The writer is former Chair of the FDIC and former Assistant Secretary of the U.S. Treasury for Financial Institutions.
More and more informed observers are asking why, after 13+ years of the Federal Reserve’s increasingly aggressive monetary interventions, the benefits remain so skewed toward Wall Street over Main Street. The answer is simple: follow the money. Using its traditional tools, the Fed pumps money into the financial system, hoping it will make its way into the broader economy. But the Fed can’t control where the money goes or who financial institutions decide to lend to, and clearly, the primary beneficiaries have been investors and the ultra-rich.
Fortunately, new technology in the form of a Central Bank Digital Currency (CBDC) provides a mechanism for the Fed to distribute cash directly to working families. This would be a profound shift in the way the Fed has traditionally responded to economic crises, largely bypassing the financial system and channeling increases in money supply to the people who need it the most.
For over a decade after the 2008-2009 financial crisis, the Fed kept money cheap and plentiful in a well-intentioned effort to revive the economy from that debacle. But the money wasn’t getting to consumers, which is why the Fed could never sustain its 2% inflation goal.
That started to change last year when the government stepped up fiscal spending for pandemic relief programs such as supplemental employment insurance, economic impact payments (EIP), rental assistance, and others. These programs were largely funded by deficit spending enabled by the Fed’s purchases of massive amounts of government debt.
As those trillions in new fiscal spending were absorbed into Main Street, voila, consumer prices started picking up (perhaps too much). This fiscal spending was more effective in getting help to working families. But even these fiscal programs were fraught with unnecessary political wrangling, overly complex requirements, and payment delays which stemmed from reliance on an inefficient and costly payments system to distribute the funds.
A better way to get cash to people who need it
CBDC would provide a better way.
By utilizing distributed ledger technology, the Fed could quickly and cheaply get digital dollars to households in times of crisis. To be sure, such a system would need to be authorized by Congress and utilized only in severe economic conditions, triggered perhaps by a precipitous drop in employment or GDP.
But with such a system of “auto-stabilizers,” families would not need to wait for the political system to wrangle over ad hoc relief programs, nor suffer costs and delays inherent in our outdated payments system. The Fed could distribute funds directly to digital wallets held by households, and/or use regulated digital payment providers to help consumers set up digital wallets and custody their CBDC.
This would also promote financial inclusion. Digital wallets could be more accessible to unbanked or underbanked populations, who fear the complexity and fees too often tied to checking accounts. Congress could authorize the Fed to provide initial “seed money” to households as an incentive to set them up.
While payments would be limited to households, indirect benefits would accrue to businesses, as they would provide emergency income for struggling families to pay rent, buy food, and other essential goods and services. By using a Fed-sponsored distributed ledger, the Fed could know the identity of the recipient, and track the money to make sure it reached its intended beneficiaries, providing strong controls against fraud.
Importantly, the Fed would no longer be trying to boost the economy by lowering interest rates to incentivize more borrowing. When people lose their jobs and incomes, they don’t need more debt, they need cash to tide them over. Providing cash assistance could help wean our economy off the use of debt to sustain growth, and hopefully lead to an eventual normalization of interest rates, ending the economic distortions caused by so many years of ultra-low interest rates.
Banking industry advocates such as the Bank Policy Institute argue against CBDC, fearing that it would disrupt banking by drawing money out of deposit accounts and into CBDC digital wallets. But this should not be a risk, particularly if the amount of CBDC per household was capped and was issued solely for government emergency support payments. Such a system could actually prove beneficial to banks as it would reduce the risk of consumer defaults during severe economic downturns. Moreover, CBDC could always be converted to traditional fiat currency and deposited into bank accounts, if banks offered households with sufficiently attractive terms. And of course, businesses and other institutions would still need banks to hold their deposits and service their needs.
Stablecoins can co-exist with CBDC
Another argument, used both for and against CBDC, is that it would undermine privately-sponsored stablecoins — a form of cryptocurrency whose value is tied to and backed by fiat currency. Some fear that privately-sponsored stablecoins could eventually displace central bank money. Thus, they support CBDC as a way to crowd out these private initiatives. For the same reason, supporters of private stablecoins advocate against a CBDC in the U.S.
I support properly regulated private stablecoins. (Disclosure, I am on the board of Paxos, a regulated trust which has one.) But I also think they can co-exist with CBDC, particularly if CBDC issuance is limited to household emergency payments. Our payments system has always relied on a combination of private and Fed-sponsored facilities. There is no reason to think CBDC would kill responsible innovation among private stablecoin issuers. Indeed, parallel private sector efforts to develop stablecoins could help inform and complement the Fed’s use of this technology.
A final argument against CBDC as a monetary tool is that it could increase the risk of inflation. To be sure, the impact on consumer spending would be much more direct than the Fed’s current tools. But that is a strength, not a weakness. Given the greater efficiency of CBDC, smaller increases in money supply would be necessary to boost consumer demand. And should consumer price inflation escalate, CBDC would provide the Fed with an elegant solution: pay interest on CBDC to give households an incentive to save, not spend it.
It is time for a fundamental rethink of how we use monetary policy to support our economy. Incentivizing borrowing with cheap money is inherently unstable. We can see the results: unprecedented levels of government and corporate borrowing, reckless speculation, and nosebleed valuations across a broad spectrum of assets. We all hope (pray) that accelerating consumer price inflation is transitory. But if the Fed is forced to raise rates to tame it, the impact on corporate and government borrowing costs could be disastrous, as would the negative impact on asset prices to financial stability.
It’s hard to see how we get out of our current predicament. But it’s easy to see how technology can, over the longer term, give us an alternative to low interest rates that can get our country out of this debt trap. If we are going to print money to support our economy, then let’s print it for the people. CBDC can provide the way.