💾 Archived View for gmi.noulin.net › mobileNews › 6570.gmi captured on 2021-12-05 at 23:47:19. Gemini links have been rewritten to link to archived content
⬅️ Previous capture (2021-12-03)
-=-=-=-=-=-=-
Individual accounts could improve consumer welfare and macroeconomic policy
A RECESSION strikes. Central banks leap into action, cutting interest rates to
perk up investment. But what if, as now, there is not much cutting to do, with
rates already at or close to zero? In such cases the manual calls for purchases
of government bonds with newly printed cash quantitative easing, or QE swelling
the reserves each bank keeps at the central bank. Imagine instead that people
also kept accounts at the central bank. New money could be added to their
accounts, providing a direct, equitable boost to spending. That is one of
several potential benefits of individual central-bank accounts, which are among
the more intriguing of the radical policy ideas in circulation.
Central banks deal in two sorts of currency: cash, which anyone can hold, and
digital money, accessible only to financial institutions through their accounts
at the central bank. Individuals hoping to spend digital money must use a bank
card or transfer (or a service, like Apple Pay, linked to a bank account), or a
private crypto-currency such as bitcoin or Ethereum. Some central banks are
considering whether and how to expand the use of their own digital money.
Sweden s Riksbank, for example, is exploring ways to create a widely used
e-krona. In June Swiss voters will participate in a referendum on a radical
monetary reform, one effect of which would be to give individuals access to
digital money at the Swiss National Bank (SNB). The main difficulty central
banks face is how to facilitate the circulation of digital currency without
routing everything through banks, as happens today.
Blockchain technology, which underpins crypto-currencies, could be one way to
avoid the banks. In such systems balances and transactions are tracked on a
distributed public ledger, secured with cryptography. But central banks worry
about security risks and technical challenges. And as Aleksander Berentsen and
Fabian Schar write in the latest quarterly Review of the Federal Reserve Bank
of St Louis, central-bank backing for anonymised transactions would be awkward
when private banks face demands to crack down on money-laundering and tax
evasion. Easier and less risky would be to extend the privilege enjoyed by
banks, to hold digital money at the central bank, to everyone.
Why, though, would central banks want to do so? One answer is that individual
accounts could help them with their monetary-policy mission. At present, they
manage interest rates across the economy indirectly, by adjusting the rates
banks earn on their reserves. But these are passed on only imperfectly to
consumers. At the moment, banks in America can earn a short-run, risk-free
interest rate of about 1.75% (those in Europe and Japan earn less). Current
accounts at private banks, meanwhile, pay approximately nothing. In a world of
individual central-bank accounts, in contrast, the rate paid on individual
deposits would become a potent policy tool. Rate changes would have a direct,
transparent effect on depositors. And were central-bank digital money to
account for a big share of transactions, swings in such spending could become a
useful real-time source of data for policymakers.
The accounts would come in especially handy when near-zero interest rates leave
central banks with few good options in a crunch. The effects of QE diminish
over time, particularly when crisis-induced breakdowns in credit markets begin
to heal. Central bankers could be more confident in the stimulative effect of
what Milton Friedman termed helicopter money : distributions to the public of
newly minted dosh. These would bring complications. Money is commonly
considered a liability of a central bank. Accountants would frown at
distributing new money without obtaining assets in exchange (like the
government bonds purchased when banks carry out QE), since they would create a
huge negative position on central-bank balance-sheets. But an institution that
can create its own money cannot go bankrupt. As long as a central bank is
keeping to a policy target (like a 2% inflation rate) an ugly balance-sheet is
not a problem.
Crucially, monetary policy oriented around individuals should be easier to
understand than the customary prestidigitation. Political constraints on the
use of QE the perception that it is a giveaway to banks, or (in Europe) a way
to prop up fiscally incontinent governments might bind less tightly for
injections of money into individual accounts.
A public option for banking ought to improve private banks behaviour, too.
To keep their deposits, they would need to offer useful services and
competitive rates, rather than hidden fees. Guaranteed access to a simple,
interest-paying savings vehicle, and to electronic money, could be a boon for
the world s underbanked poor. And though it need not, such accounts could
represent a first step away from deposit-financing of bank lending: a reform
favoured by some economists and regulators.
QE too
No bold reform comes without difficulty. Administrative costs should be low,
given the no-frills nature of the accounts. But the system would require
investment in physical and digital infrastructure. Many people will be
uncomfortable with accounts that give governments detailed information about
transactions, particularly if they hasten the decline of good old anonymous
cash. Poorly implemented systems could cause big trouble. The Swiss reform
would move all demand deposits from private banks to the SNB and tie its hands
in costly ways (although the proposal is unlikely to pass, polls suggest a
surprising third of the population are in favour). Where central banks are less
politically independent, courting votes by pumping accounts full of money, or
punishing political opponents by draining them, could be irresistible.
But used well, individual accounts could improve consumer welfare as well as
macroeconomic policy. It is a prospect that should raise interest.
This article appeared in the Finance and economics section of the print edition
under the headline "All the people s money"