According to an expert-informed punditry, the Federal Reserve’s interest rate hikes are leading to “tighter credit.” Washington Post columnist Catherine Rampell recently wrote that the noisy sound we all apparently hear is the “sound of credit crunching all across America.” At the Wall Street Journal, columnist Joseph Sternberg contends that the U.S. economic picture is bleak “because all indications are that the U.S. is at the beginning, rather than the end of the end, of its own contraction occasioned by the painful adjustment to the withdrawal of a decade of extraordinary monetary stimulus,” while the Mises Institute’s Peter St Onge claims the Fed is “causing ‘Mass Extinction’ of startups as they run out of rope.” Oh dear.
Perhaps St Onge should be given a pass? The obsession about the Fed within the halls of the Mises Institute is longstanding. The central bank exists rent-free within the heads of seemingly all of their scholars. It’s hard to tell why. Particularly on the matter of Silicon Valley startups. If we ignore that the Fed’s economic importance is well overstated for any part of the U.S. economy, it’s most certainly overstated in the area of startups. Seemingly missed by St Onge is that there’s realistically no interest rate high enough that would enable a loan to a startup. That is so because something north of 90 percent of them fail. Finance in the technology space is of the equity variety based on the latter, at which point St Onge’s videotaped assertion that the Fed’s rate hikes are “causing ‘Mass Extinction’ of startups” reads as a bit of a non sequitur.
As for Sternberg and Rampell, both ignore that access to credit is invariably challenging for the vast majority of individuals and businesses. The Fed can’t alter this reality. And it can’t because the market power of compound returns is exponentially greater than that of individuals with names like Greenspan, Bernanke, Yellen, and Powell. Put more bluntly, market forces always and everywhere run roughshod over vain attempts by economists and those who play economists to institute price controls.
The simple truth is that capitalism and capital allocators are way too smart for central bankers. Which means that even if it were true that the Fed could “tighten” as Rampell, Sternberg and St Onge imagine it can, credit markets would still have their say. Indeed, we’re seeing this right now.
As Erin Griffith of the New York Times recently reported, in the first three months of 2023 $10.7 billion flowed to Silicon Valley for “generative A.I. start-ups.” So powerful has the inflow of investment capital been that all manner of ex-Californians have returned to – yes – California to “join the next big thing.” Well, of course.
Contra the silly notion that the Fed controls the cost and availability of credit, actual market forces dance to the beat of a totally different drum. Which should be a statement of the obvious. Central planning fails. Always. If the Fed were a fraction as powerful as pundits and economists think, the U.S. economy would be too small and impoverished to support commentary from the likes of Rampell, Sternberg and St Onge. And we’d never have heard of “Silicon Valley.”
No doubt it’s true that investors have tightened the purse strings on Valley startups, which is what investors occasionally do. And they started doing this well before the Fed starting “raising interest rates.” It was rooted in growing pessimism about the valuation of “unicorns.”
Markets always speak, and the Fed can do nothing about it. Which is why billions are flowing into a region of the country that has seen a lot of layoffs of late. Actual market forces just are, and couldn’t care less about what the Fed does.