Why Should Banks be the Only Ones with Accounts at the Fed?

By Rajiv Sethi, Professor of Economics, Barnard College, Columbia University. Cross posted from his blog (original titled The Payments System and Monetary Transmission)

About forty minutes into the final session of a recent research conference at the IMF, Ken Rogoff made the following remarks:

We have regulation about the government having monopoly over currency, but we allow these very close substitutes, we think it’s good, but maybe… it’s not so good, maybe we want to have a future where we all have an ATM at the Fed instead of intermediated through a bank… and if you want a better deal, you want more interest on your money, then you can buy what is basically a bond fund that may be very liquid, but you are not guaranteed that you’re going to get paid back in full. 

This is an idea that’s long overdue. Allowing individuals to hold accounts at the Fed would result in a payments system that is insulated from banking crises. It would make deposit insurance completely unnecessary, thus removing a key subsidy that makes debt financing of asset positions so appealing to banks. There would be no need to impose higher capital requirements, since a fragile capital structure would result in a deposit drain. And there would be no need to require banks to offer cash mutual funds, since the accounts at the Fed would serve precisely this purpose.

But the greatest benefit of such a policy would lie elsewhere, in providing the Fed with a vastly superior monetary transmission mechanism. In a brief comment on Macroeconomic Resilience a few months ago, I proposed that an account be created at the Fed for every individual with a social security number, including minors. Any profits accruing to the Fed as a result of its open market operations could then be used to credit these accounts instead of being transferred to the Treasury. But these credits should not be immediately available for withdrawal: they should be released in increments if and when monetary easing is called for.

The main advantage of such an approach is that it directly eases debtor balance sheets when a recession hits. It can provide a buffer to those facing financial distress, allowing payments to be made on mortgages or auto loans in the face of an unexpected loss of income. And as children transition into adulthood, they will find themselves with accumulated deposits that could be used to finance educational expenditures or a down payment on a home.

In contrast, monetary policy as currently practiced targets creditor balance sheets. Asset prices rise as interest rates are driven down. The goal is to stimulate expenditure by lowering borrowing costs, but by definition this requires individuals to take on more debt. In an over-leveraged economy struggling through a balance sheet recession, such policies can only provide temporary relief. 

No matter how monetary policy is implemented, it has distributional effects. As a result, the impact on real income growth of a given nominal target is sensitive to the monetary transmission mechanism in place. One of the things I find most puzzling and frustrating about current debates concerning monetary policy is the focus on targets rather than mechanisms. To my mind, the choice of target—whether the inflation rate or nominal income growth or something entirely different—is of secondary importance compared to the mechanism used to attain it.

Rogoff was followed at the podium by Larry Summers, who voiced fears that we face a long period of secular stagnation. Paul Krugman has endorsed this view. I think that this fate can be avoided, but not by fiddling with inflation or nominal growth targets. The Fed is currently hobbled not by the choice of an inappropriate goal, but by the limited menu of transmission mechanisms at its disposal. If all you can do in the face of excessive indebtedness is to encourage more borrowing, swapping one target for another is not going to solve the problem. Thinking more imaginatively about mechanisms is absolutely essential, otherwise we may well be facing a lost decade of our own.

Yves here. Rajiv makes this clarification of his idea in comments:

Banks can continue to accept deposits but they will not be insured. If they want to promise redemption at par they will have to have a capital structure that has a lot more equity relative to debt. Admati and Hellwig have been arguing for significantly higher capital requirements to counteract the subsidization of bank debt financing; this will no longer be necessary under once deposit insurance is removed.

Bank loans will be financed by bank equity, long term debt, commercial paper, and money market mutual funds. The only source of financing to be removed is insured deposits.

The important point is that banks can be allowed to fail without putting the payments system at risk.

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    1. lxdr1f7

      The central bank can provide depository services alongside the private sector. The central bank depository system will be risk free though and can be used in order for the CB to conduct monetary policy directly with the public.

    2. susan the other

      I would prefer post office banking because this doesn’t quite make sense. Rogoff must be doing penance for his 80% debt to GDP stuff. Does this mitigate the current trajectory of debt? Since the banks could be allowed to fail? Because they can’t hold us hostage by putting US payments at risk. It almost sounds like Shiela Bair’s suggestion to give everyone a Fed account with which to speculate, except the only security option would be some kinda treasuries. Complicated. Maybe the banksters and their BFF like this idea because it would prevent bank runs and reduce the need for hefty regulation. But once again, even tho’ this people’s bank of the Fed would distribute money to grass roots, it does nothing to create fiscal policy; no jobs program, etc. Unless it’s just one measure to turn the economy around.

  1. lxdr1f7

    Directly interacting with the public is superior as it will increase money of accounts of all people with a higher average MPC when compared to current CB counterparties and also improve balance sheets.

    Ive also been working on this precise idea for a bit now if anyone is interested. cmamonetary.org

  2. from Mexico

    But doesn’t Sethi’s proposal fly in the face of the very purpose of Fed policy, which is to throw the commerical banks a lifeline during tough times? This is done by the Fed, which engineers a large yeild spread between what the banks pay out in interest vs. what they charge in interest to their loan customers, thus allowing the commercial banks to “earn” their way out of their problems.

    Does the Fed really care about getting money into the hands of real people? Does the Fed really give a rat’s ass about anything but the welfare of the banks?

    1. profoundlogic

      Precisely! Sethi’s proposal is by far a better transmission mechanism of monetary stimulus directly to the people, and precisely why it will NEVER happen! Do you seriously think the cartel would allow such blasphemy. The current mechanism is all about protecting their ill-gotten gains with the added benefit of some great PR about stable prices and full employment.

    2. Doug Terpstra

      Yes indeed, the Criminal Reserve’s sole raison d’etre is to serve casino cartel members and to protect their unearned wealth and privilege. Sethi certainly knows this, but the so-called Fed is a privately owned cartel, supposedly governed by mandates, to which it only pays occasional lip service. That the “Fed” is nor actually federal at all, and that its counterfeiting is not subject to audit, cannot be emphasized enough. It could run the mother of all Ponzi schemes, and no one would ever know, intil of course the entire global finance system of derivatives simply blows up, beyond any hope of reflation. (Hyothetically)

    3. fresno dan

      I have been saying for years the primary dealers are one of the most outrageous scams there is.
      Your exactly right – any sort of logic on this topic is just unpossible. Look at the facts – the sole raison d’etre of banks is to evaluate borrowers, i.e., can they pay back the principal and interest. At the most fundamental level, they proved they can’t do this. The US government decides (spare any yammering about the FED being an independent entity – its even worse, as essentially, banks regulate banks) the solution is the SAME people have to remain in charge…

      It has to get worse before it will get better.

    4. Mildred Montana

      Less said about the Fed the better. Currency stability, full employment, blah, blah, blah….Inquiring minds everywhere know that it’s a bankers’ racket.

      The question is: What’s the limit to the Fed’s so-called “balance sheet”. It’s risen from a reported $200 billion to a reported $3 trillion in five years. Where does it stop? Will it stop? Will it EVER stop?

      Inquiring minds want to know: Is this a Racket Unto Infinity? Does Bernanke think he is a financial god? Is he (or his replaceable replacement) willing to destroy the economy in order to save the banks?

      Inquiring minds everywhere are betting that he is not a financial god, but that he is willing to destroy the economy nonetheless.

      You should bet that way too.

    5. washunate

      Awesome that this comment has so many responses. We have a management problem, not a monetary problem.

      It does feel like we’re making progress in getting that point across, too.

  3. Peter Everts

    ‘The Fed” IS banks. he Federal Reserve isn’t the govt, it is the five largest US banks which charge us and US to print it via interest. America must print it own money and to hell with the Fed.

    1. Jim A

      Well sure, at some theoretical level. At a practical level, it IS part of the government, just a part that we don’t elect. The structure is designed to achieve several things, among them:
      1.) Getting around any lingering uncomfortable constitutional questions about the government issuing fiat currency. Since as a technical, legal matter the Fed isn’t part of the USG, the USG isn’t issuing fiat.
      2.) Putting bankers rather than politicians in charge of monetary policy. Like term limits, it is a sort of “I don’t trust myself to do the right thing, so take away my say in the matter.” Putting monetary policy into the hands of unelected experts with relatively long-term appointments who would presumably be focused on the long-term health of the economy rather than have to pander to the politics of the moment. Unfortunately, as wealth becomes ever more concentrated and the wealthy Wall Street interests become ever more insulated from the main street economy, their interests have become ever more divergent from ours.

    2. Banger

      Bingo! The point here is that the capitalist system needs something to balance out the decades old tilt to the finance-oligarchs such that today these oligarchs sit, along with many others, at the toll booth holding out their hands to take money from the productive public. For capitalism to work again we have to balance the board and clear the sludge form the economy. Once the finance oligarchs who offer us nothing for the tolls we pay are washed away then others the MIC, Big Medicine and so may follow. Until then it’s stagnation at best as far as the eye can see.

      1. susan the other

        This really does sound like a capitalist capitulation – that Rogoff of all people would be voicing this. Maybe he was misunderstood, maybe this was his real point. But his compatriot, Larry Summers, opined that it would be a stagnated economy for years to come unless we do stg to get the economy going. Most recently Summers recommended (here linked last week) lots of bubbles and Krugman agreed. We took him to mean bubbles for banksters. Incidentally, it seems that Steve Keen also considers bubbles to be part of a natural economic process described by Minsky (I think). Way over my head. Summers was advocating zirp and nirp to jump start the economy. It seems to me that even if we do a people’s federal bank, we will have to establish a new economy at great cost. And without zirp and nirp we won’t be able to afford it. The only thing we have left to sacrifice is the high value of the dollar. That’s OK with me.

        1. Banger

          On bubbles: I think they are a requirement at present since speculation is the only game in town. It is within the realm of possibility that bubbles can offer some short term stimulus–but at this point it is a loosing game in the long-term. If there was a way to create an economy that meets real human needs rather than just the need for toys, amusements and status goods we could find real prosperity. As I’ve said before, that can only come through people coming together into cooperatives, unions, and collectives that are not strictly organized under the banner of maximum profit. It requires buying out of the consumer economy that I think is unsustainable and moving towards something very new.

        2. Carla

          “The only thing we have left to sacrifice is the high value of the dollar.”

          Hasn’t the Fed already done that for us with QE?

    3. Yves Smith Post author

      The Fed is NOT “the banks”.

      The Fed has a peculiar public/private status, but the private part is effectively a mutual with banks as NON VOTING PREFERRED shareholders. Preferred shareholders typically, and the Fed is no exception, don’t have a vote.

      A private company can be sold to another private company. Shareholders have the right to approve board members at a bare minimum. The “boards” of the regional Feds do not play a governance role. They do not review the operations of the regional Feds or approve pay. For instance, the advisory board of the NY Fed could not fire Dudley.

      The advisory boards are tea and cookies groups which advise the Fed on economic conditions in their region. They are a holdover from the days when economic data didn’t exist and the Fed needed some input as to how to drive policy.

      1. EconCCX

        The public component sets rates. The private part pays dividends, has a liquidation provision for its owners, and owns the assets that depositors relinquish in exchange for reserve balances. Depositors including the USG. FRBs cannot be compelled to fund government by altering its reserve balances. That’s MMT fiction and would constitute bank fraud.

        For government to write checks against FRBs, it must relinquish assets to FRBs. If USG sells a national park to the Federal Reserve System, as Prof. Wray proposed, USG no longer owns that park. The profits the FRBs rebate are franchise taxes, funded by the Treasury’s own interest payments.

        Treasury Bills are liabilities of the US Government. But Federal Reserve Notes are assets of the USG, because they’re liabilities of the private Federal Reserve System. Consortium bank notes. Even at the Treasury or the Board of Governors, vaulted dollar bills are assets, per the financial reports. Whereas to FRBs, vaulted Reserve Notes are neither asset nor liability, but financially neutral, like an unissued T-Bill or an undistributed signed check to bearer. The note is the bank’s own promise to pay, thus neutral as a promise to itself. But the same note in the possession of the US Government is worth a dollar on its balance sheet. Because the USG is overwhelmingly a user of money. If USG would spend, it must borrow, tax, relinquish assets to a bank, or mint a coin.

        None of which prohibits FRBs from offering deposit services to the public. But your depiction of the public and private components of the Federal Reserve System is selective, emphasizing governance while eliding the decisive matter of ownership. If your understanding of this institution is correct, there’s no reason to sweep the discomfiting data points under the rug.

        With appreciation — EconCCX

        1. craazyman

          That’s probabaly all true, and I don’t doubt or critique it, but it sounds bizarely like a world creation myth from a tribe living in 14000 BC someplace in Asia Minor.

          There are theriantrhropic dieties and anthropomorphic animals that have relationships and powers and they command the sun and the moon and they make the world out of dreamtime from strands of a spider’s web.

          Then it all comes together when you open your eyes. It’s like that almost.

          I would just worry the Fed would pay me negative interest or haircut me to get me to spend my money. Why would I do that? What is there to buy that’s worth buying (except penny stocks)? how about if they give out a toaster for deposits over $5000? That might do it for me. Having a toaster would be OK.

        2. Katie

          The profits the FRBs rebate are franchise taxes, funded by the Treasury’s own interest payments.

          Could someone expand on this? Please?

  4. Banger

    There is no logical reason why we should persist in this financial system it does no one any good other than the finance oligarchs. Banking should be a public utility not a source of quick money for the hustler-class. Nothing would be lost in the scheme presented here. We could still have speculation but losses of major speculators would no longer be guaranteed by the Fed and the taxpayers.

    However, having said that it is like expecting crooked cops to crack down on crime–the federal government is crooked and it is closely and inextricably allied with various bands of oligarchs who also control the mainstream media who control what can be talked about everywhere but fringe websites. I’ve found, for example, that censorship of unofficial POVs to be increasingly common across the web in many new-media outposts like Huffington Post, DailyKos and so on. Though I think this discussion would be acceptable on those sites I’m just saying that the idea of free-inquiry is obsolete in most places in this country.

    1. Doug Terpstra

      Very true. The propaganda regime under which our brains have been dry-cleaned, starched, steam-ironed, Scotch-guarded, and vacuum-sealed is extremely sophisticated — crafted by the Mad Men of finance and the Harvard Harlots who fellate them. This is why we shouldn’t place a large burden of blame on the rubes for their ignorance.

      1. Banger

        As for the rubes I agree partly. Certainly they are subject to the most intense system of mind-control ever devised by human society starting about a century ago with the Creel Committee and early advertising. But I still think that the public bears quite a lot of responsibility for their addiction to entertainment, technology, toys and so on (best work on this is by Neil Postman). As the saying goes “you can’t cheat an honest man.”

        1. Crosley Bendix

          Fair enough, but incomplete. Many people in our society are corrupt, but they are in a system that encourages corruption. “A fish rots from the head down.”

        2. Mildred Montana

          Don’t blame Americans. Blame their masters. I paraphrase Gore Vidal here:

          “Americans are not stupid. Just ignorant. And kept that way.”

          1. Banger

            Vidal also called the U.S.A. the “United States of Amnesia.” It is a cultural trait to agree with Henry Ford who, famously said “history is bunk.” Also, there is a prejudice in the U.S. diplomatic community to be confounded by historical hatreds in places like the ME where history is seen as something vivid and alive. This has caused a good deal of miscalculation in foreign policy.

    1. Jim Haygood

      Yeah! Since Big Gov is doing such a great job of reforming health insurance and managing Afghanistan, obviously we should expand its mandate to run banks too.

      *pops another muffin into his ObamaToaster*

    2. F. Beard

      Consider this a think-piece, and tell me: What do you think? RMM

      Since you still have me banned at your site, I’ll correct you here:

      Even zero interest loans by the monetary sovereign are unjust since they violate Equal Protection under the Law. A monetarily sovereign government should not borrow nor should it lend since both are inherently discriminatory.

      Otoh, an equal handout of new fiat to the entire population is ethical and would do little for the rich but help the victims of the banks a great deal.

  5. dcb64

    1. dcb64 Says:
    I don’t know the merits of this proposal, but since the crisis my focus has not been on monetary policy at all. it has been with what I call structure, which is in effects the pipes of the transmission mechanism. and I have written to the nytimes multiple times about this. I have never understood the focus of economics, but ignore the transmission mechanism. Andrew haldane seems to be a new breed of economist who realizes you need both to be designed to complement each other. He thinks like an engineer, not an economist. Only an economist could design models of monetary policy that don’t take into account banks. Think of a water company that is expected to deliver water to households while pretending the pipes to deliver that water both don’t exist and don’t matter. In addition I have written extensively that the $ incentives of QE are for the large TBTF banks not to lend. So, I’ve known for years exactly what was going to happen with QE, and the effect. Since I don’t consider myself that smart, it means central bankers must have known as well, and since they have worked on transmission it means the true purpose of QE was in fact a bank bailout via raised asset prices, and throwing money to bankers and their cronies. There can be no other excuse to keep running the program but not experiment with altering the transmission mechanism.

    The reason for this is simple. private banks make profits via the transmission mechanism and by controlling money released into the economy. The boards of central banks are stacked with private bankers, and altering the transmission mechanism has the potential to guy profits. It’s capture.

    it is also clear that private banks effectively have veto power over the nomination choices of who will be central bankers. For example nobody nominated to the fed thinks too big to fail is a real problem or wants to break up the big banks (for multiple reasons).

    if economists actually had a focus on structure, they would be calling hand over foot to break up the oligopolies which distort market function (see all the rigging scandals), We’d not have hft because such short holding times distort what the purpose of the market is about. markets are there now exist as something for certain players to make money from. they do not exist for the economy any more.

    It’s interesting to see debates starting to move to structure away from monetary policy. It’s just 4 years later than it should have been

    One of the reasons I lost respect for krugman years ago is because he has refused to address the transmission mechanism/ structure as an issue. It’s all about maintain the status quo.

    In addition, if you notice the vast majority of the press doesn’t even mention this. They want the debate to be QE, or nothing. they don’t want the debate to be about the best solution to the problem. It’s how our propaganda system works. for example anytime I’m critical of QE, at once I’m a right wing austrian to liberals, when nothing could be more from the truth.

    Since early in the crisis, I have been saving articles, and have built up a rather extensive library of sorts. It’s very sad that after all this time and data people still refuse to recognize that these programs are designed to enrich the status quo, not to benefit them or the economy

    I don’t know how many old postings and letters I could post here going back years

  6. TarheelDem

    What does that mean for the governance structure of the Fed?

    How centralized would tightening or easing decisions be? Could, say, one or a few regional reserve banks have monetary policies that are tightening and others that are easing based on the geographical complexity of the economic climates in each region?

    Why are economists so hung up on monetary policy and ignoring the failure of fiscal policy because of phony economic thinking in the Congress?

  7. joe bongiovanni

    Recognizing the failure of a monetary transmission mechanism in our present money system is important.
    But rather than giving OTHERS another account mechanism at the Fed, we would all be better served were the Fed allowed, under the direction of Congress, to issue Treasury credits to the public’s accounts as a means to assure monetary policy transmission.
    All of the quasi money-policy benefits here recognized would be available through implementation of the Kucinich proposal to nationalize the money system, as according to the currency-school teachings on money.
    This from Germany’ economic sociology Professor Dr, Joseph Huber, for instance.
    Because its OUR money system.

  8. F. Beard

    Nice try to save the Fed but all dollar users should have accounts at the US Treasury and the Fed abolished.

    Still, it’s nice to see SOME aspects of ethical money/credit creation gaining traction.

    If we need banks at all, they should be 100% PRIVATE!

    And no, I’m not back, but I do hate to see legitimate ideas hijacked by those who would save the government-backed counterfeiting cartel.

  9. ArmchairRevolutionary

    Agreed with F Beard, it should be the US Treasury; but, the downside is that it would make it really easy to do national bail-ins. We would now have manufactured crises where we had to all the sudden reduce the balances of those in the Treasury in order to respond to some sky is falling moment.

    All wishful thinking anyway as nothing like it will occur without a bloody revolution.

    1. F. Beard

      Fiat should ONLY be legal tender* for government debts (“Render to Caesar” – Matthew 22:16-22) so genuine currencies for private debts ONLY would enable people to hold only as much fiat as necessary to pay their taxes with so a seizure of fiat by the government would mostly only obtain what the government would have obtained anyway and at the cost of enormous public outrage.

      As for a bloody revolution, the current struggle is an idealogical one since most economists and Progressives accept a government-backed counterfeiting cartel as a GIVEN, having no clue how unethical it is.

      *But useable for private debts too if both parties agree.

      1. F. Beard

        Well, not quite. Until a government “bail-in” or other mismanagement of its fiat, most people would use fiat for ALL debts, not just their taxes. But after a “bail-in”, you can be dang sure that people would keep only a bare minimum in fiat accounts at the Treasury, assuming they did not vote out the government and reverse the process.

  10. MFrohike

    This proposal seems to be confused for two reasons.

    First, the accounts at the Fed would not be guaranteed. How is that an improvement over the security of deposit insurance? Rogoff clearly says the depositor may not be paid back in full and Sethi endorses his comments without qualification. That kind of insecurity is the sort of thing that seems sure to undermine a possibly good change to the payment system.

    Second, wouldn’t such a radical change affect the profitability of the Fed? If distributions are to be made to depositors from its profits, how would stripping deposit insurance and removing the government guarantee actually work in terms of central bank revenues? It seems like a big change to propose without any discussion of how it would actually work.

    The current system is clearly broken, but these suggestions seem to be as bad or nearly so. I don’t see the value in losing deposit insurance in exchange for what look like federal money market funds.

    1. Yves Smith Post author

      No, that is not what Rogoff said. Please reread.

      He said if you put your money in a “bond fund” as in you wanted more return, you would not be guaranteed. In context, I am certain he means a mutual fund offered by the likes of Vanguard.

      1. MFrohike

        It’s possible that it’s me that’s confused, so I’ll provide the relevant part of the quoted text:

        it’s not so good, maybe we want to have a future where we all have an ATM at the Fed instead of intermediated through a bank… and if you want a better deal, you want more interest on your money, then you can buy what is basically a bond fund that may be very liquid, but you are not guaranteed that you’re going to get paid back in full.

        The ellipsis after bank is the question. Is this an incomplete quotation, in that it’s missing a reference to the source of the bond fund? As it’s written, it seems to refer back to the proposed Fed ATM account which is why I thought it was counter-productive.

    2. F. Beard

      First, the accounts at the Fed would not be guaranteed.

      A monetary sovereign, which the Fed essentially is, has no NEED for deposit insurance since it can create FRNs at will.

      But properly, the provision of a risk-free fiat storage and transaction service for all dollar users is a US Treasury function since it ALONE should be able to create US fiat. And a short time after such a service is provided, ALL US Government provided deposit insurance should be repealed.

      But imaginde the enormous bank runs that would follow which is why we should first make sure that all bank deposits are 100% backed by reserves. Which is why we need a universal bailout with new full legal tender fiat.

      Progressives have made a fine mess with their government-backed banks but it can be straightened out – should anyone care to make the effort.

      1. MFrohike

        You missed my point on deposit security. The point of deposit insurance isn’t the process by which it happens, but the psychological benefit of the guarantee. It doesn’t matter that the federal government has no need to buy deposit insurance, it matters that the federal government issues a guarantee in this scenario. The guarantee is what makes the system work.

  11. F. Beard

    The only source of financing to be removed is insured deposits. Rajiv

    Leaving the Fed discount window, Fed open market operations, Fed currency swaps, and unnecessary borrowing by the US Treasury as subsidies for the banks.

    Your solution is not principled. Sure, depositors can protect their principal at the Fed but the real value of it will be eaten away by the still heavily subsidized banking cartel.

    What’s the matter? Can’t you guys think of ethical endogenous private money creation? Hint: Common stock is also asset-backed money but it requires neither usury nor ANY government priviledges.

    But why share when legal theft is an option to the banks and so-called crditworthy?

    You’ll do what you’ll do but you won’t have the excuse of ignorance or TINA, not if I can help it!

  12. john c. halasz

    How exactly is this different from the old idea of “100% reserve banking”, which amounts to banks no longer being banks? If the “payments system”, i.e. the account balancing and clearing system, as a public utility-like function, is to be held clear of the risks of lending, then there are still administrative costs to be met, hence savers would have to pay fees or receive a slightly negative interest rate on deposits. But then non-depositary organizations would take over the lending functions of banks, to address the problem of “maturity transformation”: savers want their savings to be liquid and to preserve their “value”, at least keeping up with inflation, if not compensating for the opportunity costs of holding onto their savings. But borrowers want to invest in non-liquid projects, tying up funds for an extended period of time. (Indeed, the whole point of credit is to accommodate situations where there are high upfront costs, but long-term gains or benefits, cost-reductions, increases in efficiency, increased economic surpluses. And the main point of a system of credit is to finance future improved productive capacity, without deflating current production and consumption, such that it will always involve the creation of credit-money, as a near substitute for actual currency, which involves uncertainty and risk and isn’t quite “justified” by current production and consumption.) Allowing that to occur without depository guarantees safe-guards the “payment system” to a degree, but it doesn’t solve per se the maturity matching problem, which entirely liquid savings, though “safe”, are also inert, which would imply a certain duplication of savings or a decreasing “money-multiplier” effect: i.e. a certain loss of efficiency. If you think about it a bit, the current sleight-of-hand system amounts to using the temporal gap between savings and expenditures, (of which over-night sweep accounts would be a close example), to provide liquidity for solving the maturity mis-match problem. And so-called FRB has always been baked-into-the cake with the emergence of capitalism, since the peculiar “genius” of capitalism, by which it dominated prior and alternative economic formations, was to re-circulate productive surpluses into further surplus-producing investments, and thus increasing aggregate productivity/efficiency. Idle savings withdrawn from circulation don’t contribute to that process, (even if mere financial operations can’t guarantee successful productive investments).

    On the other hand, operating monetary stimulus directly through citizens’ accounts, rather than flailingly through bank reserves, would have some direct efficacy with respect to debt-overhang and spending contraction, (though with what propoertional distributional formula?). Steve Keen has already suggested a version of that. However, it would also imply withdrawing from those accounts, as a means of monetary “tightening”, should we be so lucky. And it would destroy the ideological illusion that money is something that must be laboriously earned, rather than something that can be “created” ex nihilo. Which is why it would never be attempted by the prevailing PTB. Or why maybe thinking further out about more extensive changes in institutional and organizational design might be in order.

    One point I don’t get though, is, were such a change to be adopted, what would be the point of CB open market operations and what would be the source of CB earnings?

    1. F. Beard

      If the “payments system”, i.e. the account balancing and clearing system, as a public utility-like function, is to be held clear of the risks of lending, then there are still administrative costs to be met, hence savers would have to pay fees or receive a slightly negative interest rate on deposits john c. halasz

      Actually, when one thinks about it, a monetary sovereign like the US SHOULD provide a risk-free storage and transaction service for its fiat. To expect us to deal with physical currency to any large extent is absurd. That service should make no loans, pay no interest and be free up to normal household limits on number of transactions and account size. Let purely private banks and businesses pay for the costs of that system.

      As for the need for credit:
      1) One consequence of the current unjust system is that nearly the entire population deserves restitution for subtle theft. So who needs to borrow when one has cash?
      2) Common stock (shares in equity) is an ethical form of private money creation.
      3) Purely private credit creation is ethical.
      4) Perpetual deficits by the monetary sovereign should be the norm and should keep real interest rates low in fiat low, assuming the sovereign spends wisely.

      Above all, money creation MUST be ethical. A system is NOT brilliant if it, for instance, is a major cause of war, as our was wrt to WWII.

    2. F. Beard

      And the main point of a system of credit is to finance future improved productive capacity, without deflating current production and consumption, … john c. halasz

      Except that since credit is LENT into existence it must necessarily be repaid and the interest is typically transferred to those with a lower propensitity to consume. That is deflationary.

      OTOH, common stock as private money can be SPENT into existence with no neccessary need that it ever be extinguished and with no need to pay usury to rent a “foreign” money supply such as bank credit.

    3. F. Beard

      but it doesn’t solve per se the maturity matching problem, john c. halasz

      Common stock is normally non-redeemable in the productive assets* of a company so maturity mismatch is a non-issue with common stock as private money.

      which entirely liquid savings, though “safe”, are also inert, john c. halasz

      Well, that’s an inherent tradeoff. And unless the majority of shareholders prefer no new investment then new stock issue would replace stock sidelined into savings/hoards.

      *It could be redeemed in the products of the company, though.

  13. Srl Lankan Sojourner

    Doesn’t Treasury Direct, with its zero rate certificate of indebtedness program, provide something pretty close to the service being proposed? The certificate of indebtedness program– which is only about eight or nine years old– allows individuals to hold virtually unlimited amounts of cash without any worry about either deposit insurance or financial institution solvency. In a economic environment where deflation and default are likely to be the biggest systemic risks, the zero rate return offered right now by Treasury Direct’s certificate of indebtedness program seems like a small price to pay in exchange for the security offered.

    1. F. Beard

      Then let’s give notice and a short time later repeal government deposit insurance.

      I tried to establish an account at Treasury Direct and was required that my bank or credit union provide some information or approval (Since my bank is out of state, that’s not convenient for me)! We should be able to use a Post Office to establish an account.

  14. Eric

    I’ve said it for years. “Why can’t a have a window at the Fed??” I can borrow from the Fed at low interest and buy US bonds at a higher interest and pocket the difference just like any bankster. And I promise to spend every dime I earn this way to stimulate the economy!!

  15. steve from virginia

    The author of this article is incorrect.

    The Fed is a reserve bank not a depository institution. It’s job is to backstop deposit banks when the market mis-prices bank assets during a money panic.

    Central banks have no capital structure, only balance sheets; there is very little capital and no equity to speak of. Fed capital is <$50bn w/ $3+ trillion balance sheet. However, assets and liabilities are equal, there is no leverage against collateral on Fed balance sheet.

    If there is, the central bank is instantly insolvent … because it is no different from the other insolvent deposit banks.

    Rogoff should know better, too. hello kitty …

    1. Yves Smith Post author

      No, the Fed’s job (and that of central banks) goes well beyond acting as lender of the last resort. For instance, it conducts monetary operations daily to maintain the Fed funds rate, for instance. It also conducts Treasury bond auctions. And you COMPLETELY miss that it runs the large transactions payment system known as Fedwire. Banks could not run their private payments systems without settling daily balances over Fedwire.

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