Transcripts For CSPAN2 John Tamny Discusses Who Needs The Fe

Foundation, senior economic adviser to research and trading and an editor of real clear market. Com. He frequently writes about the Securities Market along witht tax, trade and monetary policycy issues that impact those markets. Markets. Im for a ride of publications including the wall street journal, investors business daily, financial times, national review, and londons daily telegraph. These give a warm savannah welcome to john tamny. [applause] linda, thank you very much for the gracious introduction, and thank you to all of you for being here today. Its a passionate book people like you that make it possible for me to get to do what i love. And so i cant express mywh gratitude enough. Also want to thank the savannah book festival for including me, as a lookout at the other authors in the other books in featured this weekend. I cant believe i am in such good company. These are authors whom ive read for years. Ok im kind of clicking my heels appeared that he could to be part of this. So what to thank the excellent festival, kim, for all the work she did to make possible for me to be here because like to add to that, its not in the literal sense but i believe she moved mountains to give me a position to be a today pixel i am forever forever in her debt and also tot her husband, paul, whos in the audience today. They are quite simply would not be a book called who needs the fed . If not for hall. What paul knows about banking and credit could feel many, many thick books. Over the last 13 years he has taught me an enormous amounts. Hes been so patient in discussions come in person, by email, over the phone about these issues. And if id not discuss all this with hal paul and learn so muchm them, and never wouldve been a reason to write who needs the fed . In first place. So a big to all. Before i get in the book i will talk a bit about my background i was born in Charleston South Carolina so not too far from here. My dad was in the nuclear navy purchaser under the great admiral rickover. Once he got out of the navy we lived in dallas and atlanta. We moved to boston for two years so he could go to business school. Then we moved out to los angeles. I grew up in pasadena california. It was probably during grade school that i discovered not knowing at the time what i would eventually be doing in terms of writing about economics andwh economic policy. It was his little childrens books in grade school about president s called meet thomas jefferson, meet ben franklin, meet george washington. P i would read them over and over again and i would kind of be off to the side in class reading about these, reading these books. I went to my parents when night and i said im worried im in trouble at school. Im not participating in the other thinks. So my parents went to the teacher and the teacher said no, we are thrilled that is interested in these books. Please have them continue. So it was probably signaled something ahead. For college i went to the universituniversity of texas and in political science, but not for any good reason. It seemed like the most interesting major at the time. I cant say i learned a whole lot one way or the other. I think most kids in school, thats generally what they do. Tk most kids in school, thats, thats generally what they do. Their focus is elsewhere. After college i worked in sales for four years and then went to Vanderbilt Graduate School of management to get my mba. While at vanderbilt, i decided decided to go the normal route, it was a blooming bull market in the late 90s so i decided i would get into equities just like everyone else and i took a job at Goldman Sachs. Thats where, what began, thats where my future career took shape. While other people were on the trading floor, passionate about equities, i would look around and watch cnbc on the different screens, and my focus was on the economist talking about the economy. That was what really had my interest. What intrigued me the most was there was this constant stream of commentary at the time in the late 90s saying if the economy grew too much, as people prosper too much and too many people were working and creating companies there was a negative downside, that it would cause inflation. I thought wait a second, i grew up in the 1970s, i know what inflation is. Its a devaluation of the dollar. Its when the treasury shrinks the value of the dollar and i thought inflation is something that occurs exclusive of Economic Growth. When economies are growing, investment surges and so the prices of everything drop. I would look throughout history, i remember the foes first mobile phone in the early 80s, motorola put it out. It was a brick and it had a half hour of battery and if you want to make a call from savannah to atlanta it would cost you a fortune and warming charges. Nowadays you can get them for a fraction of the price. Then i knew, from history that the first mainframe computer was created by ibm in the 1960s and cost over million dollars, even by the late 90s you could get a pretty good computer for a few thousand. Now we see we can get them for a few hundred dollars. I thought thats another example of the persistent drop in the price of everything, thanks to investment. Everything i looked rejected the common view of economics from economist that somehow broke that theres a problem that the fed and Central Banks had to plan to make sure we didnt prosper enough. I wasnt allowed to do this. Goldman sachs was full of immensely talented people and they were very specific that you did your job, that you didnt go outside what you were doing, but i secretly started writing for clients, commentary saying what you are hearing on cnbc, what you are reading the newspapers is belied by basic common history and common sense. I started thinking this is what i really want to do. Then by 2001, the stock market started to dive. What people referred to as the internet bubble, effectively pops. What i would say about that is i dont think there is such thing as a bubble. That runup in internet stocks was a beautiful thing, it was a sign of economic progress as was the decline of those internet companies. It is when economies, when theres lots of failure in the economy that you know an economy is progressing. You need that constant experimentation to get you to better place to people looked at that time. As a negative, but i looked at it as a time in which the world in the u. S. Economy were utterly transformed by advances that we could not live without today. The downside to this big drop in equity prices is particularly in the internet economy and suddenly Goldman Sachs wasnt as interested in my services as they had been a few years ago. [laughter] i will say that was rather devastating at the time. You start question yourself, you start question what kind of person you are, can i ever succeed again, am i doomed for failure, but in fact, it was the best thing that ever happened to me, because i had already caught the bug. I thought i want to be commenting on the economy. I will stress up front im not an economist and i wear that lack of phd with the pride. Im not a journalist either but i thought i have got to write about this. It would paint me to not be in the field of commentary in these subjects. So, the negative about Goldman Sachs ultimately forced me to figure out what i really wanted to do. I moved to washington d. C. Not as an economist or writer about economics but as a fundraiser for the cato institute. My plan was to pay the bills working during the day, meeting donors. That was how is going to pay the bills so i could write at night and on the weekends and thats how i met hall. I met people like all who utterly transformed how i viewed the world and made me even more determined to become an economic commentator and gradually i did. My initial online columns, that was the other beauty of the internet boom is that it made it possible for someone like me to have a voice where before i can have once i began as a writer for the washington d. C. No one wanted to have an association with someone like me but gradually i developed a reputation, and my reputation was one of basically working against, or contradicting the conventional wisdom about economics. I felt the economics profession has lost a way that it had become about charts and formulas and percentages rather than a beautiful story of human action. I thought people dont dislike economics, they just dislike how its been explained to them. My argument was if people can see the beautiful world around them they can understand sports and movies, television, famous people and businesses, they would understand all they would ever need to know about economics. That has been my style of writing for all this time. I first book, popular economics, which all which all of you should buy several copies of later today, was a book that explained Economic Growth through movies and sports and television. It got rid of all the graphs that had wrecked what is really informative and essential. Who needs the fed, which is the book im talking about today is another example. I explained central banking and credit and money through things that people can understand. That has been my goal throughout all of this that economics is fun, but people have taken the fun out of it. It led to the book, who needs the fed. What i want to stress up front is please dont be fooled by the title or cover. This is a very optimistic book. This is a book that argues that the fed was never nearly as powerful or influential as commonly assumed, and even better, that Market Forces are rapidly rendering the fed irrelevant right before our eyes. What cant be stressed enough about the fed is that it doesnt have any resources. He cant increase credit. It cannot shrink credit. The fed can only miss allocate the credit that we have already created in the real economy. The fed is large not because of the talented people there. It isnt active in the markets because the people there have a specific skill that the rest of the central bankers around the world dont have, lets remember there are Central Banks in nigeria, cayman islands, barbados, bahamas, Central Banks are everywhere. We have a large one simply because the American People are the most economically productive people on earth. The fed swagger is not its own. That is the broad point of my book, that when we talk about the fed, we are misunderstanding, it doesnt have the credit, it cant increase it. The fed can only miss allocate the resources we have already created in the argument i make in the book is that we vastly overstate just how much the fed miss allocates. It is just not that important. I am a big advocate in Market Forces and market signals. I think theyre full of information in the same way i think the electorate is full of information. There is lots of skepticism in the world about our central bank. I think there is some skepticism on a misperception and to based on a very real understanding that the world the fed lives in is not defined by reality. The misperception is rooted in the idea, popularized by economists, politicians and pundits that money and credit are one and the same. In fact, money and credit couldnt be more different. If they were the same, haiti and honduras would have every bit much credit flowing through their economy as we do in the united states. I would add that would mean counterfeiting would not only be legal but it would be broadly encouraged. In fact, credit is real economic resources. To paraphrase, when you borrowed dollars, you are not borrowing dollars, you are borrowing access to computers, trucks, tractors, desks, buildings, desks, buildings and most of all labor. We are the credit of the economy. We are the producers of the resources that when people seek to borrowed dollars, they are trying to attain. The fed has has no private stash of resources over here that it can release into the economy. We are the creators of it. The creation is somewhat separate. They read in newspaper, will the fed ease, will it tighten credit , they Say Something is wrong with this picture. That doesnt reflect the reality that we know. Apple computers most valuable company in the world, yet even it pays 3 to borrowers. Anyone who has ever started a business knows that to attain credit it cost more than 0 . Its higher and higher all the time. That is the broad point. While its easy access to credit , in the real economy we act as though the fed doesnt exist. That is a very positive statement about where we are. Thinking about hollywood, brian is the most talented movie producer in the history of the industry. We are talking about splash, parenthood, a beautiful mind, apollo 13. Apollo 13. We are talking about Television Shows like empire, 24 and arrested development. As he freely acknowledges, his attempts to attain credit to fund his movie and tv ideas fail 90 of time. For this person with a near perfect track record, hollywood, as he puts it, is the land of no. What about Silicon Valley. Its commonly assumed that if you have a startup idea in the valley that money sources will be the path to your door trying to invest with you. As evidenced by all the billionaire venture capitalist out in Silicon Valley, we know credit is incredibly expensive out there. You have to give up a big portion of your business to a venture capitalist and then you will give up even more of it in the form of Stock Options to lure potential employees. What about investment banking. One of the things that offends me most in modern times is how media members have made wall street a conjured of and it creates an inception that Investment Bankers are somehow bad people. I cant think of a more important profession than investment baking. One of the reasons they are paid so well has to do with the basic truth that in the real economy, the price of credit is very expensive. Its one thing to come up with an idea for a business or come up with an idea to expand your business. Its quite another thing to attain the resources, the credit necessary to build on your vision. Investment bankers are paid very well, properly so because they can do for businesses what businesses cant do for themselves. Many of you remember the name michael melton. The media, in a similar way demonized him. He spent time in prison for charges that had never been prosecuted on anyone before. I would argue that he is one of the greatest capitalists who ever lived, and his insight in the 1960s and 70s was that unless you are the glue to the bluechip businesses you were largely set shut out of the credit market. The banks did not regard you as a reasonable credit risk. His genius, the source of his fortune was the highyield bond. It was his way of finding more expensive credit to really promising businesses. Time warner, cnn, Golden Nugget Golden Nugget hotel, the list is long of the great businesses that he attained credit for, and the broad point is his fortune was a function of the fact that while the feds never decree and easy credit, he found it for very difficult credit sources. Unless you are bluechip its very hard to attain credit in the real economy. All of which brings us to our 45th president , donald trump. I like to sell books and so i like to have stories about people who are famous. I feel like that will drive more people to buy it, as as all of you should. Thinking about donald trump, and many stress this is not a political statement, many of you remember that he reached his height as a real estate mogul back in the 1980s. Thats when he was viewed as the developer who could do no wrong, the man who had the vision for what the future of Tall Buildings would be. Whats interesting about trump is as early as 1990 he was already viewed as a major credit risk by u. S. Banks. In 1990, i tell the story in the book, he flew out to los angeles to visit with security pacific bank, which at the time was the 50 largest u. S. Bank. He wanted to borrow 50 million in borrow 50 million in order to fund the revitalization of the ambassador hotel. As you can imagine, from modern times, trump arrived at the meeting for confidence and swagger about his amazing Balance Sheet of assets, full full of some of the best properties on earth that were easily highly liquid. He was the best lending option you have out there, you probably should give me 100 million million dollars. The bankers had an entirely different view of his assets. They didnt trust them. They looked at them as highly illiquid, that that if he iran into difficulty paying off his debt is would necessarily be easily sold. They refused his request for 50 million loan and they ultimately loaned him 10 million million dollars. They wanted to be associated with his celebrity and they ultimately live to regret that decision two years later they wrote down the loan in total. He didnt pay a dime back. Its been wellknown ever since the early 90s that u. S. Banks generally have not touched donald trump and he was viewed as toxic. He had a very bad credit reputation with u. S. Bank. Let me stress, thats not a political statement, statement, but it is a statement about credit. While the fed is once again over here decreeing zero rates of interest, in the real economy, Interest Rates flowed up and down as though the fed doesnt exist. Again, that was a hugely positive statement about the u. S. And Global Economy that i would add. If the fed were a fraction as powerful as commonly assumed, we wouldnt be the richest nation on earth. The fact that the fed is just not that consequential is a signal that we are an incredibly rich nation. It just doesnt influence the flow of credit nearly as much as people think. Only among academics and economists, untouched by reality and untouched by the real world is there such thing as easy credit. In the real economy, it is price set by Market Forces and that the very positive thing. The question in the book becomes, do we need Federal Reserve. Do we need a central bank . As you can probably guess, my take is that we dont need one. My argument is if the fed were shut down tomorrow, few would notice. The fed began 100 years ago in 1913 as a lender of last resort to solvent banks. If you were a very wellrun bank with Excellent Assets on your