All Commentary
Sunday, April 9, 2017

Is the Fed Deadly, Life-Saving, or Just Useless?

Booth thinks the Fed is necessary, but only if people like her are running it.

To read (and agree with) Danielle DiMartino Booth’s Fed Up is to believe that the Fed centrally plans nearly every economic outcome, and that the problem with our central bank today isn’t its intervention in the economy as much as those in its employ are the wrong people to intervene in the natural workings of the marketplace. Advertised as yet another anti-Fed book, the real goal of the book is to make you believe it is the most indispensable institution in government today.

Booth thinks the Fed is necessary, but only if people like her are running it.

If we ignore Booth’s weak economic analysis, her overstating of the Fed’s power by a mile, and her awe-inspiring self-regard whereby she regularly sees into the future in ways that would humble the world’s greatest investors, we can’t ignore that she learned all the wrong lessons from her time as a researcher at the Dallas Fed. Booth thinks the Fed is necessary, but only if people like her are running it.

A scary thought indeed.

“Damn Ron Paul,” writes Booth. “The congressman’s 2009 book End the Fed called the bank corrupt and unconstitutional and urged its abolition. Though Paul made some good points, America is not a banana republic. It needs a strong and independent central bank.”

She speaks as a former researcher at the Dallas Fed, and Fed Up is her Cliff’s Notes history of the central bank, an economic argument in between, and a memoir of her time on both Wall Street and in the bank’s employ.

Booth doesn’t succeed in making a case that the Fed is necessary. Precisely because we’re not a banana republic, we don’t need a central bank acting as lender of last resort to insolvent banks (solvent ones don’t need the Fed), regulator of the banking system (if Fed officials could reliably detect future trouble spots they wouldn’t work at the central bank), or as planner of an overnight borrowing rate that is a price like any other.

Though I’ve argued that the belief that the Fed is the source of myriad U.S. economic ills doesn’t stand up to basic scrutiny, neither does Booth’s argument that its existence is good for the economy, or that it’s necessary.

The Fed Is Useless

Much more than the Fed’s critics and supporters would like us to believe, the Fed quite simply isn’t that relevant. It deals with massively overregulated and antiquated banks that represent a small – and declining (15%) – percentage of total credit in the U.S. economy, not to mention that banks are easily the least dynamic source of credit for what is the most dynamic economy in the world.

As for the popular notion that the Fed creates credit, let’s be serious. The pursuit of credit isn’t the pursuit of dollars created by the Fed as much as it’s the pursuit of real resources like trucks, tractors, computers, desks, chairs, buildings, labor, etc. The Fed can’t create, increase, or shrink what borrowers of dollars are in need of as much as it can distort the direction of credit.

We’re talking about economists who believe, despite voluminous evidence, that economic growth causes inflation.

Booth thinks that the Fed is “the most important, powerful institution in the world,” but spends much of the book pointing to the incompetence of the economists in the middle and at the top of the central bank. Ok, but incompetence combined with world-leading power would logically signal a “banana republic” U.S. economy, as opposed to the world’s largest. If the Fed mattered and were as powerful as Booth presumes, the U.S. economy wouldn’t matter. But it does.

Booth’s story succeeds insofar as she provides nice tidbits of information throughout, but it’s overly self-regarding as a memoir, weak as a document meant to provide economic analysis, and then it makes grand statements throughout that are never proven. A book that is at times entertaining is unlikely to change the central-banking discussion one way or the other.

Economic Growth Does Not Cause Inflation

This analysis comes from a writer who wholeheartedly agrees with Booth that the Fed’s economists are impressive in their witlessness. We’re talking about economists who believe, despite voluminous evidence, that economic growth causes inflation. Booth references former British chancellor of the exchequer Geoffrey Howe’s brilliant assertion that an economist is a “man who knows 364 ways of making love but doesn’t know any women” to make her point that the economists in the Fed’s employ have lots of theories; theories bereft of practical reality.

She adds that Fed economists aren’t ever fired. So true. The Fed is a full employment act for insight-bereft individuals with PhDs next to their name, but that’s where she should stop. The problem is that Booth believes the Fed would make sense were its staffers more in touch with reality (presumably like her), if they’d ever worked in the private sector (as she has), if they ever watched CNBC (as she does with great regularity), and if copies of the Financial Times didn’t sit unread inside the walls of the central bank.

Again, she’s right about the incompetence at the Fed, but her belief that the right people could make the Fed useful amounts to a fatal conceit that doesn’t stand up to scrutiny any more than Paul’s view that the Fed is behind much of what weakens the U.S. economically. Why would anyone take seriously that which channels its influence through that which is dying (the U.S. banking system)? Booth has no answer, but in fairness to her, there’s no book and little media attention if she acknowledges that the Fed’s always overstated importance is in rapid decline.

As mentioned previously, Booth doesn’t lack in the self-regard department. Fed Up, while ostensibly a short story about America’s central bank in the 21st century, is very much Booth’s personal story. And as the author of her own story, Booth manages to always position herself on the right side of history; the seer extraordinaire whose vision and common sense causes her to see ‘around the corner’ in ways that would make her the envy of the world’s most skilled investors.

Why Is She Always Right?

Booth, ever eager to save a world blind to what was obvious to her, decided to “serve my country.”

While working on Wall Street from the late 90s to the early part of the 2000s, when excitement about internet stocks reached its peak, Booth writes that “I didn’t encourage my clients to ride the NASDAQ wave and never steered them into stuff that would have torpedoed their assets.” When presented with the option to purchase “unregulated” (Booth attacks the idea of deregulation as unwise throughout the book) CDOs for clients in January of 2001, the always ahead of the curve Booth, able to see the difference between “money good” and lousy debt security tranches within the CDOs, asked “Who would buy this crap?”

After leaving Wall Street for the Dallas Morning News, Booth reports that then Dallas Fed President Richard Fisher, seemingly wowed by her reporting, called to tell her “You should be writing for the Wall Street Journal. You could be a Jon Hilsenrath or Greg Ip.”  About the rush into housing in the 2000s, the always future-seeing Booth notes that “by August 2003, I was truly alarmed.” Fast-forward to 2006 as Booth references “two back-to-back columns I wrote in March 2006 about escalating systemic risk make it appear that I had psychic powers.”

With the Dallas Fed’s research head Harvey Rosenblum plainly blown away by Booth’s vision, her logical next step would be to join the Fed itself. As Booth describes it, Rosenblum “was reading my stories and saying, ‘My God, what if she’s right?’” Of course, Booth, ever eager to save a world blind to what was obvious to her, decided to “serve my country” by taking a job at the Fed’s Dallas branch in research.

And as readers can probably imagine, her departure from the Dallas Morning News naturally led to an “avalanche of e-mails from readers” praising her vision that “was humbling.” Even a former critic, the “Linoleum Lady,” had to admit that Booth was right about housing, but figure the world beyond Dallas awaited her insights since she, quite unlike anyone at the Fed (and most investors apparently, too), could see that “the worst financial crisis since the Great Depression was about to break over their heads…”

She Was Not Alone

About all this, no doubt Booth could produce the columns and diary entries revealing her uneasiness. But then she was hardly alone in the 2000s. Most any investor or columnist could point to all manner of client letters and opinion pieces (including this writer) indicating something amiss; the difference is that most don’t position themselves as seers in the way that Booth does. The bigger problem is that her economic analysis doesn’t stand up to what she claims to have known before those around her.

Figure that the Great Depression, despite the protests of Ben Bernanke and Booth (Booth writes of the Fed’s “mishandling of that tragic period”), was not financial. Lest we forget, the Fed’s rather slim mandate as of the 1930s was as lender of last resort to solvent banks with quality assets in need of near-term cash. The problem is that solvent banks in the 30s were just that.

The crises of the 30s and ’08 were a creation of government getting in the way of what was necessary for the U.S. economy to rebound.

If the Fed had acted in support of insolvent banks, it would have caused a greater “financial crisis” for the central bank by propping up what should have logically been allowed to fail. The banking system is weaker in modern times precisely because the Fed’s mandate changed to reflect the truth that solvent banks don’t need the Fed. It exists to aid those institutions that market lenders have properly left for dead.

The Fed’s non-action in the 30s was correct. The Fed couldn’t have boosted “money supply” in weakened areas even on its very best day. Money, and the resources exchangeable for money, always migrates to where there’s productivity and migrates away from where productivity is undetectable. No amount of Fed meddling can change that. Booth is peddling a commonly accepted, but logically false history about the Fed during the Great Depression.

Failure Is a Feature

Booth’s implicit assertion that the eventual failure of mortgage loans and banks caused a crisis is misguided. Failure is a feature of any capitalist system, not a bug. This goes for financial institutions as well. Despite what economists would like us to believe, banks and investment banks are hardly unique or sacred. They can fail and should be allowed to fail with the health of both sectors very much in mind.

A lack of failure, on the other hand, would be real economic “crisis” as it would signal horrid stagnation. Absent the allowance of errors that cause poor stewards of limited resources to be relieved of their ability to misuse them, life would be marked by unrelenting drudgery. Failure is as essential to progress as success is, simply because the former ensures that misallocated capital will be redirected in short order to a higher use.

Absent the intervention of central banks and governments in 2008 to blunt the impact of what was healthy, there quite simply is no crisis. The crises of the 30s and ’08 weren’t financial as much as they were a creation of government getting in the way of what was necessary for the U.S. economy to rebound.

Economies gain strength from periods of weakness, and the Great Depression, like the slow-growth aftermath of 2008, was a creation of government intervention. Recessions signal the boom on the way, but in both instances, legislators and central bankers (in ’08, not the 30s) wasted resources taken from the private sector to block the cleansing necessary for a raging rebound.

The problem is that Booth is convinced that bank failure is what caused 2008, as opposed to it being an effect of previous policy error. Her solution is more regulation. While she never supports her assertion midway through Fed Up that “shadow banking is what caused the financial crisis of 2008,” her vague and oft-stated solution is more government oversight. Seemingly lost on the author is that “shadow banking” is a logical effect of a financial and banking sector suffocated by the very regulation she deems wise.

Regulation Can’t Work

Booth wants to bring back a “modern-day version of the Glass-Steagall Act” given her view that regulators should “leave the gambling to the investment banks, and call it a day.” An empty proposal if there ever was one. If we ignore how much such a regulation would weaken U.S. banks forced to compete in a global economy with banks not shackled by what makes no sense, we can’t ignore that it wasn’t investment banking practices that caused banking’s troubles in the 2000s.

Interest rates from the Fed were a sideshow when it came to the 21st-century housing boom.

By her own admission, a rush of housing debt was the problem, but banks have always been a part of the housing loan market. Furthermore, and as banking history makes very clear, allegedly vanilla lending has time after time proven the industry’s Achilles Heel. Goodness, inside sources at the Fed have told me that the central bank has bailed out Citigroup alone five times in the last twenty-five years. The solution is more failure in a free marketplace, as opposed to symbolic moves like a modern Glass-Steagall that wouldn’t even be symbolic when we consider how it would suffocate banks already struggling to compete in a world of low margins.

Regarding the slow-growth rush into housing that preceded the eventual correction, Booth asserts that Alan Greenspan’s Fed “blew another bubble” with a low Fed funds rate that led to a housing boom. In Booth’s defense, her analysis is broadly shared by most in the economics commentariat despite it being easy to disprove.

What Caused the Boom?

Indeed, a read of Sebastian Mallaby’s mostly weak and misanalyzed biography of Greenspan reveals that interest rates from the Fed were a sideshow when it came to the 21st-century housing boom. Booth felt she was bringing unique knowledge to the Greenspan Fed about what it was doing, but as Mallaby makes clear, Greenspan had seen this housing boom movie before in the 1970s, and it had nothing to do with the Fed’s target rate meant to influence the cost of overnight lending.

Mallaby writes that when Greenspan returned from the Gerald Ford administration to his Townsend-Greenspan economic consultancy in 1977, employee Kathryn Eickhoff “had been telling clients that a hot housing market was driving consumer spending: people were taking out second mortgages on their homes and using the proceeds to remodel their kitchens or purchase new cars, turbocharging the economy.” So while Eickhoff’s belief that housing consumption could drive economic growth was as wrongheaded in the 1970s as it was in the 2000s, her research is yet another reminder that the Fed’s low-rate policies had little to do with the housing boom of more recent vintage. We know this because the Fed’s funds rate was soaring in the 70s.

Interesting about all this is that when initially told of what his employee had been reporting to clients, the empiricist in Greenspan grumbled that Eickhoff failed to “get the data” to prove her argument. Greenspan proceeded to gather up the numbers only to admit to Eickhoff that she “had absolutely no idea of the size of this phenomenon.” We’ve once again seen the housing froth movie of the 2000s before; albeit in the 1970s when the Fed was aggressively hiking rates.

Gilder’s Take

Indeed, further on in his re-telling of the late 70s that Greenspan plainly saw, Mallaby writes that despite the fact that “the Fed had just increased the short-term interest rate to 9 percent….mortgages were still easy to come by and house prices were booming.”  Mallaby adds on the same page that “One decade earlier [in the 60s], new mortgage creation had seldom exceeded $15 billion per year. Now six times that quantity was normal.” Later on, Mallaby noted that “home prices had nearly tripled during the 1970s.”

The dollar is once again a political concept, and the existence of a central bank is not required for it to be debased.

The money quote regularly used by this reviewer to reveal conventional wisdom about the Fed and housing vitality as wanting comes care of George Gilder. Observing the 70s housing boom alongside a soaring Fed funds rate much as Greenspan did in his 1981 book Wealth and Poverty, Gilder wrote “What happened was that citizens speculated on their homes…Not only did their houses tend to rise in value about 20 percent faster than the price index, but with their small equity exposure they could gain higher percentage returns than all the but the most phenomenally lucky shareholders.”

The 70s reveal popular arguments about the Fed’s role in the slow-growth housing rush of the 2000s as wildly false. Not only does consumption of housing shrink economic growth (the latter the principal flaw in the Townsend-Greenspan thesis which said housing consumption was a stimulant), it soars for reasons unrelated to the central bank’s rate target. Getting into specifics, hard assets do well during periods of currency weakness. The U.S. Treasury devalued the dollar in both the 70s and 2000s. So while the Fed employed interest rate policies in the 2000s that were the exact opposite of how it operated in the 70s, the result was the same. The Fed was and is largely a sideshow when it comes to housing health (or lack thereof) despite what we’re frequently told.

Volcker Revisionism

All of which brings us to the dollar question. Historically inflation has been viewed as a devaluation of any currency; gold often used (or stable fiat currencies) as the objective measure of the currency’s decline. About this, it’s commonly believed that the Fed controls the dollar’s exchange rate. So while towards the book’s end Booth embraces the false notion that economic growth and rising incomes cause inflation (“You cannot force inflation higher if incomes aren’t rising”), earlier she properly alludes to it as a monetary, dollar concept. Booth writes that Paul Volcker is “widely regarded as one of the best Fed Chairman in history because he vanquished double-digit inflation (created by Burns [Fed Chairman Arthur]) during the 1980s.”  The problem here is that history doesn’t support her admittedly popular contention. Indeed, as Burns’ diaries reveal rather plainly, he begged President Nixon and his top advisers to not sever the dollar’s link to gold; the latter an implicit devaluation that gave us the 1970s inflation wrongly associated with Burns.

Taking this further, Volcker took over at the Fed in 1979, only to begin a failed three-year monetarist experiment whereby an always inept Fed would presume to plan economic growth by virtue of it vainly trying to plan “money supply.” Volcker’s timing is instructive simply because the dollar price of gold sat at roughly $260 when he began his alleged “tight money” experiment only for the dollar to plummet; gold hitting a then all-time high of $875 in January of 1980.

More than Fed critics and supporters would ever like to admit, and beyond the fact that the dollar’s exchange value is not a Fed function, history is clear that currency devaluation, stability, or rising currency values are more than anything a political concept. Figure that the Fed opened its doors in 1913, and the dollar generally held its value until 1933 when FDR, against the protests of Fed Chairman Eugene Meyer, devalued the dollar from the 1/20th of a gold ounce to 1/33rd. Meyer resigned over FDR’s decision.

Nixon, as mentioned, devalued the dollar in 1971 despite the protests of Burns. Ronald Reagan ran on a strong dollar, and perhaps surprising to some, Bill Clinton’s Treasury was the most pro-dollar of any since the greenback was floated in ’71. The dollar sank in value in the 2000s (thus a housing boom that mirrored the one that took place in the weak-dollar 70s), but this didn’t reflect a change in Fed policy (Greenspan was still running the show) as much as the Bush administration made plain its preference for a weak dollar.

Debasing the Money

Wall Street has historically prospered precisely because credit is never cheap in the real world.

Nowadays Fed officials wrongly define inflation as too much growth, but if analyzed by its traditional definition of currency devaluation, the Fed’s inflation role since 1913 is greatly oversold. All that, plus there were substantial devaluations of the dollar in the 19th century despite the lack of a central bank. The dollar is once again a political concept, and the existence of a central bank is not required for it to be debased.

What about quantitative easing (QE) and a zero funds rate from the Fed? Booth takes the latter literally and suggests that in pushing the overnight borrowing rate down to zero, the Fed magically gave us “cheap money.” Supposedly this was especially great for “Wall Street” despite the fact that staffing in finance is still below 1990s levels; levels artificially higher today than they otherwise would be thanks to a surge in compliance officers within suffocated financial institutions.

Wall Street has historically prospered precisely because credit is never cheap in the real world. Booth fancies herself as in touch with reality, so the “cheap money” commentary signaled to this reviewer the excess influence of an editor eager to create an ‘us vs. them’ memoir. Again, in the real world credit is always difficult to attain.

In Hollywood, even the best movie producers have their requests for credit to make films turned down 90 percent of the time. In Silicon Valley credit is so expensive that start-up visionaries must give up a big portion of their business to venture capitalists in order to attain credit, only for them to give up even more of the business in the form of stock options to lure quality employees.

On Wall Street, investment bankers are paid well precisely because credit is so hard to find for even blue chip businesses. Goodness, even Apple, the most valuable company in the world, pays 3 percent to borrow. “Cheap money” is a fun concept, but it’s not real. This reviewer believes Booth intuitively knows the latter is true.

Is the Fed Fueling the Boom?

And perhaps unsurprisingly given her fairly conventional critique of the Fed, Booth promotes the popular notion that modern Fed policies “have fueled skyrocketing valuations across the full spectrum of asset classes.” Despite her correct analysis of a central bank populated by the inept, she asserts that monetary engineering by these same incompetents tricked the most sophisticated investors in the world (according to Booth, the common investor is out of the market thanks to the ‘little guy’ having been tricked too many times) into an “increasingly desperate search for yield.” Booth ultimately concludes that “As long as the Fed kept its QE machine up and running, the markets were pleased.” In Booth’s defense yet again, what she writes about the markets is what is regularly asserted. But is it true? A basic analysis says no.

According to Booth, thanks to quantitative easing “investors would party, under the assumption that the Fed had their backs.” Somehow a collection of witless economists channeling the Fed’s influence through anachronistic banks could stimulate an impressive, 200%+ rally? Let’s unpack this.

If what Booth writes is true, why is the Japanese stock market still half of what it was in the late 1980s despite at least eleven doses of QE by the Bank of Japan (BOJ) ever since? Booth might reply that low-interest rates made the U.S. rally inevitable, but Japan’s story stands in the way of what makes little sense in the first place. Figure that the BOJ was at zero for years and years, Japanese rates across the yield curve were much lower than they were in the U.S., but with no corresponding equity rally. Ok, but with rates on Treasuries and high-grade corporates so low, doesn’t logic dictate a rush into equities and a “desperate search for yield”?

The Fed robbed us of what would have been a much bigger market rally had it simply done nothing.

It’s a nice theory, but if true then it’s also true that there would have been a correction in Treasuries and high-grade corporates to reflect a rotation out of low-yielding bonds and into stocks. But it never occurred; the major correction occurred years into the rally, and after the election of Donald Trump. But wasn’t the Fed printing trillions that had to find a home? There’s debate about the latter, but even if true, for $4 trillion to enter the stock market, $4 trillion must exit by definition. For every buyer there’s a seller, so for every QE optimistic buyer to express that optimism, a QE skeptic must be able to express an equal amount of pessimism.

But the main truth that Booth’s commonly stated argument ignores is that just as economies gain essential strength from periods of weakness when bad ideas, bad habits, bad investments and bad businesses are cleansed from the economy on the way to a rebound, so is this true with equity markets. It’s when markets are correcting that investors are starving bad and marginal companies of investment, only to direct precious resources to better companies.

In short, even if Booth’s widely shared theory is true, it only serves to remind us that by acting at all the Fed robbed us of what would have been a much bigger market rally had it simply done nothing. Of course, the QE/market theory isn’t true, and even Booth alludes to it. As she notes on p. 160 of Fed Up, “The Fed was following the Bank of Japan into territory that, so far, hadn’t worked for them.”

Well, of course it didn’t. Not only is the power of central banks vastly overrated, even if they could artificially create equity rallies the damage would be fairly immediate owing to massive amounts of precious capital remaining lodged in the hands of the imprudent. Investors would correct what is economically harmful in short order.

Not Entirely Without Merit

So while there’s much to criticize about Fed Up, Booth tells an interesting story. Her writing is entertaining, if at times a little (“I felt a knot as big as one of my Italian grandmother’s meatballs lodged in my gut”) over the top and profane. Readers will find lots of good information if they’re willing to look.

For instance, the “$10 bill has the shortest life span, surviving only a little over 4.5 years before it must be replaced.” $100 bills, according to Booth, last over 15 years, while coins stay in circulation for decades.

Booth has unearthed a letter “published in the Times of London on March 30, 1981, signed by 364 prominent economists, [which] predicted that Margaret Thatcher’s stringent fiscal policies would be disastrous.”! This reader will be using that gem for years and years!

While each resists the notion that they were bailed out, Booth notes that Morgan Stanley and Goldman Sachs both regularly borrowed from the Fed from March of 2008 to March of 2009. It seems Morgan Stanley borrowed overnight 212 times, while Goldman did so 84 times for a total of $600 billion.

Yellen the Ridiculous

And then her various quotes from Janet Yellen are positively priceless. There are too many to list, but in 2007 Yellen, the allegedly great forecaster, said, “I think the prospects for a really serious housing collapse that spreads to consumer spending have diminished substantially.”

Are the hotel companies blind to the economic chances of the millennials in ways that Booth isn’t?

Booth rightly has little respect for Yellen, and about the Fed Chairman, she also unearths the sad truth that Yellen and her husband (Nobel Laureate George Akerlof) generally agree on everything economic. This alone is terrifying for anyone who has ever read the 2015 book Akerlof co-authored with Robert Shiller, Phishing for Phools. It would be hard to find a greater modern indictment of the economics profession than this insight-free, most worthless of books.

Can the Fed Unfreeze the Frozen?

Of course, all of this speaks to the broad truth glossed over by Booth that, while the Fed is once again staffed with economists who aren’t in any way troubled by common sense, they don’t have that much power. If they did, the U.S. economy would be a basket case. But Booth is convinced that the U.S. economy is a basket case despite the fact that more of the world’s plenty is directed to the U.S. than any other country.

That the latter is true, that the businesses of the world fight aggressively to attain U.S. market share, calls into question Booth’s Trumpian argument about carnage, but she spends the early part of the book vainly painting a picture of Dickensian American suffering that’s belied by the incessant desire of the world’s poorest to get to the United States. For Booth to be correct about American economic agony, the rest of the world must be stupid. This is doubtful. But that’s her take. Her economic analysis does Fed Up no favors.

According to Booth, the Fed has the U.S. economy “frozen in motion.” Really? The Fed that deals with banks which by her own admission are being worked around by the “shadow banking” system? If frozen in motion, why does the world continue to ship us so much? Booth can suggest “cheap money,” but according to her, only Wall Street has access to the Fed’s “cheap money.”

Booth writes that the Fed’s “high interest rates in the 1980s killed” Erie, PA’s “steel and auto industries.” Ok, but in the first third of the 20th century, New York City and Los Angeles ranked 1st and 4th in the U.S. as manufacturing locales. They’re not anymore, but are they both poor like Erie? Did the Fed have it in solely for the formerly robust Pennsylvania town, or are Erie’s troubles unrelated to the Fed and more a function of a town that didn’t evolve as others did?

Booth laments the situation of millennials apparently made worse by the Fed and writes that “Nearly half of males and 36 percent of females age eighteen to thirty-four live with their parents, the highest level since the 1940s.” Interesting stuff, but last this reviewer read, every major hotel chain is starting up all new brands to appeal to millennial tastes. Are the hotel companies blind to the economic chances of the millennials in ways that Booth isn’t?

The Fed once again deals with banks, but banks are increasingly losing market share in the mortgage market. Despite this truth, Booth claims that Fed machinations are “killing the move-up housing market.” Long-term investment? According to Booth, the all-powerful Fed has “pulled the plug.” The latter might interest investors in Silicon Valley who regularly back start-ups that history says have a 90 percent chance of failure.

The Fed Can’t Manage Anything

All of her economic analysis speaks to the biggest problem with Fed Up: nearly every word written by her about the central bank reveals a presumption that it’s the Fed’s job to manage the economy. But it’s not. Thank goodness it’s not. And Booth knows why. The economists at the Fed wouldn’t have a clue about how to manage anything, but the greater point is that no human, or collection of humans, could manage the economy. That this includes the plainly talented and world-wise Booth should in no way be construed as an insult to the author.

It’s likely true that Booth can run circles around Fed economists when it comes to common sense, but as a human being, she’s still fallible.

Still, as mentioned at this review’s beginning, Booth doesn’t call for ending what serves no useful purpose. Booth thinks the Fed necessary. Because she does, her reform solution is that the Fed should get a spending increase from Congress in order to “Hire brilliant people” (presumably like her) to run it. In proposing this, Booth reveals that she learned less than she thinks during her time at the Fed.

By her analysis the Fed’s problem is that there aren’t enough people from the real world in its employ, but as former trader Nick Kokonas (firmly entrenched in the real world as an owner of numerous restaurants helmed by master chef Grant Achatz) explained about trading in a 2012 book he co-authored with Achatz (Life, On the Line), “If you are good, 49 percent of your decisions will be wrong. Even if you are great, something just short of a majority will be losers.”  

Kokonas helpfully revealed that even the truly talented err with great frequency. This basic truth has seemingly eluded Booth on the way to the mistaken belief that what makes no sense can be fixed through reforms of her liking. No. Contrary to what Booth believes, the Fed’s problem isn’t about personnel as much as the fact interventions in the natural workings of the marketplace never work.

Better Off Without

It’s likely true that Booth can run circles around Fed economists when it comes to common sense, but as a human being, she’s still fallible. So is everyone. In the real world, we’re wrong all the time. What it comes down to is that the Fed’s problem is not the people as much as the problem is intervention itself by the humans who staff the central bank. Though the Fed’s power is thankfully overstated, what Booth misses is that we don’t need the Fed at all. We’d be better off without it, but somehow that lesson didn’t sink in during her decade on the inside.

Early in Fed Up, but just after she’d begun working at the Dallas Fed, Booth expressed surprise about Wall Street fascination with the Federal Reserve. She asked herself “Did they know people on the FOMC were mere mortals?” That’s how she might have been advised to end her book. These people are mortals, highly fallible ones at that. But so is Danielle DiMartino Booth mortal. Reform of the Fed won’t alter this reality, and it won’t alter the truth that no matter who is in charge, the Fed’s existence will never add to the economy, but it may sometimes bring damage to it.

  • John Tamny is Director of the Center for Economic Freedom at FreedomWorks, a senior economic adviser to Toreador Research & Trading, and editor of RealClearMarkets.