The Covid-19 pandemic greatly increased the scope and power of the Federal Reserve. The Fed created a number of new emergency lending facilities, which allowed it to make off-balance sheet loans and buy the debt of corporations and municipalities through special purpose vehicles backstopped by the Treasury under the CARES Act. Meanwhile, the Fed's large-scale asset purchase program, known as quantitative easing (QE), was put on steroids after the pandemic struck in March 2020. The Fed has been purchasing longer-term Treasuries and mortgage-backed securities amounting to $120 billion per month, pushing the size of its balance sheet to an astonishing $7 trillion.Of course, the pandemic and lockdowns, which put the economy in a downward spiral, justified pumping liquidity into the financial system. But the shift toward allocating credit and the drift into fiscal policy have put the Fed's independence and credibility at risk. Indeed, those actions have set a precedent for the future, making it difficult for the Fed to normalize monetary policy and adhere to its primary function of providing sound money and a stable growth of nominal income.This conference's focus is on digital currency. In my remarks today, I will paint with a broader brush and briefly discuss the lessons I think the Fed can learn from the pandemic, including why it is important to leave entrepreneurs free to experiment with digital currencies and why any credible monetary system ultimately needs to be based on a genuine rule of law. I shall begin by arguing that while Covid-19 has been costly, both in terms of human and economic losses, it has provided for deregulation and innovation that will benefit society.
{"title":"LESSONS FOR THE FED FROM THE PANDEMIC","authors":"J. Allison","doi":"10.36009/CJ.41.2.17","DOIUrl":"https://doi.org/10.36009/CJ.41.2.17","url":null,"abstract":"The Covid-19 pandemic greatly increased the scope and power of the Federal Reserve. The Fed created a number of new emergency lending facilities, which allowed it to make off-balance sheet loans and buy the debt of corporations and municipalities through special purpose vehicles backstopped by the Treasury under the CARES Act. Meanwhile, the Fed's large-scale asset purchase program, known as quantitative easing (QE), was put on steroids after the pandemic struck in March 2020. The Fed has been purchasing longer-term Treasuries and mortgage-backed securities amounting to $120 billion per month, pushing the size of its balance sheet to an astonishing $7 trillion.Of course, the pandemic and lockdowns, which put the economy in a downward spiral, justified pumping liquidity into the financial system. But the shift toward allocating credit and the drift into fiscal policy have put the Fed's independence and credibility at risk. Indeed, those actions have set a precedent for the future, making it difficult for the Fed to normalize monetary policy and adhere to its primary function of providing sound money and a stable growth of nominal income.This conference's focus is on digital currency. In my remarks today, I will paint with a broader brush and briefly discuss the lessons I think the Fed can learn from the pandemic, including why it is important to leave entrepreneurs free to experiment with digital currencies and why any credible monetary system ultimately needs to be based on a genuine rule of law. I shall begin by arguing that while Covid-19 has been costly, both in terms of human and economic losses, it has provided for deregulation and innovation that will benefit society.","PeriodicalId":38832,"journal":{"name":"Cato Journal","volume":"1 1","pages":"423-427"},"PeriodicalIF":0.0,"publicationDate":"2021-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"90112748","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
[...]I should say that there was no greater single authority who impacted our policy deliberations when I served as chairman of the House Financial Services Committee than John Taylor. [...]the balance sheet can certainly be injurious to future taxpayers, and it is one more way that the Fed's independence could be compromised. [...]when the 2008 financial crisis occurred, the Fed asked for the power to pay interest on excess reserves. The CBO can't foresee a year in the next decade where the national debt won't rise faster than national income, which is a frightening prospect. [...]the Fed has a massive balance sheet with the assets it has bought, and it has borrowed the money from commercial banks to pay for those assets.
{"title":"REFLECTIONS ON MONETARY POLICY AND ITS FUTURE","authors":"Jeb Gramm Phil Taylor John B. Hensarling","doi":"10.36009/CJ.41.2.1","DOIUrl":"https://doi.org/10.36009/CJ.41.2.1","url":null,"abstract":"[...]I should say that there was no greater single authority who impacted our policy deliberations when I served as chairman of the House Financial Services Committee than John Taylor. [...]the balance sheet can certainly be injurious to future taxpayers, and it is one more way that the Fed's independence could be compromised. [...]when the 2008 financial crisis occurred, the Fed asked for the power to pay interest on excess reserves. The CBO can't foresee a year in the next decade where the national debt won't rise faster than national income, which is a frightening prospect. [...]the Fed has a massive balance sheet with the assets it has bought, and it has borrowed the money from commercial banks to pay for those assets.","PeriodicalId":38832,"journal":{"name":"Cato Journal","volume":"46 1","pages":"213-223"},"PeriodicalIF":0.0,"publicationDate":"2021-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"74754548","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The Federal Reserve started to pay interest on bank reserves during the Great Recession in 2008. These payments set an effective floor to the fed funds rate and allowed the Fed to determine shortterm interest rates with great precision. Together with a greatly expanded balance sheet, the interest rate paid on reserves became the primary monetary policy tool by which the Fed implemented its monetary policy decisions during the last decade. But the payment of interest on bank reserves had several side effects that were perhaps not fully recognized at the time that the decision was made. By paying interest on reserves, the Fed not only contributed significantly to the earnings of its member banks, but also influenced the size of the income transfers that the Fed regularly makes to the Treasury. Consequently, the effects of monetary policy actions became directly linked to the operating revenues of the federal government and by this to fiscal policy. As the Fed increasingly influences important fiscal variables, such as the size of the federal deficit, there looms the danger that politicians will attempt to influence the monetary policy actions of the Fed, thereby endangering the independence of the institution.
{"title":"Will Paying Interest on Reserves Endanger the Fed’s Independence?","authors":"H. Heller","doi":"10.36009/CJ.39.3.6","DOIUrl":"https://doi.org/10.36009/CJ.39.3.6","url":null,"abstract":"The Federal Reserve started to pay interest on bank reserves during the Great Recession in 2008. These payments set an effective floor to the fed funds rate and allowed the Fed to determine shortterm interest rates with great precision. Together with a greatly expanded balance sheet, the interest rate paid on reserves became the primary monetary policy tool by which the Fed implemented its monetary policy decisions during the last decade. But the payment of interest on bank reserves had several side effects that were perhaps not fully recognized at the time that the decision was made. By paying interest on reserves, the Fed not only contributed significantly to the earnings of its member banks, but also influenced the size of the income transfers that the Fed regularly makes to the Treasury. Consequently, the effects of monetary policy actions became directly linked to the operating revenues of the federal government and by this to fiscal policy. As the Fed increasingly influences important fiscal variables, such as the size of the federal deficit, there looms the danger that politicians will attempt to influence the monetary policy actions of the Fed, thereby endangering the independence of the institution.","PeriodicalId":38832,"journal":{"name":"Cato Journal","volume":"13 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86940401","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
During the last few years an apparently new and revolutionary idea has emerged in economic policy circles in the United States: “Modern Monetary Theory” (MMT). The central tenet of this view is that it is possible to use expansive monetary policy—money creation by the central bank (i.e., the Federal Reserve)—to finance large fiscal deficits, and create a “jobs guarantee” program that will ensure full employment and good jobs for everyone. This view is related to Abba Lerner’s (1943) “functional finance” idea, and has become very popular in progressive spheres. According to MMT supporters, this policy would not result in crowding out of private investment, nor would it generate a public debt crisis or inflation outbursts.
{"title":"Modern Monetary Theory: Cautionary Tales from Latin America","authors":"S. Edwards","doi":"10.36009/CJ.39.3.3","DOIUrl":"https://doi.org/10.36009/CJ.39.3.3","url":null,"abstract":"During the last few years an apparently new and revolutionary idea has emerged in economic policy circles in the United States: “Modern Monetary Theory” (MMT). The central tenet of this view is that it is possible to use expansive monetary policy—money creation by the central bank (i.e., the Federal Reserve)—to finance large fiscal deficits, and create a “jobs guarantee” program that will ensure full employment and good jobs for everyone. This view is related to Abba Lerner’s (1943) “functional finance” idea, and has become very popular in progressive spheres. According to MMT supporters, this policy would not result in crowding out of private investment, nor would it generate a public debt crisis or inflation outbursts.","PeriodicalId":38832,"journal":{"name":"Cato Journal","volume":"119 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78176810","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Thank you very much for the invitation to be here with you today. I understand that today’s summit is the first event as part of Cato’s new “Initiative for Financial Inclusion.” Cato has been recognized for decades as a vanguard of the liberty movement, and I am grateful that your scholars, especially Todd Zywicki and Diego Zuluaga, are focused on this vital issue. We at the Bureau have much to learn from you. I look forward to a continued dialogue about your innovative policy proposals to expand access to financial services and bolster consumer protections. My remarks today are focused on the relationship between financial inclusion and consumer protection. But before I begin, let me dispense with one minor formality: “While I am here today as a representative of the CFPB, my remarks do not constitute legal interpretation, guidance, or advice of the CFPB, and any personal opinions or views expressed are my own and may not represent the official views or position of the CFPB in all cases or in connection with specific matters.”
{"title":"Consumer Protection and Financial Inclusion","authors":"B. Johnson","doi":"10.36009/CJ.39.3.1","DOIUrl":"https://doi.org/10.36009/CJ.39.3.1","url":null,"abstract":"Thank you very much for the invitation to be here with you today. I understand that today’s summit is the first event as part of Cato’s new “Initiative for Financial Inclusion.” Cato has been recognized for decades as a vanguard of the liberty movement, and I am grateful that your scholars, especially Todd Zywicki and Diego Zuluaga, are focused on this vital issue. We at the Bureau have much to learn from you. I look forward to a continued dialogue about your innovative policy proposals to expand access to financial services and bolster consumer protections. My remarks today are focused on the relationship between financial inclusion and consumer protection. But before I begin, let me dispense with one minor formality: “While I am here today as a representative of the CFPB, my remarks do not constitute legal interpretation, guidance, or advice of the CFPB, and any personal opinions or views expressed are my own and may not represent the official views or position of the CFPB in all cases or in connection with specific matters.”","PeriodicalId":38832,"journal":{"name":"Cato Journal","volume":"40 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77065529","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Twenty years after the introduction of the euro, the European Monetary Union (EMU) is at its crossroads. Following the outbreak of the European financial and debt crisis in 2008, the European Central Bank (ECB) took comprehensive measures to stabilize the common currency. Interest rates were cut to and below zero and several asset purchase programs have inflated the ECB balance sheet (Riet 2018). Within the European System of Central Banks, large imbalances have emerged via the TARGET2 payments system, which can be seen as quasi-unconditional credit in favor of the southern euro area countries (Sinn 2018). While the ECB terminated its asset purchase program at the end of 2018 and is expected to increase interest rates in late 2019, financial instability is reemerging. Growing uncertainty about the fiscal discipline of the Italian government has triggered a significant increase in risk premiums on Italian government bonds. In particular, in Italy and Greece, but also in Germany, bad loans and assets remain stuck in the banking systems. In the face of the upcoming downswing, European banks do not seem ready for new financial turmoil.
{"title":"The 1948 German Currency and Economic Reform: Lessons for European Monetary Policy","authors":"G. Schnabl","doi":"10.36009/CJ.39.3.7","DOIUrl":"https://doi.org/10.36009/CJ.39.3.7","url":null,"abstract":"Twenty years after the introduction of the euro, the European Monetary Union (EMU) is at its crossroads. Following the outbreak of the European financial and debt crisis in 2008, the European Central Bank (ECB) took comprehensive measures to stabilize the common currency. Interest rates were cut to and below zero and several asset purchase programs have inflated the ECB balance sheet (Riet 2018). Within the European System of Central Banks, large imbalances have emerged via the TARGET2 payments system, which can be seen as quasi-unconditional credit in favor of the southern euro area countries (Sinn 2018). While the ECB terminated its asset purchase program at the end of 2018 and is expected to increase interest rates in late 2019, financial instability is reemerging. Growing uncertainty about the fiscal discipline of the Italian government has triggered a significant increase in risk premiums on Italian government bonds. In particular, in Italy and Greece, but also in Germany, bad loans and assets remain stuck in the banking systems. In the face of the upcoming downswing, European banks do not seem ready for new financial turmoil.","PeriodicalId":38832,"journal":{"name":"Cato Journal","volume":"33 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85318275","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In the absence of a monetary rule, a central bank is vulnerable to politicization. In the case of the United States, Congress delegated monetary authority to the Federal Reserve in 1913 and has increased the scope of that authority over time, especially following crises. However, Congress has never enacted an explicit rule to guide Fed policy, and it has used the Fed as a scapegoat when things go awry. By law, the Federal Reserve has a triple mandate to “promote effectively the goals of maximum employment, stable prices, and
{"title":"Myopic Monetary Policy and Presidential Power: Why Rules Matter","authors":"J. Dorn","doi":"10.36009/CJ.39.3.5","DOIUrl":"https://doi.org/10.36009/CJ.39.3.5","url":null,"abstract":"In the absence of a monetary rule, a central bank is vulnerable to politicization. In the case of the United States, Congress delegated monetary authority to the Federal Reserve in 1913 and has increased the scope of that authority over time, especially following crises. However, Congress has never enacted an explicit rule to guide Fed policy, and it has used the Fed as a scapegoat when things go awry. By law, the Federal Reserve has a triple mandate to “promote effectively the goals of maximum employment, stable prices, and","PeriodicalId":38832,"journal":{"name":"Cato Journal","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"81528026","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
MMT has become popular with Green New Dealers because it claims to remove or at least loosen traditional constraints on government spending. Although MMT makes much of its preferred way of looking at the process of producing money, it does not credibly reveal more scope for deficit spending without inflation. Its proposal to use taxation as a monetary policy instrument ignores decades of efforts to separate monetary policy decisions from fiscal/spending decisions in light of
{"title":"Modern Monetary Theory: A Critique","authors":"W. Coats","doi":"10.36009/CJ.39.3.4","DOIUrl":"https://doi.org/10.36009/CJ.39.3.4","url":null,"abstract":"MMT has become popular with Green New Dealers because it claims to remove or at least loosen traditional constraints on government spending. Although MMT makes much of its preferred way of looking at the process of producing money, it does not credibly reveal more scope for deficit spending without inflation. Its proposal to use taxation as a monetary policy instrument ignores decades of efforts to separate monetary policy decisions from fiscal/spending decisions in light of","PeriodicalId":38832,"journal":{"name":"Cato Journal","volume":"59 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76723657","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The U.S. Postal Service (USPS) is a large business enterprise operated by the federal government. It has more than 600,000 employees and more than $70 billion in annual revenues. Revenues are supposed to cover the postal service’s costs, but mail volume is plunging, and the USPS has been losing billions of dollars a year for more than a decade. The USPS has a legal monopoly over letters and mailboxes. That policy is an anomaly because the federal government’s general economic stance is to encourage open competition in markets, yet the USPS monopoly prevents entrepreneurs from entering postal markets and trying to improve quality and reduce costs for consumers. While mail volumes have fallen, the USPS has expanded its package business. But it makes no sense for a privileged federal entity to take business from private, taxpaying companies in the package industry. Postal and package markets are evolving rapidly, and the goal of federal policy should be to create a level playing field open for competition and innovation. Europe is facing the same challenge of declining mail volume, and it has focused on opening postal markets and privatizing postal providers. The U.S. Congress should follow suit by privatizing the USPS and opening postal markets to competition. These reforms would give the USPS the flexibility it needs to cut costs and diversify, while providing equal treatment to businesses across postal and package markets.
{"title":"Restructuring the U.S. Postal Service","authors":"C. Edwards","doi":"10.36009/CJ.39.3.9","DOIUrl":"https://doi.org/10.36009/CJ.39.3.9","url":null,"abstract":"The U.S. Postal Service (USPS) is a large business enterprise operated by the federal government. It has more than 600,000 employees and more than $70 billion in annual revenues. Revenues are supposed to cover the postal service’s costs, but mail volume is plunging, and the USPS has been losing billions of dollars a year for more than a decade. The USPS has a legal monopoly over letters and mailboxes. That policy is an anomaly because the federal government’s general economic stance is to encourage open competition in markets, yet the USPS monopoly prevents entrepreneurs from entering postal markets and trying to improve quality and reduce costs for consumers. While mail volumes have fallen, the USPS has expanded its package business. But it makes no sense for a privileged federal entity to take business from private, taxpaying companies in the package industry. Postal and package markets are evolving rapidly, and the goal of federal policy should be to create a level playing field open for competition and innovation. Europe is facing the same challenge of declining mail volume, and it has focused on opening postal markets and privatizing postal providers. The U.S. Congress should follow suit by privatizing the USPS and opening postal markets to competition. These reforms would give the USPS the flexibility it needs to cut costs and diversify, while providing equal treatment to businesses across postal and package markets.","PeriodicalId":38832,"journal":{"name":"Cato Journal","volume":"144 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"75051642","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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