Somewhere Up There John V. Lindsay Smiles Admiringly at An Inept Fed

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What’s about to be read will surely trigger all manner of self-identified free market types, but here we go: neither Milton Friedman nor Walter Bagehot were truly for free markets. That they weren’t speaks to why they were so incorrect about central banks.

In Friedman’s case, his belief that Fed-engineered falling “money supply” caused the Great Depression to this day smothers reasonable conversation about how economies grow. All too many chin-scratchers buy into Friedman’s assessment; one that confuses what money is, what money does, and its role in economic growth.

To be clear about money, it’s a consequence. Money well predates the state, and it came about thanks to producers desiring an agreement about value that would enable exchange. I’ve got bread, I want your wine, but you want the butcher’s meat. Money came about to facilitate exchange among those who’d already produced. Money doesn’t instigate production, rather it facilitates the exchange of production that’s already taken place.

To see why money doesn’t instigate, imagine the Fed dropping billions into perennially depressed Cairo, IL tomorrow. The money would depart this economically wrecked town as quickly as it would arrive. Money only has a purpose insofar as there’s production to exchange first.

Looked at in terms of the 1930s, massive government intervention of the tax-hiking (the top rate was raised to 83%), regulation (the AAA aimed, among other things, to regulate half of the U.S. economy), tariff-raising (Smoot-Hawley leveled record levels of taxation on 20,000+ foreign goods), dollar devaluation (in 1933 FDR devalued the dollar from 1/20th to 1/35th of an ounce of gold), and government spending (arguably the ultimate tax) variety massively restrained economic activity. This reduced activity logically rated much less in the way of “money supply” to facilitate exchange of shrunken production. Much as dollars in circulation are scarce today in Cairo, but abundant in Lake Forest, money very naturally finds production, as opposed to unnaturally stimulating it thanks to "easy" central bankers.

That economists and central bankers view money as an instigator explains Sunday’s laughable stab at relevance and meaning from the Federal Reserve. As readers know, it “slashed” the rate it targets to near zero with an eye on boosting credit. Somewhere, perhaps above us, the late John Vliet Lindsay is smiling, or laughing, or perhaps having ultimately come to terms with his failed mayoralty, horrified. Lindsay, as some know, was the charismatic mayor of New York City long ago. In 1969, he imposed rent controls in the city with an eye on shrinking the costs of apartment rents. All he succeeded in doing was to shrink the availability of apartments to rent. No matter what politicians do, markets will speak over them.

Fast forward to the Fed decision on Sunday night, markets will always set the real price of credit. Always. We borrow money for the resources it can be exchanged for, countries around the world are being locked down economically by hapless politicians, this means production will decrease; hence, there will be fewer resources to borrow. It cannot be said or written enough that the Fed can’t alter reality. At best, or worst, the Fed can lightly reshape reality to our detriment.

The market reaction to what fixed income analyst Seth Levine referred as the “dialing up of the stupid” was predictable. Equities collapsed. About their decline, let’s make it clear that this wasn’t all, or even in large part a reaction to the Fed’s hopelessness. Again, central banks can’t alter reality. The Fed can at best magnify an economy’s decline. But politicians can truly wreck things by limiting economic activity, and that’s what they continued to do over the weekend as announcements came out across the country about lockdowns of seemingly everything. The Fed’s rate fiddling can’t deter market corrections, which means yesterday was happening either way. If politicians are going to severely limit freedom to produce and exchange, investors must price their matchless stupidity.

Which brings us to Bagehot. Free market types frequently justify their support for government interventions by invoking the 19th century British monetary theorist. Bagehot said that during crises, central banks should aggressively lend to solvent banks. Former Fed Governor Kevin Warsh naturally wrapped his call for intervention in yesterday’s Wall Street Journal in Bagehot’s still extant credibility. Crucial here is that Bagehot was very clear about the solvent part, but seemingly left out by him, and free markets types like Warsh today, is that solvent financial institutions don’t need the Fed, or any other central bank. More realistically, solvent institutions avoid central banks like the plague lest investors get the idea that they’re not solvent.

Considering the Fed in the here and now, its actions will do less than nothing for economic growth. Figure that information-pregnant markets literally informed by the infinite decisions made every millisecond by billions around the world are constantly setting the interest rate price for accessing resources. Warsh contends that “the Fed possesses powerful untapped authority” to “ensure that sound businesses and households have ready access to cash,” but the former central banker leaves out a simple truth: the Fed can’t create credit, which means it can only provide “ready access to cash” insofar as it redirects cash from where it would otherwise be directed by information-infused market forces. Government spending amounts to politicians redirecting precious resources in blind fashion, and just the same, Fed machinations amount to central bankers directing precious resources in blind fashion. For the Fed to unclog credit markets deemed crucial by Warsh and other growth-at-all-costs happy talkers, it must clog other markets previously cleared by actual market forces.

Implicit in Warsh’s reasoning is that per George W. Bush, “the market is not functioning properly.” Actually, markets just are. They have no bias. What Warsh really means is that during crises, the rule of fallible man should replace the rule of markets. That’s not acceptable.

Better it would be for political types, including Republicans who talk endlessly about the wonders of free markets during happy times, to recognize that the crisis may well be them, and people like Warsh. If central planning is a tragedy during booming times, it’s a catastrophe during the bad. So stop intervening, Republicans. It does not work.


John Tamny is editor of RealClearMarkets, Vice President at FreedomWorks, and a senior economic adviser to Toreador Research and Trading ( His new book is titled They're Both Wrong: A Policy Guide for America's Frustrated Independent Thinkers. Other books by Tamny include The End of Work, about the exciting growth of jobs more and more of us love, Who Needs the Fed? and Popular Economics. He can be reached at  

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