Silicon Valley’s Boom As a Consequence of an ‘Easy’ Fed Is ‘You Didn’t Build That,’ Right-Wing Edition

For businesses and business sectors to succeed, they need “cheap, easy access to capital.” Those are the words of Manhattan Institute senior fellow Allison Schrager in a City Journal piece written about Silicon Valley’s ascent. Schrager asserts that the “easy money” flowing into the Valley ceased with the Federal Reserve’s rate hikes, at which point she’s eager to re-imagine northern California’s future in the aftermath of a supposedly accommodative central bank. Schrager is not alone.

The Wall Street Journal’s editorial page has said much the same in recent years. Supposedly all the frenzied activity in the crypto space and in technology more broadly (think hundreds and hundreds of “unicorns”) had a central bank benefactor. It’s a popular view, but there’s arguably another way of looking at what’s taken place. The view here is Schrager and the world’s most important editorial page are in so many words suggesting “you didn’t build that,” all the while expecting readers to believe that the Fed, seemingly for being the Fed, can run roughshod over ironclad laws of economics. Which is why readers should be skeptical.

To begin, it’s useful to ask why businesses and individuals borrow. It’s not to lovingly caress money as much as it’s to attain access to what money can be exchanged for. Think resources (including human) necessary to grow. And since no one would borrow money just to borrow it, it’s not unreasonable to assert that “low” or “easy” rates of interest aren’t born of decrees by central bankers as much as they’re a consequence of production. Indeed, credit availability logically mirrors production, not Fed decrees. The Fed produces nothing in the way of resources, and by extension it lacks any power to make money “easy” just by fiddling with rates at which banks lend to each other.

Speaking of the banks that the Fed projects its well overstated influence through, they don’t factor in Silicon Valley’s prosperity. And Silicon Valley Bank shows us why. The latter was where VCs, VC-funded companies, and liquidity-event recipients parked their money after accessing incredibly expensive capital. In other words, whether decreed by the Fed or actual market participants, lending rates don’t have anything to do with Valley funding despite what Schrager and the Journal editorial page report. Capital is so expensive in Silicon Valley that 1,000% rates of interest would appear cheap by comparison. That is so because per the Wall Street Journal’s very own Andy Kessler, something north of 90% of businesses funded out there fail.

Still, let’s assume for fun that the Fed’s decrees actually had teeth. If so, logic dictates that money would be the opposite of “easy.” We know this because artificial price controls placed on, for instance, apartments, result in scarcity of same. Which means that to believe the “easy money” narrative, we have to believe the Fed not constrained by accepted laws of economics.

From there, we’d then have to believe the Fed so powerful that it doesn’t just turn its nose up to basic economic laws, it’s also impervious to the most powerful force in investing: the genius of compound returns. The power of the latter is staggering, and it’s what informed Warren Buffett’s certitude at an early age that he would someday be very rich. But to believe the Fed narrative, people with last names like Bernanke, Yellen and Powell can cause those with title to money to blithely ignore compounding in favor of doling out funds in near “costless” fashion.

Economic laws and powerful investment truths aside, Schrager wonders how Silicon Valley can “remake itself” when “rising interest rates” and “the end of easy money threaten the tech mecca’s current model.” The Journal’s editorial page wonders much the same as evidenced by its routine assertion that an “easy” Fed created the frothy environment that brought us to where we are. This is interesting, and it is mainly because similar things were bruited by the scolding and skeptical in the 2000s. Which is the point, or should be.

Even if it’s true (it’s not) that “easy money” funded the internet boom, would anyone give back all the brilliant advances that emerged from that era? Put another way, how many readers who nod along to Schrager opinion pieces and Journal editorials would give up AmazonAMZN
, WiFi, and smartphones just to avoid the 2001 bust?

Please keep this in mind with the “easy money” as the cause of today’s troubles narrative of today top of mind. Even if the analysis is true, who among us would willingly give up what’s ahead just to avoid any near-term carnage? Tick tock, tick tock.

If honest, most would demand that the Fed always be “easy” if it could be, not to mention how central banks around the world would do the same. Except that they can’t. And they can’t because money is never easy, nor is it dumb as the present analysis suggests. To say otherwise is for the Right to assert that “you didn’t build that,” but the Fed did.