At heart, I’m a confederate. Rather than centralizing power in omnipotent institutions, I favor a confederation of smaller entities bound together by culture rather than coercive measures of conformity. Government, of course, is the most pernicious of these coercive institutions—but others exist as well, often spawned by government regulations and policy initiatives that benefit select groups.
Lord Acton famously stated, “Power tends to corrupt, and absolute power corrupts absolutely.” After the Battle of Britain, Churchill proclaimed, “Never in the field of human conflict was so much owed by so many to so few.” After the Covid era, it can be said: “Never in the course of human history have so few damaged so many.”
In case you’ve been "Rip Van Winkling" the past year, there are now dozens of peer-reviewed papers asserting that the Covid virus was almost certainly a gain-of-function creation funded by the NIH; that the guidance offered by the FDA and NIH was consistently and catastrophically wrong; and that the vaccines and accompanying anti-prophylactic policies are responsible for millions of deaths and permanent injuries. The most powerful institution in the world—the U.S. Government, with its virtually unlimited resources—got it completely wrong. How could this be? Ah, Lord Acton’s quote again: the symbiosis of power and corruption answers the question.
Powerful institutions, especially those created or empowered by the state, are inherently political and tend to disseminate data that serves their benefactors rather than the truth. This is not always the case, but nothing reinforces our innate prejudices like self-interest. And when the institution we serve bestows riches, fame, and power upon us, we should be most wary of its proclamations.
Covid taught me to question—if not outright disbelieve—and to seriously consider the opposite of whatever certain notable institutions declare. Historical knowledge is a vital aid in this process. I’ve never understood why so many people trust government-sponsored entities that have been wrong so many times. Rational analysis makes clear they can’t possibly know what they claim to know. Throughout history, humans have been mesmerized by the pomp and ceremony of wealth and power—the courtiers of Versailles in their gilded palaces. Logic, however, demands we treat such spokespeople as Hester Prynne was treated.
Why shouldn’t they be forced to stand on a platform on the Washington Mall with a giant red W pinned to their chests? WRONG!
Here, dear reader, I introduce into the lexicon of modern economics the Bedford Falls Rule. Remember when Clarence Odbody showed George Bailey what Bedford Falls would have become had he never been born? Now ask: What would the world look like if certain government or quasi-government institutions—those that are always wrong—had never been created? What would have evolved naturally and organically?
Let’s examine the Federal Reserve System.
I understand the argument: we need the Fed because the government regulates the banking system, and Fed oversight keeps banks in line so they won’t go broke and crash the system. (We’ll skip for now how federal tax policy rewards debt and penalizes savings.) But the Fed doesn’t do its job very well. Read Alex Pollock’s Finance and Philosophy. We have major banking crises and massive taxpayer bailouts about every ten years.
In my Confederacy of Natural Order, depositors and shareholders would better protect their own interests than a cadre of hubristic technocrats thousands of miles away. It’s easy for them to guarantee deposits when the money doesn’t come out of their own pockets.
For the Fed to function as advertised, its Chair would need the powers of Merlin the Magician, and its board members would have to be all-knowing prophetic Druids, seeing deeply into the future with perfect knowledge of 46 trillion banking transactions each day. I’d sooner believe its employees smoke crack every day than believe they possess such sorcery.
But the Fed is wrong—all the time, on almost everything. It’s easier to believe in Santa Claus than to accept the popular myth of its prophetic powers or its supposed ability to manage the economy wisely. The Fed is not a propertied class providing wise stewardship over its own capital; it is a political entity. Its interests lie in prestige, not prudence—in being a big shot, with all the perks of fame, glory, and inflated egos.
I can hear you now, status-quo loyalists: “Smith, you’re a nut! The world would crash without the Federal Reserve and its expert control over the economy!”
Oh really? The insurance industry holds about $10 trillion in assets. These companies are extremely well-managed. Their budgets and forecasts are typically accurate years into the future. They almost never go bankrupt or require federal bailouts. Regulation occurs at the state level—in other words, through a confederacy tied together by a shared regulatory culture. Does anyone even know an insurance regulator? They’re not the type to be invited to Georgetown cocktail parties or featured in the morning news.
Sometimes the best way to puncture a widely held myth is with a simple example that lays bare its absurdity.
The Fed is currently renovating its headquarters for $2.5 billion. Not a new building—just a renovation! This reveals its “Philosopher King” mentality and why it’s so often wrong.
Think of the egos of these PhDs. They consider themselves so exalted that they require a $2.5 billion, high on top the Acropolis temple—paid for with someone else’s money—to carry out their “sacred” duties. That’s Problem #1.
Problem #2: the project is already $600 million over budget. That’s right—$600 million. I’ve done a fair amount of construction and development work myself. It’s my money at risk. It’s my ass on the line when I borrow from the bank. I aim to make a fair return on my labor and capital. I know my bankers. I want my projections to be dead-on. And if they’re off, I want the error to favor the bank.
I want credibility. I want my lenders to see me as a thorough, honest, stand-up guy.
None of these incentives apply when over-educated academics with inflated egos are spending other people’s money. So how can we trust this institution—which can’t even manage its own budget—to manage the nation’s economy?
I’ll skip my list of all the flawed economic theories the Fed clings to. The most ludicrous, of course, is that a fast-growing economy is bad, and that the Fed must step in to slow it down—to make everyone poorer. Markets work. They regulate themselves. When the Fed intervenes, it often creates artificial distortions, doing more harm than good.
It hides its incompetence behind formulaic data and a soup of acronyms that don’t really measure what they claim to: GDP, CPI, U-3, ECJ, PCE... blah, blah, snore. Hiding behind acronyms is the sophist’s favorite trick.
But here is the most important acronym in all of economics: OPM—Other People’s Money. The Fed theorizes with other people’s money. The best stewards of any asset class are always those who own it.
So rather than blindly accept the status quo, apply the Bedford Falls Rule: Ask what would have evolved had these government-mandated institutions never existed. You’ll likely find that stakeholders—when left to their own devices—would have created something far more efficient, resilient, and honest.
