The Social Reconstruction of Money
June 9, 2018 1:45 PM   Subscribe

Treat money as the public good it is (pdf) - "The Swiss will vote on a proposal that, if passed, would transform the economy even more radically than UBI would have done."
The so-called “Vollgeld” or “sovereign money” initiative — covered at length by my colleague Ralph Atkins — aims to require private banks to back clients’ deposits fully with central bank reserves. Put differently, they would abolish the fractional reserve banking practised virtually everywhere, under which private banks can create deposits when they issue loans over and above the cash, currency and reserves with the central bank that they possess in assets.

The Vollgeld promoters are right about two big things. The first is that in a fractional reserve system, the amount of money circulating in an economy is largely determined by private banks and their decentralised, profit-maximising decisions about how much to lend. The broad money supply consists almost wholly of bank deposits created ex nihilo by private institutions, rather than government-issued money. Just making more people realise this is itself a benefit of the referendum campaign. (Free Lunch has described this phenomenon in our analysis of the Bank of England paper that remains the best explanation of how money is created by banks.)

The second is that if we had to design a system for managing the economy’s money supply from scratch we would never opt for what we have today. A stable and appropriate size of the money supply is a deeply important public good. It is a public good in the general sense that the government is rightly held responsible for it; but it is also a public good in the technical economic sense in that it has properties which mean it will not be adequately provided by privatised free markets. Suffice to note that profit-maximising private banks have an incentive to expand lending when money supply growth is already too high and retrench when monetary stimulus is most needed. In other words, they create credit cycles. They also have no incentive to take into account the effect their money creation has on others.

Full reserve backing — essentially nationalising the money supply — must in principle be superior, at the very least because it would give central banks more tools to manage the economy. Central banks today determine the amount of “base money” (cash and central bank reserves) but have no direct control over “broad money” — what we use to pay for goods and services in real economic transactions. Having such control would allow them to both keep doing what they do at the moment (target interest rates or using more unconventional tools such as securities buying) and to try bolder monetary instruments such as directly managing the amount of broad money in circulation or issuing “helicopter money”. And in a crisis, banks would no longer be endangered by deposit runs, since deposits would be fully backed by the central bank.
Radical reform: Switzerland to vote on banking overhaul - "Our view is that money is a public good and it is right that there should be a macroeconomic perspective. A commercial bank has a very narrow perspective — namely, to make money."

Why the Swiss should vote for 'Vollgeld' - "Martin Wolf endorses the Swiss sovereign money (Vollgeld) Initiative."
The obvious possibility is to use the money to finance the government. This idea is highly objectionable to some: it would surely create big challenges. Yet those challenges are nothing like as fundamental as was transferring responsibility for a core attribute of the state — the creation of sound money — to a favoured set of profit-seeking private businesses, co-ordinated by a price-setting government institution, the central bank. In no other economic area is public power so mixed with private interests. Familiarity with this arrangement cannot make it less undesirable. Nor can familiarity with its performance.

There are many other ideas in this broad area that seem worth pursuing. One would be to allow every citizen to hold an account directly at the central bank. The technological reasons for branch banking are, after all, perishing quickly. Nicholas Gruen, an Australian economist, has argued that no private institution should have better access to the public’s central bank than the public itself does.
All the people's money: Central banks should consider offering accounts to everyone - "We might lose the fiction that banks are private entities funded by customer-investors. As demand deposits migrate to the central bank, state finance of modern banking systems could become explicit rather than tacit."
Central banks deal in two sorts of currency: cash, which anyone can hold, and digital money, accessible only to financial institutions through their accounts at the central bank. Individuals hoping to spend digital money must use a bank card or transfer (or a service, like Apple Pay, linked to a bank account), or a private crypto-currency such as bitcoin or Ethereum. Some central banks are considering whether and how to expand the use of their own digital money. Sweden’s Riksbank, for example, is exploring ways to create a widely used e-krona. In June Swiss voters will participate in a referendum on a radical monetary reform, one effect of which would be to give individuals access to digital money at the Swiss National Bank (SNB). The main difficulty central banks face is how to facilitate the circulation of digital currency without routing everything through banks, as happens today...

A “public option” for banking ought to improve private banks’ behaviour, too. To keep their deposits, they would need to offer useful services and competitive rates, rather than hidden fees. Guaranteed access to a simple, interest-paying savings vehicle, and to electronic money, could be a boon for the world’s underbanked poor. And though it need not, such accounts could represent a first step away from deposit-financing of bank lending: a reform favoured by some economists and regulators.
"There will come a point when comprehension that offering digital accounts with the central bank is possible becomes widespread. Then, the discussion about whether it should do so may change gear somewhat." --Tony Yates (2017)

also btw...
  • Visa glitch shows it is high time for digital cash - "Arguments for central bank electronic money also support full-reserve bank reforms."
  • Critiquing the Carney critique of central bank digital currency - "Digital currency updates the cash model by introducing a wonderful new invention: the ability to adjust the interest rate on cash."
  • Fiatsplainin' - "Although the modern dollar is a 'fiat' currency, not backed by any other asset, like gold, its value is ultimately backed by the fact that the U.S. government will accept it, in fact demands it, in payment for taxes. Its purchasing power is also stabilized by the Federal Reserve, which will reduce the outstanding supply of dollars if inflation runs too high, increase that supply to prevent deflation."
  • More fiatsplainin': let's play fiat-or-not - "We don't need gobbledygook like fiat. The term carries too much baggage. Let's select a more precise set of words, then apply them to the real world in order to understand what our monetary systems were like, how they are now, and where we are going."
  • Hyperledger fabric: a distributed operating system for permissioned blockchains - "Fabric is a distributed operating system for permissioned blockchains that executes distributed applications written in general purpose programming languages (e.g., Go, Java, Node.js). It securely tracks its execution history in an append-only replicated ledger data structure and has no cryptocurrency built in."
  • RChain - "A distributed computing infrastructure based on the reflective higher-order π-calculus, the ρ-calculus."
posted by kliuless (34 comments total) 63 users marked this as a favorite
 
So...hyperledger is a Cassandra Database?
posted by nikaspark at 2:14 PM on June 9 [2 favorites]


Hyperledger is IBM's permissioned blockchain architecture. The bold is 'cause that's the important term here.

A permissioned blockchain is kinda like Bitcoin, but instead of no one knowing who all writes to it, and having a proof-of-work system to pick who validates transactions by lottery, there's a members list (thus 'permissioned') and transaction validation is done by Byzantine Agreement (just imagine it as a parliament-style thing where nodes vote to see if a transaction should be accepted or not - supermajority required).

Permissioned blockchains have a lot of potential, to be honest. I'm not going to comment on using them for financial transactions, though.
posted by Quackles at 2:59 PM on June 9 [3 favorites]


Abandoning the fractional reserve system is a Very Bad Idea. Let's not sugarcoat these fever-dreams of neofeudalism that come dressed up as the gold standard, deflationary currencies (all proof-of-work instances of blockchain, though I think the jury is out on proof-of-stake iterations), and, the lede of this article, full-reserve banking.

There are a lot of good ways to restrain stupid profit-chasing in the banking industry. They all start with an R and end in EGULATION.
posted by tclark at 3:29 PM on June 9 [35 favorites]


Yeah this idea is kind of nuts. Making credit less and less available but maintaining a capitalist mode of production only ensures that wealth will more rapidly accumulate in the hands of those who already have it, because only they will be in the position to lend it out for interest. The wealthy will lend to the wealthy and nobody else will have access to the debt necessary to take the kind of big risk that, when it pays off, raises a person from one class to another. It's already the case that there is very little class mobility, but a system without easy credit is one in which there will be no class mobility at all.
posted by dis_integration at 4:11 PM on June 9 [5 favorites]


(placeholder for longish screed about Switzerland's insanity and blindspots. I mean Cheeto is the preznit, I'm off base ranting about another country I have significant feelings for)
posted by mwhybark at 4:44 PM on June 9 [1 favorite]


You can have a bank account that is not used towards fractional-reserve banking if you really want.

It's called a safe deposit box.
posted by Hatashran at 6:21 PM on June 9 [4 favorites]


I hope this thread engenders some more conversation. I always enjoy it when Mefites who know about economics and finance get opinionated. Be sure to drop links and references if things get spicy, will happily trawl through them later.
posted by Telf at 7:41 PM on June 9 [7 favorites]


Abandoning the fractional reserve system is a Very Bad Idea.

Yes.

These sorts of pieces are always really weird to me because it's unclear why it's the case that the problem with monetary policy is missing levers vs not pulling the existing ones in a good way - I don't think the problem is so much that central banks can't achieve their policy targets as that they have bad targets. 2% (or 0 if you're the Bundesbank) inflation is too low a target - and a left monetarily policy might say that the relevant basket to measure inflation relative to is the net (production (ie wages) - consumption) of some representative household. But neither of these seem to obviously require more than the existing policy instruments.
posted by PMdixon at 8:23 PM on June 9 [5 favorites]


I see some people here commenting obviously without having read the links in kliuless’s brilliant-as-usual post.

Abolishing the fractional reserve system has nothing to do with the gold standard or the merit of deflationary currencies, those are completely separate things.

It means money creation is controlled by the government rather than private banks. That’s it.
posted by moorooka at 9:30 PM on June 9 [5 favorites]


I was in Zurich a few days ago and the amount of construction going on in the city is astounding.

Think multiple kilometers-long construction sites of 10-20 story buildings going up.

And every other building campus seems to be a major consulting firm.

Zurich from my eyes looks like the seat of neoliberal capitalism on full display right now. I can well imagine this vote is in some way reflective of the ground situation, because what I saw looked like speculative construction running frighteningly out of control.
posted by nikaspark at 9:34 PM on June 9 [2 favorites]


speculative construction running frighteningly out of control

I thought that was Vancouver.

here's a free tip to all you capitalists out there. If you want your system to survive, keep yrrr vile fucking paws out of essential needs and services. In other words, stop commoditising homes and health care, and food for that matter. We will eat you if we need to.
posted by philip-random at 11:37 PM on June 9 [8 favorites]


Abandoning the fractional reserve system is a Very Bad Idea.

This is a question not a comment, if commercial banks are free to borrow money at very low interest rates from the reserve bank, and these rates are set at whatever level results in appropriate money supply and sustainable banks, how will full reserve really be significantly different from fractional reserve? Won't the total interest paid by the banks actually end up being an equivalent amount, calculated from a lower rate on higher amount of borrowing? Won't base money just end up expanding to be equal to current broad money?
posted by compound eye at 2:38 AM on June 10 [4 favorites]


Not to address the Swiss proposal specifically but rather the more general idea; I see the key difference being that private banks would lose the privilege of intermediating between the central bank and the rest of society, and the extension of loans/money/credit (including toward public expenditures) would no longer be contingent on the pecuniary interests of a concentrated sector of private fund-managers.
posted by moorooka at 4:38 AM on June 10 [4 favorites]


I don't know about the whole non-reserve thing, but public banks of the sort described would help control the ceiling on the cost of money to consumers. I feel like there was a thread about postal banks in a similar context a while back.
posted by snuffleupagus at 5:09 AM on June 10 [1 favorite]


IANAE but it seems to me that restricting the number of credit-expanding (and thus "money creating") institutions to 1 (a central bank) instead of a handful (the banking oligopoly) is exactly the opposite of what a "democratize money" movement would want.

Why not vastly expand the seigniorage privilege so that ordinary citizens can make loans on fractional reserve? Let Hans, who has $5k in his retirement account, loan his friend Hilda $7k for a used car. He knows her as well as any bank and knows she can pay it pack. Make sure there are limits on the amount of interest he can charge to some small multiple of the prime rate.

If we don't want to let everyone in on it, then make it dead easy: anyone with a "banking" endorsement on their drivers license, which they can get after passing a written exam at the DMV.

My point is that fewer entities expanding the credit supply is probably worse for people who don't already have easy access to capital through friend or family networks. Even just doing regular antitrust breakups of big banks would seem (to me, having no Economics education) to be better for the average working stiff than centralizing it all.

That said, I do like the sound of schemes like postal banking that essentially let the government step into the retail banking sector as just another competitor, effectively putting a floor on how awful the private banks can be. Let anyone open an account at the Fed and get the prime rate. Force the commercial banks to offer some kind of service above and beyond collecting a rake by renting money cheap and lending it our dear.
posted by LiteOpera at 7:05 AM on June 10 [4 favorites]


The link to the Bank of England paper on money creation in the first post seems to be dead, but here's another link that should work. I haven't finished reading it, but it's really interesting if you don't actually understand how money's created.
posted by repute at 8:20 AM on June 10 [2 favorites]


At first reading through this my brain wanted to categorize it as the Swiss version of the “Abolish the Fed” gold standard people. It took a disturbingly long time for me to process that this is basically the exact opposite idea.
posted by vogon_poet at 9:09 AM on June 10 [4 favorites]


IANAE but it seems to me that restricting the number of credit-expanding (and thus "money creating") institutions to 1 (a central bank) instead of a handful (the banking oligopoly) is exactly the opposite of what a "democratize money" movement would want.

If the banking oligopoly isn't accountable to the people, and the central bank is democratically accountable, then having only the central bank be able to create money does in fact democratize money.

Creating more actors that aren't democratically accountable, by contrast, decreases the extent to which money can be said to be democratized.

Of course, you might think that these newly-minted "banks" will still be accountable to regulations, but that's just tclark's point again.
posted by kenko at 9:55 AM on June 10 [3 favorites]




Banks are not intermediaries of loanable funds — and why this matters

Every time I try to sit down and read one of these papers I feel like they're simply describing a mirror image of reality--nothing has changed, only your perspective. As best I can tell, their point is that money is created a tiny bit faster than you think, because they'll hold onto your loan for a bit until you spend it.
posted by pwnguin at 10:00 AM on June 10


Let Hans, who has $5k in his retirement account, loan his friend Hilda $7k for a used car.

You appear to be proposing negative reserve banking, instead of fractional reserve.
posted by pwnguin at 10:03 AM on June 10 [2 favorites]


If the banking oligopoly isn't accountable to the people, and the central bank is democratically accountable, then having only the central bank be able to create money does in fact democratize money.

I think it's worth reading Lords of Finance to observe the kind of stumbling and flailing that went on during the gold-standard period, when the central bank did have much tighter control over the money supply.
posted by praemunire at 12:27 PM on June 10 [4 favorites]


You appear to be proposing negative reserve banking, instead of fractional reserve.


Maybe I misunderstand how the term is used (like I said, IANAE).

After the loan, Hans will have $12k in assets: $5k in his retirement account and a $7k loan to Hilda. He therefore has ~42% of his assets in reserves, much higher than is required of most "real" banks.
posted by LiteOpera at 1:07 PM on June 10


Obligatory reading: interfludity post on the complexity of finance.

This is a really complex question. It's obvious to anyone who is paying attention that excessive/easy debt is choking most Western countries. This is true at both the governmental and the individual level. So there is some intuitive appeal to any proposal which would help to make the true risks of lending a bit more transparent.

To me, the appeal of narrow banking plans (like Vollgeld or the Chicago Plan) is that it makes it a little easier for people to see the truth of the matter: oversimplifying, the taxpayer is ultimately on the hook for all of that "easy credit" we're currently enjoying. (Through FDIC insurance, TBTF implicit subsidization, and Fannie Mae/Freddie Mac). When the credit crunch comes, and loan defaults start increasing, it's not clear that governments will have the financial strength to absorb that risk without severe financial consequences for the country. (And by the way, if it's somehow not the taxpayer, who is it? To a first approximation: your pension or retirement fund).

Making credit less and less available but maintaining a capitalist mode of production only ensures that wealth will more rapidly accumulate in the hands of those who already have it, because only they will be in the position to lend it out for interest. The wealthy will lend to the wealthy and nobody else will have access to the debt necessary to take the kind of big risk that, when it pays off, raises a person from one class to another. It's already the case that there is very little class mobility, but a system without easy credit is one in which there will be no class mobility at all.

I agree with the front end benefits of easy credit, but you're ignoring the downside risk. What happens when the next financial crises occurs, and the US government doesn't have the financial strength or tools to mitigate the crises, having used up all our dry powder the last time around? The GAO estimated a while back that within the next 15 years, 100% of all federal tax revenue will be needed to pay only for entitlements (social security and medicare) and interest on the national debt. Notice what isn't on that list? Everything else: the military, the EPA, the IRS, the DOJ, federal courts and prisons, and on and on.

Obviously, extremely hard choices are coming well before we hit that point. Certainly there's no money left (without inflation) for a big bank bailout.

And there's reason to believe that our assumption of endless growth, which is built into our financial system, may be about to come to an end. (See, e.g., Tyler Cowen's the Great Stagnation). Zero growth, or something close to it, may be the new normal as we revert to the historical mean. In other words, our debt may be risker than anticipated, and that risk will ultimately fall on a government (that is to say, taxpayers) at a time when the government is already stretched to the limit with its own debt. The possible responses (default, inflation, etc.) all add up to one basic outcome: another Great Depression (of a sort). History doesn't repeat itself, but it rhymes.

here's a free tip to all you capitalists out there. If you want your system to survive, keep yrrr vile fucking paws out of essential needs and services. In other words, stop commoditising homes and health care, and food for that matter. We will eat you if we need to.

And here's where it gets really scary: your model no longer works. I read an article a while back which suggested that the invention of the rifle is what allowed democracy to "work," because it prevented the powerful from controlling the masses through the employment of skilled warriors. Once you could shove a rifle into anyone's hands and make them into a reasonably effective fighting force, feudalism fell apart because the masses could compel more equality of power and resources.

But we are now entering an age of asymmetry. Automated, artificially intelligent drones will allow the powerful to project (deniable) physical violence without putting themselves at risk. Similarly, pervasive electronic surveillance (facial recognition, AI, internet tracking, the loss of personal privacy) will allow the powerful to efficiently monitor the masses and take proactive, targeted action against potential troublemakers. Finally, the impending failure of antibiotics may incentivize the powerful to physically segregate themselves from the masses, which could create psychological distance and minimize empathy. If you doubt the reality of this future, look to China.

In sort, in a few years you could be trying to organize others (without getting caught by the pervasive surveillance AI's) into assaulting well-defended fortifications while dodging deniable drones dispatched to kill you before your organization gains steam. Good luck with that.
posted by gd779 at 1:21 PM on June 10 [4 favorites]


I'm not an economist either, just a layman interested in the field's output.

After the loan, Hans will have $12k in assets: $5k in his retirement account and a $7k loan to Hilda. He therefore has ~42% of his assets in reserves, much higher than is required of most "real" banks.

Except to loan the money to Hilda, Hans has to liquidate his retirement investments down to zero to give her anything close to $7k. This is a cash flow problem if Hilda can freely withdraw the amount you claim to have loaned her.

The 'magic' of loan money creation is the part where every loan ends up being deposited in another bank after being spent. Another way to think of it is that a bank pools demand deposits, and then decides how many other demand deposits it may invent (loans it can make) without running into the cash flow problem. The factors that determine how quickly you run into the cash flow problem are essentially how likely a deposit is to be demanded, and how likely it is to arrive back at your bank. As an example, my employer has a preferred status bank; employees get free checking there, and I imagine the employer uses the bank for some deposits. Deposits withdrawn from the employer to pay employees have a pretty high odds of the bank just increasing one number in the ledger and decreasing another by an equivalent amount, without having to call in any of those loans to pay for it.

So, widening the number of banks then reduces the likely hood of getting your loan back in the form of deposit, and narrowing it increases the odds. Surprisingly, narrower banking would have the ability to create more money than the free-for-all you propose then.
posted by pwnguin at 7:02 PM on June 10 [2 favorites]


Abolishing the fractional reserve system has nothing to do with the gold standard or the merit of deflationary currencies, those are completely separate things.

They are all outgrowths of the neofeudalist, Dark-Enlightenmentist strain of economic thought. That's what they have to do with one another.
posted by tclark at 12:08 PM on June 11 [1 favorite]


Yeah no, how about reading the links dude
posted by moorooka at 3:55 PM on June 11


Yeah, I totally did. And even with all those links, it's still a bad idea. Even those interested in doing things that sound authentically leftist like nationalizing/centralizing credit can be the useful idiots of people who really just want to increase the barrier to entry of economic participation.
posted by tclark at 4:44 PM on June 11 [2 favorites]


Please explain. How is a private, corporate monopoly over money creation necessarily a lower barrier to economic participation that public, democratic control over the money supply? Especially in a world where we’re constantly told we “cannot afford” to create a decent society, when there are ample real resources to do so? When “the national debt” is used as a sledgehammer against any and all progressive visions? You haven’t made any arguments or posted any links to support your “useful-idiot” theory, you’re talking about irrelevant unrelated stuff like the gold standard and in the absence of anything actual argument it would seem that the reason you think this is a bad idea is due to some right-wing nutjobs having occasionally said stuff that sounds somewhat vaguely related but actually isn’t.

(The Iraq war wasn’t good just because Ron paul opposed it; our current monetary arrangements aren’t good just because some “neofeudalists” oppose them)
posted by moorooka at 5:54 PM on June 11 [1 favorite]


Full-reserve banking restricts credit. When credit is restricted, only the wealthier and "better" people (for local social-pathology defined values of "better") will have credit extended to them. This isn't some mysterious unexpected consequence, it's baked right in. It's such an unambiguously predictable outcome that I believe that it's one of the salient features for supporters.

If you can't see a connection between the demonization of debt and policies which are designed to restrict the extension of credit (a common feature of full-reserve, the gold standard, and deflationary currency), I really have nothing further to say.
posted by tclark at 8:24 PM on June 11 [2 favorites]


Credit is already restricted by private commercial interests.
Full-reserve banking brings credit creation under the control of the state, removing this restriction.
Yes conceivably the state could impose other restrictions like a gold standard but that’s not relevant to the topic of this post.
Again you are conflating full-reserve together with the gold standard and deflationary currency, indicating that you are confused about the actual subject being discussed.
posted by moorooka at 8:38 PM on June 11 [1 favorite]


Found it. Previously:

Public Utility Postal Banking and RTGS for All (7/11/17)
[also brought to you by our ever-informative kliuless]

and

An old idea that’s new again, and again. (3/10/18)
posted by snuffleupagus at 11:18 AM on June 12 [1 favorite]




-Who should create money? Swiss vote promises a revolution
-The Vollgeld Proposal is Bad. Very Bad.
-The Sovereign Money Blues
-Brian Blackstone on the ECB and the Swiss Referendum on Sovereign Money

Give Everyone Government Bank Accounts - "A radical new idea from two former Obama officials could revolutionize the way Americans manage their money."
...a new report co-authored by two Treasury Department veterans, “Central Banking for All: A Public Option for Bank Accounts,” argues that Americans should have an account at the Federal Reserve, just as banks do. They believe this would solve a vast array of problems at once, ensuring that everyone is included in the financial system, driving down retail costs for businesses and consumers, and even making recessions less likely.

Morgan Ricks and Lev Menand, who worked in the Obama administration, and John Crawford, a law professor at UC-Hastings, call their idea FedAccount. These personal accounts would operate like the accounts that commercial banks already have with the Fed—with all the attendant privileges. Whereas the average checking account draws 0.05 percent, federal reserve accounts earn interest equivalent to the federal funds rate—currently 1.75 percent. Americans wait up to two days for a check to clear, but thanks to the Fed, banks can instantly transfer money to each other. And while personal bank accounts are only guaranteed through the FDIC up to $250,000, Fed accounts can never default, no matter how large the account balance, because it’s the central bank that prints America’s money.

“The time has come to end this special privilege of banks,” the authors write. Every American, every business, every institution would have the option of a FedAccount, with all the functionality of a normal bank account, like debit cards, direct deposit, online bill pay, and mobile banking, and no chance of default. The authors see the U.S. Postal Service’s 31,000 locations nationwide as a good place to locate ATMs and provide teller services for deposits and withdrawals.

This would be offered as a free public service; nobody could be turned away for a minimum balance or any other reason. That means the 33.5 million Americans with little or no access to the financial system would suddenly have a stable bank account, which is critical to modern life. This would eliminate the need for check-cashing stores or prepaid debit cards, services that often charge exorbitant fees. Everyone would enjoy higher interest rates, transferring an enormous windfall from banks to the people. Americans wouldn’t have to subject themselves to banks with predatory sales practices such as signing them up for fake accounts, which, as federal bank regulators revealed last week, was not limited to Wells Fargo.

Real-time payments, in which transactions clear immediately, would revolutionize the payment system (as it did for Japan in … 1973). Think Venmo, but with no intermediate step of linking of your Venmo account to a bank account or credit card; the transfer goes right from one FedAccount to another. That eliminates one middleman with access to your personal financial data and a desire to monetize it.

Transfers would also work between people and businesses with a FedAccount, with no transaction fees, saving billions for retailers. If your employer had a FedAccount, it could instantly deposit your salary. The government could instantly transfer your benefits or tax refunds. This functionality would push more people and businesses into FedAccounts and make them more powerful. Think of it as a substitute for cash, and cheaper to use than a debit card.

The Federal Reserve would get more accurate means to deploy monetary policy. Right now, the Fed raises or lowers interest rates to influence macroeconomic policy—an inexact tool. With FedAccounts, individuals would receive that interest on their balances, impacting their lives far more directly. Financial stability could increase too, as FedAccounts eliminate the possibility for a run on the bank and eat away at the big banks’ giant deposit bases, reducing the banks’ size and potentially their risk to the financial system.

And far from overburdening the Fed, the FedAccounts would likely generate hundreds of billions of dollars. Right now, the Fed adds $95 billion to the Treasury every year, thanks to profits from investing the trillions of dollars that it holds. If millions of people carry FedAccounts, the Fed’s balance sheet would grow, as would the earnings, even after factoring in the cost of account maintenance and fraud prevention.

Obviously, there’s the small matter of what this might do to the entire commercial banking system. Opening up Federal Reserve accounts to individuals and non-banks, which would require new legislation, would draw fierce opposition. Banks use deposit accounts to establish customer relationships—they’re not going to give that up willingly. And they certainly have the money to mount a massive lobbying campaign against such legislation.

The study’s authors note, however, that not only would individuals benefit from FedAccount, but powerful industries like retailers, too. It would make money for the government, which could help sway deficit hawks on Capitol Hill. Plus, FedAccounts wouldn’t loan money, so banks and credit card companies would still have a big business in lending. Banks wouldn’t have as many deposits as a cheap source of funds, but they can always borrow cheaply from … the Federal Reserve.

Banks are already fending off financial-tech firms, which are offering all kinds of bank account and payment services to “disrupt” the industry. Even Goldman Sachs has trotted out a consumer-account product called Marcus. FedAccounts would introduce another disruptor—the government, which already has the scale and scope to give better terms without needing to profit from customers. Banks could always compete; they’d just have to offer higher interest rates and more attractive services than the public option. That competition will benefit all consumers.
also btw... posted by kliuless at 10:40 PM on June 15 [3 favorites]


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