Too Fed to Fail

[The Minsky Moment]

Well, it is not like having the free choice over where to receive and keep your income is a big part of personal liberty, nor there is any risk to having a single state institution handle the finances of the entire population. Not to mention the complete lack of temptation of corruption and/or short-sighted populist political actions with that insane power over the citizens` savings. So I say go ahead.

Individuals would have free choice in the proposal - they could put whatever amount of savings they want in a private bank, they just wouldn't get a government guarantee to back it.  That is arguably a more free market solution than the present system.

It does whittle away at the distinction between fiscal and monetary policy -  a distinction that is rather artificial to begin with in any fiat currency regime like the US. And that does raise the other concern you mention because either the political branches would tend to give up control over fiscal instruments (unlikely) or the political independence of the monetary authority would be curtailed.

[grumbler]

I think I will just cut this short and concede that you, again, won a match of the sport called Grumblerwinsinwhathecallsdebate. Knock yourself out.

Okay, emo-boy.  Dunno what your knickers are all twisted about, but they seem to have cut off blood circulation to your brain.  Glad you were able to finish the ad hom before you burst into tears and shorted out your keyboard.

[Ed Anger]

I think I will just cut this short and concede that you, again, won a match of the sport called Grumblerwinsinwhathecallsdebate. Knock yourself out.

Okay, emo-boy.  Dunno what your knickers are all twisted about, but they seem to have cut off blood circulation to your brain.  Glad you were able to finish the ad hom before you burst into tears and shorted out your keyboard.

[DGuller]

I think I will just cut this short and concede that you, again, won a match of the sport called Grumblerwinsinwhathecallsdebate. Knock yourself out.

I'm going to interpret your concession of defeat as a sign that you lost this argument.

[Tamas]

Individuals would have free choice in the proposal - they could put whatever amount of savings they want in a private bank, they just wouldn't get a government guarantee to back it.  That is arguably a more free market solution than the present system.

It does whittle away at the distinction between fiscal and monetary policy -  a distinction that is rather artificial to begin with in any fiat currency regime like the US. And that does raise the other concern you mention because either the political branches would tend to give up control over fiscal instruments (unlikely) or the political independence of the monetary authority would be curtailed.

both good points

[Admiral Yi]

It does whittle away at the distinction between fiscal and monetary policy

Please elaborate.

[MadImmortalMan]

It does whittle away at the distinction between fiscal and monetary policy

Please elaborate.

I think it would break down a bunch of the layers we have between the policymaking steps officialdom can take and the average Joe's bank balance. Right now, if the Fed alters the funds rate, it does affect Joe, but only after trickling through several other layers of errata in the economy. This would create a direct immediate link between Joe and Bernanke, and we've never seen anything quite like that before. That would, in turn, democratize the Fed much more and inject it with a hell of a lot more politics. At least I'm guessing it would.

The next things to come would be using the Fed accounts to assist tax collection, enforce child support, etc.

[The Minsky Moment]

It does whittle away at the distinction between fiscal and monetary policy

Please elaborate.

Imagine two institutions.
One is called LH.  LH spends money-units (Mu) on various projects.  In order to fund that spending it levies Mu from people who benefit from those projects, and it also can raise additional Mu by issuing IOUs (bonds).  Looked at in isolation it appear that LH is credit constrained - that is, all spending of Mu must ultimately paid out of levies and LH's ability to obtain credit advances is just a matter of shifting the burden of those levies into the future.

Second is RH.  RH is a depository for Mu holdings that has a special power - it can create stocks of Mu at will.

Now imagine that LH stands for left hand and RH stands for right hand.  They are two parts of the same body.  If that is so then the apparent credit constraint on LH is an illusion.  If the left hand needs Mu to fund projects it can just get it from the right hand.  It doesn't need recourse to levies.  In this world, what purpose do the levies serve?  Essentially two: (1) as a way to control the quantity of Mu (inflation) - because raising levies brings Mu back out of the economy and into the LH-RH depository, and (2) to create a need (demand) in the general population for Mu - i.e. because they are needed to satisfy levies.  Bond issuance serves the purpose of providing benchmarking and convenient collateral for the private financial system.

You could simply the whole LH-RH system by amalgamating the institutions into one: LRH.  LRH would make a decision on how much to spend on projects (G).  It then would set levies/taxes (T).  This appears to be fiscal decision but now in fact is monetary.  T is set in order to achieve a desired level of Mu.  If LRH wants to expand Mu, it cuts T in relation to G; if it wants to contract the supply it raises T in relation to G.

This is a nutshell is Abba Lerner's old theory of Functional Finance which he argued is a feature of any fiat currency regime.  For LH read Treasury, and for RH read the Fed.  Only it doesn't really work that way in the US because of convention as reflected in the legal and institutional structure of the Treasury and the Fed.  The two are kept formally separate by law and convention and hemmed in by various rules in an attempt to separate a fiscal budgeting function from the monetary function.  But when push comes to shove, it is all one government, and there can be a blurring, as happened in the financial crisis where the Fed and Treasury coordinated jointly to fund and support the banking system.

The logical ending point of the Rogoff concept (as elaborated by Sethi) is an LRH institutional structure that breaks down the separation of functions.

[Sheilbh]

Doesn't that describe the way it used to work in the UK?

I like the sound of the idea because it's quite simple and elegant.

[frunk]

Problems I see are:

1) political infeasbility.  The Ron/Rand Paul audit the Fed nutters go ape.  And the anti-keynsians (read the entire GOP and decent swaths of the Dems) oppose for the very reason Sethi likes the idea: it facilitates the ability to monetize debt-financed stimulus on the debtor side.

2) it doesn't end up solving TBTF for the same reasons that Lehman's collapse was problematic even though Lehman wasn't a deposit taking bank.  The government still has a interest in preventing total disruption of asset markets, even if there is no direct impact to the payment system.  And it is very likely that during a boom period, ordinary consumers will move balances from the safe Fed accounts to private bank investment accounts - putting huge pressures on the government to bail out those institutions.  One way to deal with these problems is to only bail out indirectly by infusing cash into debtors as per Sethi's proposal, but that brings us back to #1.

3) The fed would have to either recreate or incorporate customer banking, or let existing banks act as a front end for these federal accounts (and provide some way for the banks to access these accounts).  That sounds like a project that could make the ACA website look like a walk in the park, and with many worse potential consequences for security holes.

[Admiral Yi]

I can see a number of problems with the proposal.

1. The 800 pound gorilla is ceding control of the money supply to the political-legislative process.  Economic history is littered with examples of the damage this can cause.

2. The dissapearance of Treasury securities from the market would cause serious problems in terms of bank capitalization and collateralization of deals.

3.  There will be times when you don't want fiscal and monetary policy to coincide: for example, a war fought during full employment/risk of inflation.

4.  Surely there is *some* value in having the government compete for available funds on the open market with other users of credit.  This proposal eliminates that competition.

[The Minsky Moment]

3) The fed would have to either recreate or incorporate customer banking, or let existing banks act as a front end for these federal accounts (and provide some way for the banks to access these accounts).  That sounds like a project that could make the ACA website look like a walk in the park, and with many worse potential consequences for security holes.

That shouldn't be a problem.   The Fed already has tried and true linkages to private banks.   For things like ATM service (e.g.) the Fed could contract out to competing service providers, or even better - set basic standards and then link their system to whoever wants to enter the market and satisfies the standards. 

[mongers]

Thread worthless, entertainment wise, without contribution from anti-FIAT currency nut.

I'll try and deputise, but I'm way outta my depth with regular economics, let along the tinfoil stuff. 

[The Minsky Moment]

I can see a number of problems with the proposal.

1. The 800 pound gorilla is ceding control of the money supply to the political-legislative process.  Economic history is littered with examples of the damage this can cause.
Hence the rage for independent central bank structures following the 70s.  But that has issues of its own.  One could see the present structure as a way to maximize technocratic control over the economy without causing the peasants to revolt.  There is something to be said for that.  Also something to be said against that

2. The dissapearance of Treasury securities from the market would cause serious problems in terms of bank capitalization and collateralization of deals.
  The government could still issue bond if it wished, even absent a budgetary function - see below

3.  There will be times when you don't want fiscal and monetary policy to coincide: for example, a war fought during full employment/risk of inflation.
War finance presents the same problem as now: whether the government can create a credible commitment to undo the monetary expansion once the crisis ends.  If the government;s commitment is credible then there won't be an expectation of permanent monetary enlargement and inflation can be kept under control.  Under this schema that could be done the traditional way - selling warbonds to mop up the excess liquidity with a commitment to retire the bonds in the future 

4.  Surely there is *some* value in having the government compete for available funds on the open market with other users of credit.  This proposal eliminates that competition.
see above

Responses in italics.

[frunk]

That shouldn't be a problem.   The Fed already has tried and true linkages to private banks.   For things like ATM service (e.g.) the Fed could contract out to competing service providers, or even better - set basic standards and then link their system to whoever wants to enter the market and satisfies the standards.

These linkages, I assume, are on an institutional level and not at the individual account.  If the communication is now hundreds of millions of accounts involving billions or more transactions per day I think it becomes significantly more complicated.  Could I potentially access my federal account from different banks, or would it be "assigned" to one and there would have to be a process to switch between them?