Private banks have two very important functions in society: they provide the infrastructure for the payment system and they control credit.
This proposal would disentangle those functions making, I think, a more robust financial infrastructure.
The payment system is, by its characteristics, a natural monopoly, and it's so important that makes sense that it become public. If that was the case, the main function of private banks would be to control the issue of credit.
I assume fintechs of any size would be permitted to issue credit to folks by transfers directly into these accounts (in real time), thereby allowing for innovation while providing a bare minimum of financial service to citizens.
“Robust banking system” is inherently tied to reserve ratios, or having the deposits on hand to cover the loans you’re writing.
A bank that only writes loans and doesn’t have deposits is the opposite of robust. If any bank gets to do this it would be the central bank. Payment facilitation is less of a superpower and can be more safely entrusted to the private sector.
Maybe they are, but modern private banks already do that.
Before a bank concede a credit it's just checking if it's a good business, not if it has enough deposits or enough reserves.
When giving a credit, banks, are, basically, creating money that it's destroyed when the debt is payed.
A posteriori of giving the credit, the bank will search (assuming it have not already enough) the legal reserves requirement for the new created money.
Note, that this is the opposite of what we normal hear. In reality, first come the credit, then the reserves.
The bank that gave the credit, trying to meet its legal obligations of reserves, will try to get reserves loaned from other banks, creating demand for reserves in the inter-bank system. If the Central Bank does nothing, the added demand would increase the interest rate.
Modern Central banks don't try to control the quantity of money in the system, but the interest rate. If the are not enough reserves for the existing demand, in order to keep the interest rate in their target, the central bank will increase the reserves in the system.
So, deposits are not necessary, otherwise, the quantitative easing programs of the last years, would be impossible.
If a bank is constrained by the Basel capital requirements, it can e.g. attempt to issue bonds. If it does so successfully, it can then create new loans corresponding to a multiple of the value of those bonds.
In the event of a run, a bank is considered illiquid, an insolvent bank is one where losses on debts exceed loss provisions and capital.
An entity that only wrote loans, and didn't have deposits would not be a bank - the definition of a bank is implicitly that it is performing fractional reserve banking via double entry book keeping. (Unless it's the World Bank, which is actually a fund, because the US and UK had an argument about who would control the International Monetary Fund (which is actually a bank) when the Bretton Woods agreement was setup.
No banks, including central banks can really be described as robust. They have at best around 1% fault tolerance in terms of the quantity of loans as a percentage of total lending that they can write-off each year.
Yes, that is about to become a huge problem.
This indicates that the traditional story of how fractional reserve banking causes money growth is wrong.
In reality, even a non-zero reserve ratio doesn't limit money creation if you look at the financial system as a whole, because the created money will simply become deposits elsewhere.
The true limiter of money creation is capital constraints: somebody must give money to the bank and be willing to lose it - only then is the bank allowed to make loans.
The two issue's with non-zero reserve regulation were (historically) the price of gold was implicitly linked to deposit expansion, and in the Bretton Woods era, all the countries had different expansion rates. Then post Bretton Woods, Basel comes in.
With Basel the Bank's risk weighted capital also regulates the amount of lending, and hence deposit expansion.
I suspect if the Fed is supposed to do it, they will outsource it to regular banks which will then add on restrictions, fees and other hurdles there by making it the same as today's bank accounts.
What so say is not a natural phenomenon: the government isn't so stupid as to unintionality write a contract so vague that the recipiant can just renk sneak all the want.
2. I worry that this might threaten the political independence of the Fed, which is something that I think is really important to maintain.
But it may still be doable; there do exist Federal Agencies that are supposed to be apolitical but we've seen how the current admin has corrupted even non political agencies like the CDC, EPA etc. So ... I don't know. There would need to be better safeguards.
>Private banks would simply have to offer something of value.
They do but they can not compete with a central bank.
I imagine the underbanked and unbanked individuals that would want this service aren't actually craved by the private banks right now.
Building out an ATM network though would probably be ridiculously expensive. You could probably just build them into the USPS though. I think Japan does this?
The US had "postal banking" from 1911 to 1967, but it was all paper based.
It’s a bit tiring to hear the government can’t do, when those social security deposits roll out without hiccup each month, and Medicare has exceptionally high satisfaction rates from the 65 and older crowd.
Been a long time coming.
Who is The Great Democracy Initiative, and where does their funding come from?
>The Great Democracy Initiative is housed at the Roosevelt Institute
Lindsay Owens - ... Senior Economic Policy Advisor to Senator Elizabeth Warren...
Suzanne Kahn, Deputy Director - ... Director of the Great Democracy Initiative ...
Julie Margetta Morgan - ... served as a senior counsel to Senator Elizabeth Warren...
Ganesh Sitaraman - ... professor of law at Vanderbilt University ...
Anna N. Smith - ... supports the Education, Jobs, and Worker Power program for the Roosevelt Institute ...
I disagree with some of the other claimed benefits. Central bank accounts holding monetary base would not offer interest, just like paper money, and will always offer negative real interest when considering inflation. The government pays interest when borrowing from the banking system, and you can certainly use your central bank account to buy these securities (just like banks do today) but then you are no longer holding the risk free monetary base, you have a security with some non-zero risk of sovereign default.
The stability of the system is also not a given. Commercial banks run the payment system as an ancillary to their main function, and that is to match un short term liquidity, that is temporary savings and surplus of people and firms, and redirect those resources to long term investments. This is a critical economic role and for the economy to work it will still need to be provided in some other fashion, for example by a credit market.
This already happens to a large degree, for example banks offer mortgages and package them into securities that are sold on markets. This whole MBS process was behind the financial melt-down in 2008, since these practices were less scrutinized than the direct loans and deposits of banks. In fact, both are the same process: monetary base increases in velocity and is multiplied in the form of interest bearing securities that represent investments in the productive economy. The stability of the whole financial system is predicated on the quality and diligence of these investments, and credit markets proved to be notoriously bad at discovering this.
One thing to note though, is that when a "bank run" happens in the "shadow banks" of the credit markets, the bad securities are wiped out but the goods ones quickly recover. So the central bank can ride a financial storm by blanket buying paper with fresh money and let the market discover the winners and losers. Bank runs are self-limiting because securities drop to a value where they become enticing to value investors. When commercial banks are involved though, you have massive contagion since bank runs are self-fueling, once a bank is in trouble every investors starts to request their money, even if the fundamentals of the loans made by that bank are sound in the long run.
If the financial system is a tree, the root node is the central bank, the second level nodes are the private banks and in the next level are the business and households.
By the way, this perspective makes clear that banks are not "only another business" as we hear sometimes.
I feel that you glossed over the most important part of credit card companies. I would say 100% of the reason I have a credit card is their diligence in preventing and solving fraud on my account. I would imagine the same to be true for many financially responsible HN readers as well.
For remote transactions, aside from discontinuing the absurd practice of treating numbers printed on a card as secret authentication data, thereby reducing fraud manifold, we could have a unified system where consumer protection is offered by a 3rd party. For example, before you are allowed to shop online using your central bank account, you must select a private payment processor such as PayPal, Revolut etc., and agree to their terms and fees, and they in turn would handle charge-backs for remote transactions.
How can the market determine the winners if the central bank is propping up the losers by buying their paper?
The public will soon learn that public banking means your personal account is a policy instrument. Need to stimulate the economy? Just tell everyone that no accounts will be permitted to have a balance over $2k by Friday at midnight. Either spend the rest or lose it, up to you.
Or maybe you owe child support. Or maybe you haven't paid a parking ticket. Or maybe you attended a "riot". All of which may be "legal" reasons to deduct funds. Its all digital so you can't stop it. The possibilities are endless.
I suppose the upside is it will require a phone, so you'll get a free burner Android phone if you want one.
Also, modern financial theory is predicated on a nominally positive risk free rate. If the nominal time value of money is strictly zero, a lot of things start to break down.
Also, risk free interest rates are negative in Europe, let alone zero.
In short, three Fed officials (two former, and the current President/CEO of Fed Bank of Cleveland) are speculating on a product like this. Most interesting is the idea of directly sending cash payments to individual citizens using this product.
To name one example of many, they were saying that JP Morgan was rigging commodities markets for years. I know people not in finance who heard that ZH story (years ago now, when ZH was in their pomp): lololol, tinfoil hat...that JPM were rigging commodities markets was known in finance for literally decades, it was common knowledge (I didn't work in commodities and heard about it, JPM were just fined $1bn for it).
I think people get confused because they have trouble signal from noise, particularly from people who are obviously biased (this is a key ability in finance, almost all the information you receive is conflicted, and you have to understand human nature at a deep level i.e. understand what people lie to each other about, what they lie to themselves about, etc.). I am totally fine with biased coverage (everyone is prone to biases, it is just some people deny that to themselves/others). I don't have to believe everything they say and, compared to every other finance publication, they really do cover stuff that no-one else is covering. Yes, it is sensational and their political coverage is usually insane (tbh, it is quite funny)...but, again, that doesn't mean they are wrong about everything or add no value (btw, almost every economist I have ever met has had bizarre political views...people who work in finance usually do because being an expert in one thing does not make you an expert in all things).
In my experience, people who talk about news not being reliable also believe all kinds of insane shit that appears in the mainstream media. Believing that you are hyper rational is, in itself, not rational.
There's a problem in wireless communications called multipath. When a signal is transmitted over the air, the receiver will often not receive the original signal. Instead, it will receive a lot of reflected, refracted and distorted versions of it.
So the question is: what's the best way we can combine those signals to recreate the original?
Not going into the specifics, but it turns out that to maximize information it's often necessary to listen to trash signals (one that has a lot of noise) because those might have information that good signals do not have (as many times they will be redundant).
(I realize that this proposal is something slightly different, but I wanted to preempt the inevitable "poor are unbanked because of fees" claims.)
I know it's hard to believe in today's tech bubble, but there are hundreds of thousands of people in America who simply don't have any identification. They might have a Social Security number they remember, but that's about it.
I'm not talking about hobos or criminals, but just people who choose to live a different lifestyle.
I was first introduced to this society when me and a bunch of friends cycled across the continent. We ran into all kinds of interesting — and very nice — people who just weren't on any official radar. Drifters, in a sense. People who just enjoy the freedom of working in a coffee shop in one city for a few months, then a bar in another city for a few months, then camping for a few months.
I'd forgotten about this subculture until a couple of weeks ago when the New York Times did a photo piece about the people who still ride Amtrak during a pandemic. One couple that was interviewed had to take Amtrak because they didn't have any official documents that would let them get on a plane.
I always thought this is what the target is for with the Libra cryptocurrency.
In my opinion private banks are perfectly fine, the problem isn't the idea of independent banks, the problem is government and central banks subsidising losers by bail-outs and the "lender of last resort" mandate while also enacting enormous regulatory barriers that make it impossible for new banks/financial institutions to compete with incumbents.
Many forms of credit are basically government lons anyway. The current model of thousands of retail and commercial banks isn’t sustainable. Most bank business could be done at a post office or gas station counter. They exist as a sales funnel.
Indeed the current centralised banking model is quite recent and only started to creep in after the enactment of the Federal Reserve (and the consequent central planning of money and credit) and dramatically accelerated after the end of the gold standard in 1971 and the decoupling of money from sane fundamentals. It's not a coincidence that what followed was extreme consolidation of banks and the quasi-neofeudalism that we see today with large corporates who are able to get credit from large multinational banks which they are close to and then with that money price out small businesses and drive them to bankruptcy.
What has been happening for the past 40 years is not natural, and what banks are doing now is almost entirely driven by central banks and not some natural order resulting from the free market (which throughout history has always selected a decentralised banking system with thousands of small local banks). In my opinion we need to protect what little we have left instead of just yielding to the central planners at the Fed, the ECB etc.
The free market in my country has produced two banks that provide banking to 80% of the population (6M people). It has also more or less killed off cash in favour of credit cards and more recently a single, 100% privatized smartphone app. Accepting cash is still a legal requirement, ie. it is being kept alive by our government and central bank, but it is mostly old people and a few privacy/conspiracy kooks who use it.
Almost all of the private banks also have negative interest rates, at least for deposits over a certain amount. And they are all pushing investment (stocks) as an alternative for savings.
I really do hope our central bank wakes up and starts providing a way to store my savings without gambling them on the stock market soon, as well as a way to transfer money to other people without going through a privatized middle man. There is obviously a need for financial services like loans and mortgages, and even investment for people who want that, but storage and transfer of money should not rely on private businesses who then get to charge money for the use of money - the original definition of the word usury! - but be a publicly owned, publicly accessible infrastructure just like central bank cash was.
I don't want to assume where you are from, but almost every developed country has incredibly complex, expensive, and insurmountable bank licensing procedures which make it impossible for startups to compete. That is not a free market, it is a crony capitalist market which shields incumbents.
Yes, we've had sustained economic growth and wealth generation to a magnitude never seen before in the history of the world (although not equitable, but that's a different policy problem).
What does it mean that its not "natural"? There is nothing "natural" about the "free market"; its a way we decide to organize resource allocation. There are other ways to do so. Central banks have prevented catastrophic economic failures in the past few decades. I think I like this system better than one which results in "natural" destruction of economy and livelihoods like what happened in the Great Depression.
There are many ways I'd like to rebut this, but instead I'll just ask for who and how? Technology has improved that is for sure as it is a incredibly deflationary, but what else has improved in your eyes? The vast majority in the U.S. and some parts of Europe while nominally earning more than what they did in the 1960's are in my opinion worse off than before. Minimum wage used to be 40-50 dollars inflation adjusted, and one lower middle-class salary could support an entire family and provide material comforts. I don't see much of that happening now as I and many others believe inflation has completely ravaged the middle-class in the West and is making it increasingly difficult to get ahead.
>What does it mean that its not "natural"? There is nothing "natural" about the "free market"; its a way we decide to organize resource allocation. There are other ways to do so. Central banks have prevented catastrophic economic failures in the past few decades. I think I like this system better than one which results in "natural" destruction of economy and livelihoods like what happened in the Great Depression.
We didn't "choose" to have a free market. A free market is simply the voluntary and spontaneous interaction between free individuals, nothing more, and is entirely natural. Central planning and using coercion to force market outcomes, on the other hand, is definitely not natural.
It is often taught that we have avoided a scenario like the Great Depression almost exclusively due to the enactment of a central bank, but this is outright false and is borderline malicious historical revisionism (in fact many economists, including some at the Fed, believe that the Fed was actually the cause of the credit bubble during the 1920's which eventually burst in 1929). We had periodic recessions before the Fed, but they almost always resolved themselves quite quickly and wasn't near the impact that recessions have today.
Ask yourself this, why is it that recessions seem to get worse and worse and more importantly affect everyone and not just localised sectors in an economy? 2008 was definitely worse than 2001, and the current covid recession is arguably worse than 2008 due to how overleveraged everyone is (a direct consequence of Fed monetary policy).
So what? A free market was the only possible market when society did not have the tools to organize and control resource allocation on the scale its possible today, due to advances in technology and expansion in education. We have better tools today, and we as a society can choose other methods for resource allocation that are now accessible.
This kind of thinking baffles me: horses are the only "natural" way of transportation, by your definition. But we discovered automobiles, trains and all that shebang.
Many have thought like you, some have even tried to architect society into something like you are describing, and fortunately those that did failed so spectacularly that they are remembered in the history books with names like the Soviet Union, Venezuela, Cuba, and maoist China. They all failed because centrally planned societies, either done through envisioned high-tech computerised/AI systems or through at-the-time high-tech 5-year plans like the Soviet Union, all suffer from the knowledge problem. It is simply impossible for someone to know everything about an economy to be able to plan it efficiently.
Perhaps a more tangible argument for the tech-crowd on HN is the lack of understanding that non-engineer managers in some companies have for the software development process and the disastrous results that follow. Now imagine having a Politburo dictating what every little work group in a country should do from software engineers to janitorial staff and you can see where this leads.
>But we discovered automobiles, trains and all that shebang.
Ironically things that were discovered and developed in the 1800s, the times of almost unrestricted capitalism and market price discovery.
Citation needed. I'm pretty sure the growth of real GDP in the US was higher in the 50 years prior to the end of the gold standard, than in these ~50 years since.
"The dollar as a reserve currency transfers wealth from the rest of world to the USA
One final way in which money works today that has a substantial effect on the workings of the global political economy is the use of the US dollar as the international reserve currency. This follows the decision of the OPEC countries shortly after the end of the Second World War to accept only dollars for their oil. Today, the dollar is used for trade in many other commodities.
This acts as a huge subsidy to the US economy, since countries elsewhere in the world sell goods and services to the US, but instead of buying back from US companies, they keep the dollars so as to be able to trade among themselves — as well as to be able to protect their currencies from speculative attack. This effective transfer of wealth from the rest of the world to the US permits the US to be easily the world’s largest debtor nation, while driving the unprecedented widening of wealth disparity within the global community (Douthwaite, 1999)." 
If that theory was true how they explain Japan?
Usually a good law will end up expanding the number of people who are elite, but still give marginal benefit to the commoner.
For example, statutory jurisprudence as opposed to rule by nobility, let people who were only good at trading become part of the elite. Previously you had to also have a private army, in order to be elite.
When you use the word 'commoners', is this akin to the word consumers, in contrast to producers - who make and invent the things commoners/consumers buy and use? I'm asking because this definition comes up from Wikipedia:
"Commoner: The common people, also known as the common man, commoners, or the masses, are the ordinary people in a community or nation who lack any significant social status, especially those who are members of neither royalty, nobility, the clergy, nor any member of the aristocracy."
> Labor laws greatly expanded protections for the commoners, as did Social Security and other welfare programs.
Many argue those post-war gains are being wiped out 
 https://www.weforum.org/agenda/2016/11/precariat-global-clas... or video: https://www.youtube.com/watch?v=nnYhZCUYOxs
"sometimes violently" is a bit of an understatement.
With the use of our current system we are literally making the world uninhabitable for human existence. We are systemically destroying mother earth's carrying capacity through ecological destruction, not to mention the misery caused by Magical Voluntarism and labour rights abuses the world over.
I'm still finding ways to describe the issues with our economic system and it's apparatus, and the meaningful changes proposed by one of the projects I follow, in a way that acknowledges that in a way we are all victims to this current system (including neo-Imperialist USA), as today's money does not respect the law of requisite variety . My above critique might sound anti-American, but America (together with other formal colonial powers in the Global North) is just the most powerful player in a game with outdated, harmful and inadequate economic models and governance systems. It's a painful era where we are using inadequate wealth acknowledgement systems, where the old Platform Capitalism paradigm is breaking down and showing it's flaws, and where the potentiality for Protocol Cooperativism is starting to emerge. Money is an information technology created by humans, operating a set of protocols. Tomorrow's world is governed by the practice of Commons-based peer production that is not subject to the contrived scarcity of today's value regime and system, where a neoliberal Intellectual Property system blocks innovation and monopolizes knowledge and information .
 http://eric.harris-braun.com/blog/2007/05/14/id-53, especially:
"When I’m talking with free-market business people my elevator pitch [for community currencies supported by the MetaCurrency Project's Holochain pattern] is about allowing the power of competition and the marketplace to work on the currency system itself. [...] When I’m talking with engineers and information-theory folks my elevator pitch is about Ashby’s Law of Requisite Variety and questions of the insufficient information carrying capacity of the monetary system to handle the control problems posed by the modern economy. When I’m talking with computer geeks my elevator pitch is about cc as a peer-to-peer distributed information system and about “pushing the intelligence to the edges” as in Reed’s Law."
 https://c4ss.org/content/52947 and https://www.resilience.org/stories/2017-08-03/book-day-corru...