economic history of price controls actually leading to abundance over scarcity. He again emphasizes that an interest rate is a price like any other. As a price, the interest rate is meant to float to whatever rate maximizes the possibility that those who have access to credit (savers) will transact with those who need access to economic resources (borrowers). So why is it assumed by so many that a handful of bureaucrats at the Fed can define what the proper level of interest rates should be?

It is also assumed by too many people that the Fed's quantitative easing (QE) scheme created a boom in the U.S. stock market. According to Tamny, the Fed wasn't "printing money" to conduct QE.  It was doing something much worse by borrowing trillions from America's banks while backed with America's credit.  His more credible claim is that the Fed helped to deprive the U.S. economy of a massive rebound that would've taken place absent the central bank and federal government presuming to allocate so many trillions of the economy's resources.

If the Fed's QE machinations were the reason for the rise in stock prices in recent years, why didn't Japan's multiple bouts of QE since the 1990s not boost the Japanese stock market? The Nikkei 225 is no where near the level it was in the late 1980s. A more plausible reason for the rebound in U.S. stocks since early 2009 can be better explained by the impressive recovery in corporate profits from the lows of the last recession.

Tamny addresses the Fed's ludicrous belief in the Phillips Curve, which posits an inverse relationship between inflation and unemployment. Essentially, the Fed believes that inflation is created by too much prosperity. Could a theory more antithetical to prosperity possibly be promulgated? It must be stressed that economic growth, if anything, leads to lower prices. Goods that are initially available only to the wealthy become available to the masses as entrepreneurs find ways to lower prices of such goods to serve a much larger market. Historical examples abound, including the automobile, the personal computer, flat-screen televisions, and cell phones. All were once available exclusively to the ultra-wealthy but soon became ubiquitous. That's the beauty of capitalism.

In the final chapter, Tamny states that robots will ultimately be the biggest job creators, because automation will free up humans to do new types of work by virtue of robots eliminating work that was once essential. It seems every major advance that improves human living standards initially creates fears that workers will be displaced. But as Tamny notes, what resources are saved on labor will redound to increased credit availability for new ideas. We "see" the jobs destroyed by advances in technology but the "unseen" is all the new forms of work that will be created.

Tamny repeats key points frequently throughout the book. Some may find that somewhat annoying, but I believe his repetition helps drive critical points home.

Readers outside of the United States may not be quite familiar with the names of the college football coaches cited in Chapter Two, but that shouldn't distract from an understanding of the points Tamny is conveying about labor as a form of credit.

Tamny has a real gift for clear writing and making sense of issues that are unnecessarily complicated by the economics profession and the media. Who Needs the Fed? is a provocative, yet highly enjoyable companion volume to his 2015 book Popular Economics.