Federal Reserve Chair Jerome Powell is grilled by Representative Katie Porter, a California Democrat, during his semi-annual congressional testimony Tuesday for his attendance at a party thrown by Amazon.com Inc. Chief Executive Officer Jeff Bezos last month.
<iframe width=”560″ height=”315″ src=”https://www.youtube.com/embed/8pS1edpeGqI” frameborder=”0″ allow=”accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture” allowfullscreen></iframe>Jesse Ventura visited Google’s Santa Monica office on April 13, 2011 to discuss his new bestseller: “63 Documents the Government Doesn’t Want You to Read.”
Julia Coronado and Simon Potter say recession insurance bonds could activate payments and bypass political wrangling in a crisis.
The coronavirus pandemic that shut down economies around the globe showed how crucial—and difficult—it is to get money swiftly to people who need it most in a crisis. Former central bank officials Simon Potter, who led the Federal Reserve Bank of New York’s markets group, and Julia Coronado, who spent eight years as an economist for the Fed’s Board of Governors, are among the innovators brainstorming solutions. They propose creating a monetary tool that they call recession insurance bonds, which draw on some of the advances in digital payments. Coronado, president and founder of MacroPolicy Perspectives LLC, and Potter, nonresident senior fellow at the Peterson Institute for International Economics, spoke with Bloomberg Markets to explain their idea.
JULIA CORONADO: Congress would grant the Federal Reserve an additional tool for providing support—say, a percent of GDP [in a lump sum that would be divided equally and distributed] to households in a recession. Recession insurance bonds would be zero-coupon securities, a contingent asset of households that would basically lie in wait. The trigger could be reaching the zero lower bound on interest rates or, as economist Claudia Sahm has proposed, a 0.5 percentage point increase in the unemployment rate. The Fed would then activate the securities and deposit the funds digitally in households’ apps.
And so instead of these gyrations we’ve been going through to get money to households, it would happen instantaneously.
SIMON POTTER: It took Congress too long to get money to people, and it’s too clunky. We need a separate infrastructure. The Fed could buy the bonds quickly without going to the private market. On March 15 they could have said interest rates are now at zero, we’re activating X amount of the bonds, and we’ll be tracking the unemployment rate—if it increases above this level, we’ll buy more.
The bonds will be on the asset side of the Fed’s balance sheet; the digital dollars in people’s accounts will be on the liability side.
BM: Aside from speed, what are the main advantages of this approach?
JC: It’s the most efficient from a macroeconomic standpoint in supporting spending and confidence. The fear of unemployment acts as an accelerant on a recession. There’s a shock—people are losing their jobs or worry about losing their jobs. They get very risk-averse. [By] getting money to consumers you can limit the depth and duration of a recession.
And you could actually generate real inflation. It could be beneficial for not only avoiding negative rates but creating a more healthy interest-rate market, a more healthy yield curve.
BM: What are the origins of the idea?
JC: The Bank of England has proposals for digital currency. And a number of people have talked about the need for monetary financing—the idea that the interest-rate tool is simply less effective in lower growth, slower credit growth economies. Helicopter money [making direct payments to the public] goes back to Milton Friedman, but Ben Bernanke revisited it.
Some people proposed doing that through financing fiscal stimulus. We think going directly to consumers is more efficient than wading through that sticky fiscal process.
BM: This policy could be complementary to Treasury stimulus?
JC: It’s not a replacement for fiscal policy. It makes sense from a fiscal perspective, for example, to authorize unemployment insurance benefits for people who lose their jobs and other assistance for medical-care providers in the current situation.
SP: The central bank is not elected. It cannot make allocation decisions about fiscal transfers. It’s now being pushed to make allocation decisions around credit with the Treasury, because we believe this situation is so unique that the private sector cannot make those decisions itself.
The simplest way to do this would be a lump sum. Not in the way Congress did it. We’d take the bluntness of monetary policy and say anyone who’s eligible should get the same amount of bonds.
Fiscal controls could use the same infrastructure. The imperative to invest in it is high. Nearly all Treasury payments at some point touch the Fed because it’s the Treasury’s bank. The digital payment providers—called interface providers in the Bank of England proposal—would manage these accounts and link them to the Fed and Treasury.
BM: What are the objections from the Fed, and other challenges?
SP: The reaction from some of my former colleagues a while ago to the notion of helicopter money was not the most embracing. Some of those concerns have disappeared.
The two objections were related to the switch of deposits in normal times from the traditional banking system into digital accounts and the extra stress in crisis times as people want to get safe. An account with the central bank is safe because the central bank can always print money to honor that claim. A private bank can’t do that because their asset side has all kinds of credit on it. What we’ve created is a narrow bank-type model [narrow banks only take deposits and invest them in the safest assets] that’s small and fit for purpose, with a cap of $10,000 [per person].
JC: One challenge is making it profitable for digital providers. We want strict limitations on the fees so we’re reaching people that are underbanked, but we also want a public-private partnership with a diversity of competitors jumping into this market.
Privacy is just as important, because one thing that might induce them is access to people’s data. As the Fed, are you blessing that, and what structure do you put around that?
SP: We’ll all have to deal with deep questions of privacy in the digital world. One of the issues Congress had in passing the Cares Act is identifying who’s got mainly tip income, who doesn’t have sick days. If society wanted, you could use large datasets to direct fiscal transfers to those people. But that’s a job for Congress.
BM: Have you seen similar trials elsewhere?
SP: Sweden is a leader in thinking about this in part because they had a large decline in cash use. China is testing versions of digital currency. Fintech firms in the U.S. are interested in this—there’s a stable coin version of our proposal.
There’s easily sufficient innovation within the U.S. to do this. How to do it in a way that’s well regulated and serving the public purpose is something the Fed should focus on over the next few years. It would be a key accomplishment of the Fed and Treasury to get this infrastructure in place.
How The Fed Bubble Will Burst | The Stock Market Bubble Explained Recently I have highlighted how the liquidity provided by the Federal Reserve (Fed) has driven the stock market to new highs and, if the Fed continues to provide liquidity the stock market will continue to rise higher. This has left many people wondering if the stock market is a bubble and, if so, how and when will the stock market bubble burst. In this video I describe the dynamics of the current stock market bubble and some likely scenarios for how the stock market bubble might burst.
Bitcoin, and more generally, cryptocurrencies, are often described as a new type of money. In this post, we argue that this is a misconception. Bitcoin may be money, but it is not a new type of money. To see what is truly new about Bitcoin, it is useful to make a distinction between “money,” the asset that is being exchanged, and the “exchange mechanism,” that is, the method or process through which the asset is transferred. Doing so reveals that monies with properties similar to Bitcoin have existed for centuries. However, the ability to make electronic exchanges without a trusted party—a defining characteristic of Bitcoin—is radically new. Bitcoin is not a new class of money, it is a new type of exchange mechanism, and this type of exchange mechanism can support a variety of forms of money as well as other types of assets.
Money vs Exchange Mechanism
The distinction between money and an exchange mechanism is not new to the field of payments. For example, according to a report from the Committee on Payments and Market Infrastructures (CPMI), a body within the Bank for International Settlements (BIS), money refers to the asset that is being transferred, for example currency in your wallet. In contrast, the exchange mechanism is the way in which the asset is transferred, such as physically handing the currency to a merchant in exchange for a coffee.
It is not uncommon for Bitcoin, and cryptocurrencies more generally, to be described as a new type of money. For example, this chapter of the 2018 Annual Economic Report released by the BIS “evaluates whether cryptocurrencies could play any role as money.” Similarly, Tobias Adrian and Tommaso Mancini-Griffoli categorize cryptocurrencies as a type of money in an IMF FinTech note.
With this in mind, it is worth asking what aspect of Bitcoin is truly unique: the type of money it represents or the exchange mechanism it uses? To address this question, we propose two simple classifications, one for monies and another for exchange mechanisms. For each classification, we make use of categories that are deliberately stark. While finer subcategories might improve the classifications in some instances, it is tangential to our main message.
Three Types of Money
We divide monies into three categories:
- fiat money,
- asset-backed money, and
- claim-backed money.
The distinction between asset-backed and claim-backed money is meant to replicate the distinction between secured claims and unsecured claims. These three categories are broadly consistent with the categories of money proposed by Adrian and Mancini‑Griffoli.
Fiat money corresponds to intrinsically worthless objects that have value based on the belief that they will be accepted in exchange for valued goods and services. A typical example is currency. The paper on which a twenty‑dollar bill is printed is worth almost nothing. But a consumer can purchase coffee by handing over that piece of paper because the barista believes that she can in turn use the latter to purchase something of value. Of course, central-bank issued currencies are different from pure fiat money due to its legal tender status. Examples of fiat money without legal tender status include Rai stones or Ithaca HOURs. And Bitcoin is just another example of fiat money.
Asset-backed monies derive their value, at least in part, from the assets backing the money. A prime example is commodity money. Gold coins are intrinsically valuable because it is possible to melt a coin and find someone who would like to use the metal for another purpose.
Finally, claim-backed monies derive their worth, at least in part, from the promise of some institution to exchange the money for something of value. For example, an (uninsured) bank deposit has value based on the promise the bank makes to exchange the deposit for currency. Non-financial firms could issue claim-backed monies as well. For example, a barista may offer a coffee in exchange for a (fully punched) loyalty card. In this instance, the loyalty card is a specialized type of money that can be exchanged for a valued item. In principle, if others believe that the barista will keep her promise to redeem the punch card in the near future, it could be used like money for other goods, as long as a sufficient number of people want the barista’s coffee.
Three Types of Exchange Mechanisms
Exchange mechanisms can also be divided into three categories:
- physical transfer,
- electronic transfer with a trusted third party, and
- electronic transfer without a third party.
While not identical, our categories are broadly consistent with categories of exchange mechanisms described in the CPMI report mentioned earlier.
Physical transfer is intended to capture the transfer of money through a physical means, such as currency or notes. This includes the exchange of goods and services for a physical money. In the case of currency, if a consumer wants to buy a coffee with a twenty-dollar bill, he needs to physically hand it over. Similarly, he could make a payment by sending a check in the mail, which would be transported physically to the recipient, for example, to pay rent to his landlord. (Technically, a check is a payment order, rather than money. That said, endorsed checks can circulate like money.)
Electronic transfers with a trusted third party represent the vast majority of electronic payments today. These transfers involve some trusted entity responsible for making sure transfers are valid. The Fedwire Funds Service® is an example of an electronic transfer system, with the Federal Reserve System acting as a trusted third party on behalf of banks and other financial institutions transferring central bank deposits to each other. (“Fedwire” is a registered service mark of the Federal Reserve Banks.)
This brings us to the final category: electronic transfers without a trusted third party. These are exchange mechanisms where the validation of transactions is decentralized, as is the case for Bitcoin and many cryptocurrencies.
To illustrate how monies differ along these two dimensions, we have built a 3-by-3 matrix combining the types of money with the types of exchange mechanisms and, for each combination, we offer an example. The following table summarizes this exercise.
Monies transferred physically include:
- currency—a fiat money;
- gold coins—the value of which depend on the gold backing the coin; and
- checks—which are backed by the promise of a bank to exchange the check for currency.
In the United States, many bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC), so they benefit from greater protection than only the promise of the individual bank.
Monies transferred electronically with a trusted third party include central bank reserves, which in the United States can be transferred using Fedwire; money market mutual fund shares, a very liquid investment backed by assets (often Treasury securities); and (uninsured) commercial bank deposits.
Finally, monies transferred electronically without a third party include Bitcoin, which is not backed by anything; “stablecoins,” which are cryptocurrencies whose value is (in principle) tied to assets; and tokens from initial coin offerings (ICOs), for which issuers offer rights (though not necessarily legally binding) to a product or service in the future. In all these cases, the transfer of monies can be facilitated without a trusted third party. Notably, all of these examples are recent phenomena that have emerged in the post-Bitcoin era.
As is evident in the table above, Bitcoin and other cryptocurrencies are not a new type of money. Other examples of fiat monies have existed for a very long time. The same can be said for stablecoins, which are just the latest incarnation of monies tied to the value of an asset. By contrast, the third row of the table (“electronic without third party”) did not exist before 2009. The real innovation of cryptocurrencies is that they offer a radically new exchange mechanism. This type of exchange mechanism can support the transfer of different kinds of monies; fiat money in the case of bitcoin, money backed by assets in the case of stablecoins, and even future services or products, as in the case of ICO tokens. And this type of transfer mechanism could also support the transfer of other types of assets, like CryptoKitties.
In this post, we have argued that Bitcoin is not a new type of money. Instead, it is more accurate to think of Bitcoin as a new type of exchange mechanism that can support the transfer of monies as well as other things. Why should we care? History provides lessons about what makes a good money as well as what makes a good transfer mechanism. These lessons could help cryptocurrencies evolve in a way that makes them more useful. But to know which lessons are relevant, it is important to be clear about what is new about Bitcoin.
Michael Lee is an economist in the Federal Reserve Bank of New York’s Research and Statistics Group.
Antoine Martin is a senior vice president in the Bank’s Research and Statistics Group.
Jun.03 — Scott Minerd, chief investment officer at Guggenheim Investments, discusses the impact of the Federal Reserve’s efforts to stabilize the U.S. economy on credit markets, corporate debt, and defaults. He speaks with Bloomberg’s Sonali Basak on “Bloomberg Markets.”
CNBC’s “Halftime Report” team breaks down how they’re investing in the market amid the coronavirus pandemic.
CommentsLook at how happy this guy is about unlimited QE, they are dancing on the grave of the American middle class!!“it’s possible we are in a completely fraudulent system” – Michael BurryThis shows how much the Feds can manipulate things, and probably in the past too?I’m from the same city Kevin is from and everyone here doesn’t take him seriously.Kevin is disconnected from society.as long as the rich get richer, there’s no problem. No jobless schmucks going to be interviewed on CNBC