need to know about economics, for the purposes of this chapter Uber’s genius will be used to explain credit.
When my wife and her friends realized that the lines for the Metro were too long, and cabs nonexistent, they tapped their Uber apps. They were soon relieved to find that Uber drivers were in the area and available within minutes. However, an Uber ride that night would cost its passengers 3.6 times the rate the company normally charged. Did my wife and her friends turn off their phones in disgust and delete the app because Uber was charging them so much during a time of need? No. They rejoiced.
Despite Uber’s implementation of “surge pricing,” my wife and her friends eagerly tapped on SET PICKUP LOCATION. A driver was there within minutes to take them home. They happily paid $34.03 for transportation that on a normal night would have cost $9.45.
Uber’s surge pricing is a worthy metaphor for interest rates. Uber “gouged” my wife and her girlfriends that night, but they were only too happy to be gouged. The other option was to wait potentially hours to get home. They valued their time and a good night’s sleep far more than the $34.03 fare they ultimately paid to arrive home at a reasonable hour.
From simplicity genius often springs, and it certainly has with regard to Uber. While the Federal Reserve employs thousands of well-credentialed economists with doctorates from the best schools in order to divine the interest rate it naively presumes to set, Kalanick’s app has ably revealed that the expensively dressed Fed truly has no clothes. It’s no reach to say that the economists in the Fed’s employ have IQS that render them among the smartest people in the world. Yet, even the brightest people with the best computers and models at their disposal are not smarter than the market itself. Neither one genius nor a collection of geniuses could ever properly process the infinite decisions occurring in the marketplace every millisecond.
Kalanick’s intuitive understanding of this truth is the basis of Uber’s immense global popularity. Fully aware of the tautology that there are only buyers as long as there are sellers, Uber ensures that its customers will be able to purchase transportation when they need it most by virtue of it placating the seller, too. Surge pricing is the company’s way of luring drivers onto the road, and into the most nightmarish of conditions (rain, snow, after a Taylor Swift concert), so that it can serve its customers.
More to the point, Uber achieves an “easy” supply of drivers for its customers not by making their services cheap but by doing the exact opposite. Pricing is once again the free market’s way of regulating the supply of the resources we deem credit. High prices—on New Year’s Eve pricing from Uber has been known to “surge” to more than nine times its normal fare—are at times what ensure the existence of a market good that is in high demand.
Contrasting this with the Fed, economists with highly impressive resumes regularly commentate and opine on when the Fed will “hike” interest rates, and when the Fed will “ease.” Fed officials lap up all the attention from the various forms of business media about what their next move will be.
Even more amusing, and disturbing at the same time, is that right when credit is needed most, when the economy is most imperiled, or when the nightmarish scrum equivalent of the aftermath of a Taylor Swift concert is upon us, the Fed’s alleged wise minds almost reflexively “cut” interest rates. If Uber did as the Fed does vis-à-vis savers (for someone to borrow, someone else must first save), if it scoffed at the needs of its drivers during the periods of highest passenger demand, drivers would never be available when they were most needed for Uber’s customers.
What all of this hand-wringing and speculation about price-fixing from the Fed should signal to readers is that intelligence and common sense aren’t one and the same. Can these bright economists and Fed officials really be so dim? Can they honestly claim their meddling with the price of access to the economy’s resources actually achieves something positive for the economy in terms of broadly available credit? For those who’ve long bought into the obnoxious conceit that is the Federal Reserve, to answer this question in the affirmative seems rather dishonest.
As the story of Uber signals rather plainly, plentiful access to resources (credit) is a clear function of the price of resources that reflect the infinite wants and needs of those actually participating in the markets, including those who have access to those resources. Uber succeeds by virtue of allowing the price of its service to fluctuate such that the needs of both its customers and its drivers are met.
Fed officials cannot make a similar claim. The Federal Reserve’s meddling with the price of credit at best restrains credit’s availability, and at worst, as the book will reveal, destroys it with abandon. Luckily the Fed’s relevance in what still remains a market economy continues to decline. Imagine how badly off we’d all be if the Fed were the sole source of credit, or for the purposes of the next several chapters, if its rate setting truly dictated credit costs. Thankfully neither is the case.
Jim Harbaugh, Urban Meyer, and Pete Carroll Would Never Need an Easy Fed
You are what your record says you are.
—Hall of Fame NFL coach Bill Parcells
IF YOU FOLLOW college football and basketball with any kind of intensity, odds are you have the Rivals.com website bookmarked. Absent talent, teams can go only so far, and Rivals chronicles the recruiting of that talent. Just as entrepreneurs and corporations in pursuit of profits aggressively seek the best engineers, salespeople, and administrators, so too do coaches travel far and wide each year in search of the players necessary to field great teams.
Labor itself is a form of credit, and realistically it’s the most important form. When CEOs seek monetary “credit” to start or expand a business, they’re often borrowing access to labor. College coaches do much the same. The individuals on the field whom they recruit are their ultimate resource.
Applied to college sports, coaches are offering prospective student athletes a free college education along with room and board, a university name they can carry around for life, and, depending on the player, use of the school’s resources to boost their chances of playing professionally in the future. College football and basketball recruiting is very much a credit story.
To help rabid fans develop a better sense of which players are the most desirable, Rivals employs a team of analysts that watches hours of player tape. The analysts also visit high schools nationwide, interview coaches, and generally do everything possible to put a grade on the best players available. The most desirable recruits for teams are the few athletes graded as 5-Star by Rivals. These are the players seen as most likely to thrive on the collegiate level. 4-Star recruits are similarly much coveted. 3-Star athletes are slightly less desirable. You get the picture.
In addition to player rankings, Rivals calculates team rankings on a points basis. 5-Star recruits logically generate the most points, and consequently it’s usually the teams who can sign the most 5-Star players that win the annual Rivals recruiting championship. In 2015, the USC Trojans won the national recruiting title after then head coach Steve Sarkisian and his staff scored some late 5-Star commitments.1
National Signing Day for college football recruits falls on the first Wednesday of February every year. Going back two months before signing day in 2015, the University of Michigan fired head coach Brady Hoke after an ugly 5-7 season.2 5-7 records don’t cut it for Wolverine fans used to spending New Year’s Day in Pasadena, California, at the Rose Bowl. But what made Hoke’s dismissal even more likely was the outlook for Michigan recruiting. According to the Rivals team rankings as of early December 2014, Michigan’s 2015 class ranked 96th. Fresno State was one spot behind the University of Michigan at 97th, while Toledo, Army, and even