U.S. Markets close in 5 hrs 26 mins

Former FDIC chair: The Fed needs to get serious about its own digital currency

Sheila Bair
Contributor

NOTE: This post was originally published on June 8, 2018.

Last week’s market volatility reminds us — again — of the fragility of modern-day financial systems. In just the past decade, we’ve experienced our own subprime crisis, followed by Europe’s sovereign debt crisis, followed by assorted calamities in Portugal, Venezuela, Russia, Ukraine, Brazil, and now the risk of Italy exiting the Eurozone.

Lack of confidence in our banking systems motivated the mysterious Satoshi Nakamoto to develop bitcoin. He (she, they?) originally intended it as a widely accepted method of payment that could function completely outside of the banking system. Unfortunately for M. Nakamoto, bitcoin has failed miserably as a method of payment. Its extreme volatility has made it popular as a speculative investment and store of value, but who wants to pay for something in bitcoin when its value could double in a month, or accept it as payment if its value could just as precipitously drop?

A radical idea that’s gaining credibility

But what if the Fed or other central bank issued their own digital money? Though it sounds radical, the idea is gaining credibility among an increasing number of mainstream economists and central bankers themselves. Presumably, a central bank-issued digital currency (CBDC) would be as stable as traditional fiat currency, while reducing the risk of financial crises and improving monetary policy tools. To be sure, a sudden, wholesale shift from bank accounts to CBDC could have severely negative consequences for credit availability given banks’ reliance on deposits to fund loans.

Former FDIC director Sheila Bair on Capitol Hill in Washington June 26, 2013. REUTERS/Yuri Gripas

Consider the current bank-dominated payments system. Institutions and individuals place most of their ready cash with banks, either through deposit accounts (a portion of which is FDIC insured) or by purchasing banks’ short-term debt. The system works smoothly under benign conditions, but in times of extreme stress, people lose confidence in their banks. So they pull their uninsured money out of the banking system, disrupting the free flow of payments. This problem of “bank runs” is as old as banking itself, and has yet to be fully conquered, notwithstanding the advent of deposit insurance.

However, suppose consumers and businesses could convert their bank deposits into a digital currency that would be issued and backed by the Fed? Let’s call it FedCoin. They would no longer need to worry about bank instability. Since the Fed can print its own money, by definition, it can always make good on its financial obligations. What’s more, the costs and inefficiencies in the current payments system would be greatly reduced. Consumers would no longer need to maintain checking accounts, with their expensive maintenance and overdraft fees, to effectuate payments. At the same time, businesses accepting Fedcoin could avoid the interchange fees charged by banks and their card networks — fees that are particularly burdensome to small firms.

A better tool to conduct monetary policy

Importantly, the Fed would have much more effective tools for conducting monetary policy to address economic cycles. The Fed now manipulates the money supply through buying and selling securities with a select group of big banks and by paying them interest on the reserves they deposit at the Fed — currently a tidy 1.75%. When the Fed wants to stimulate the economy — as it did after the crisis — it buys securities from these banks and reduces the rates it pays them on reserves, inducing them to lend the proceeds to the real economy to get a better return. When it wants to raise rates — as it is doing now — it reduces its holdings of securities and increases the rates it pays on reserves.

This is a nice deal for the banks, but hasn’t done a whole lot to help the rest of us. The past 10 years are proof positive that current monetary tools are woefully inadequate to stimulate broad-based economic growth. The super rich have gotten a lot richer, while the middle class has struggled.

But imagine that we all held interest-bearing FedCoin. During inflationary periods when the economy is overheating, the Fed could raise rates on interest which would be paid directly to the general public, giving us an incentive to put more savings into FedCoin and spend less. During recessionary periods, the Fed could reduce the interest rate on that currency, giving us more incentive to spend to stimulate economic growth. If the Fed reduced rates to zero and the economy still spiraled downward, it could issue special digital coins that would disappear, within a time certain, if not spent on consumption. This would be much more effective stimulus than the deficit-funded tax and Social Security refunds we employed during the Great Recession. Instead of spending that money, most people either saved it or paid down existing debt.

Why the Fed needs to stay ahead of this technology

This may sound like monetary nirvana, yet FedCoin could have major disadvantages as well. The biggest is disruption to credit availability. Over $10 trillion is currently deposited in demand deposit accounts with banks. This is money banks use to lend to consumers and businesses, but could theoretically disappear if the public moved their all of their bank transaction accounts into FedCoin. Yet, this risk could be mitigated by limiting the amount of FedCoin issued and allowing banks to compete with FedCoin for deposits (though they might have to offer better rates and service to do so).

Many central banks — including those in the UK, Singapore, China, and Sweden — are proactively evaluating the merits of a central bank-issued digital currency. Meanwhile, tech geniuses in the private sector have not given up on Nakamoto’s original vision to create a privately issued, stable digital currency that could be widely used for payments. Perhaps the most well-publicized effort is Basis, a startup backed by such luminaries as billionaire investor Stanley Druckenmiller and highly regarded former Federal Reserve Governor Kevin Warsh. Basis’s algorithm stabilizes its value by issuing more of the currency when the price goes up relative to the dollar, and buying it back when the price declines.

It is far from certain whether Basis or similar private sector efforts will be successful, at least in the short term. However, think of the ramifications if they were. Retailers, large and small, loathe paying interchange fees on card transactions, as much so as consumers hate getting trapped in high account fees. One can imagine they would be eager to start using digital currency as payment, bypassing the banks. That could prompt a different kind of run on banks, as fiat money quickly migrated out of deposit accounts into digital coins.

That would be very bad for the banking system, but also the Fed, as its current monopoly on currency issuance would be threatened, as would its ability to control the money supply. To avoid that result, the Fed needs to get serious now about evaluating the relative merits of issuing its own digital currency. If it does not stay ahead of this technology, not only could banking be disrupted — but the Fed itself could also be at risk.

Sheila Bair is the former Chair of the FDIC and has held senior appointments in both Republican and Democrat Administrations. She currently serves as a board member or advisor to a several companies and is a founding board member of the Volcker Alliance, a nonprofit established to rebuild trust in government.

Read more:

Former FDIC chair: Trump’s attacks on Amazon are an attack on the Bill of Rights

Former FDIC chair: Why we shouldn’t ban bitcoin

  • Hedge Funds Dropped The Ball On Continental Building Products Inc (CBPX)
    Business
    Insider Monkey

    Hedge Funds Dropped The Ball On Continental Building Products Inc (CBPX)

    Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Hedge fund interest in Continental Building Products Inc (NYSE:CBPX) shares was flat at the end of last quarter. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives.

  • Hedge Funds Are Betting On American Outdoor Brands Corporation (AOBC)
    Business
    Insider Monkey

    Hedge Funds Are Betting On American Outdoor Brands Corporation (AOBC)

    Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds' and successful investors' positions as of the end of the third quarter. You can find articles about an individual hedge fund's trades on numerous financial news websites.

  • Hedge Funds Are Dumping Cardiovascular Systems Inc (CSII)
    Business
    Insider Monkey

    Hedge Funds Are Dumping Cardiovascular Systems Inc (CSII)

    There were 17 hedge funds in our database with CSII positions at the end of the previous quarter. Our calculations also showed that CSII isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

  • Hedge Funds Have Never Been This Bullish On Agilysys, Inc. (AGYS)
    Business
    Insider Monkey

    Hedge Funds Have Never Been This Bullish On Agilysys, Inc. (AGYS)

    In this article we will find out how hedge fund sentiment to Agilysys, Inc. NASDAQ:AGYS) changed recently. Is Agilysys, Inc.

  • Business
    Thomson Reuters StreetEvents

    Edited Transcript of ATD.B.TO earnings conference call or presentation 27-Nov-19 1:00pm GMT

    Q2 2020 Alimentation Couche-Tard Inc Earnings Call

  • Boris Johnson's huge victory will reshape US-UK relations and Britain's DNA
    World
    Yahoo Finance UK

    Boris Johnson's huge victory will reshape US-UK relations and Britain's DNA

    One of the first people to congratulate Boris Johnson on his party's massive victory in the UK's general election was US president Donald Trump. Further bolstering the close relationship he has developed with Johnson —so much so he even gave his private cell number to him — Trump reiterated his enthusiasm to get a trade deal done post-Brexit. While people can be forgiven that it's probably just business-as-usual between Trump and Johnson, the Tories' win means that we are about to witness a strengthening of US-UK ties, and an economic-political bromance that hasn't been seen since George W Bush and Tony Blair.

  • Business
    American City Business Journals

    Tesla raises objections — a lot of objections — to NLRB’s labor ruling

    In a pair of filings this week, Tesla Inc. has objected to a ruling by the National Labor Relations Board that says the company engaged in anti-labor activity and violation federal labor laws. The Mercury News reports that in filings dated Dec. 9, Palo Alto-based Tesla raised 166 exceptions to a decision made by administrative law judge Anita Baman Tracy. The case could be heard by the NLRB in the coming year unless a settlement is reached.

  • Business
    Fox Business

    Private company boardrooms have few, if any, female directors

    Calls for diversity in boardrooms across corporate America appear to have fallen flat among at least one group – venture-backed private companies. The House Financial Services Committee held a hearing in June aimed at boosting racial, ethnic and gender representation on corporate boards at the same time that the Government Accountability Office predicted it could take 40 years for female representation to equal that of their male counterparts at S&P 500 companies. And the problem is even more pronounced for some private companies.

  • Are Investors Undervaluing Insperity, Inc. (NYSE:NSP) By 39%?
    Business
    Simply Wall St.

    Are Investors Undervaluing Insperity, Inc. (NYSE:NSP) By 39%?

    Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Insperity, Inc. (NYSE:NSP) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

  • Costco pops after releasing first-quarter results
    Business
    Yahoo Finance Video

    Costco pops after releasing first-quarter results

    Yahoo Finance's Seana Smith breaks down Costco's first-quarter earnings results live.

  • Here is What Hedge Funds Really Think About Enerplus Corp (ERF)
    Business
    Insider Monkey

    Here is What Hedge Funds Really Think About Enerplus Corp (ERF)

    Hedge funds are known to underperform the bull markets but that's not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. Conversely, hedge funds' top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark.

  • Billionaire George Soros Snaps Up These 3 High-Yield Dividend Stocks
    Business
    TipRanks

    Billionaire George Soros Snaps Up These 3 High-Yield Dividend Stocks

    To watch Boyd's track record, click here) BP shares have received three recent Buy ratings, giving the stock a unanimous 'Strong Buy' from the analyst consensus. The average price target stands tall at $51.33 -- indicating a robust upside potential of 39%. See BP stock analysis on TipRanks) BP wasn't the only energy industry company that Soros was interested in.

  • Hedge Funds Couldn’t Dump AnaptysBio, Inc. (ANAB) Fast Enough
    Business
    Insider Monkey

    Hedge Funds Couldn’t Dump AnaptysBio, Inc. (ANAB) Fast Enough

    With the first-quarter round of 13F filings behind us it is time to take a look at the stocks in which some of the best money managers in the world preferred to invest or sell heading into the second quarter. One of these stocks was AnaptysBio, Inc. (NASDAQ:ANAB). AnaptysBio, Inc. (NASDAQ:ANAB) was in 15 hedge funds' portfolios at the end of the third quarter of 2019.

  • Is W.P. Carey Inc. (WPC) A Good Stock To Buy?
    Business
    Insider Monkey

    Is W.P. Carey Inc. (WPC) A Good Stock To Buy?

    The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. Insider Monkey finished processing more than 750 13F filings submitted by hedge funds and prominent investors. In this article we are going to take a look at smart money sentiment towards W.P. Carey Inc. (NYSE:WPC).

  • Should You Buy BioTelemetry, Inc. (BEAT)?
    Business
    Insider Monkey

    Should You Buy BioTelemetry, Inc. (BEAT)?

    Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers.

  • Business
    American City Business Journals

    New Central Florida hotel to hire 180 workers

    A new Central Florida hotel is set to ramp up hiring for 180-plus jobs as it prepares to open in the fastest-growing retirement community in the U.S. The 151-room, 215,000-square-foot Brownwood Hotel & Spa in The Villages will be hiring for hotel jobs, as well as its banquet and convention center and Wolfgang Puck Kitchen + Bar. The Wolfgang Puck Kitchen + Bar, which will feature indoor and outdoor seating for 150 and private dining rooms, is hiring kitchen, bar and wait staff. Brownwood will hire for those positions from 10 a.m.-6 p.m. on Jan. 6, at the hotel's pre-opening offices at 340 Heald Way, Suite 238, in The Villages.

  • Is Iron Mountain Incorporated (IRM) A Good Stock To Buy?
    Business
    Insider Monkey

    Is Iron Mountain Incorporated (IRM) A Good Stock To Buy?

    Hedge fund activity in Iron Mountain Incorporated (NYSE:IRM) Heading into the fourth quarter of 2019, a total of 14 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. The graph below displays the number of hedge funds with bullish position in IRM over the last 17 quarters. With the smart money's capital changing hands, there exists a few noteworthy hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).

  • General Electric climbs after UBS upgrade
    Business
    Yahoo Finance Video

    General Electric climbs after UBS upgrade

    GE shares are climbing after UBS upgraded the stock to a 'buy' and raised its price target. Yahoo Finance's Brian Cheung joins Seana Smith on The Ticker to discuss.

  • Should You Be Tempted To Sell Post Holdings, Inc. (NYSE:POST) Because Of Its P/E Ratio?
    Business
    Simply Wall St.

    Should You Be Tempted To Sell Post Holdings, Inc. (NYSE:POST) Because Of Its P/E Ratio?

    The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). Post Holdings has a price to earnings ratio of 62.42, based on the last twelve months. How Do You Calculate A P/E Ratio?

  • What To Know Before Buying Sempra Energy (NYSE:SRE) For Its Dividend
    Business
    Simply Wall St.

    What To Know Before Buying Sempra Energy (NYSE:SRE) For Its Dividend

    Net debt to EBITDA measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). Sempra Energy has net debt of 5.76 times its EBITDA, which implies meaningful risk if interest rates rise of earnings decline. We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company's net interest expense.

  • Here is What Hedge Funds Think About KalVista Pharmaceuticals, Inc. (KALV)
    Business
    Insider Monkey

    Here is What Hedge Funds Think About KalVista Pharmaceuticals, Inc. (KALV)

    Hedge fund interest in KalVista Pharmaceuticals, Inc. (NASDAQ:KALV) shares was flat at the end of last quarter. At the end of this article we will also compare KALV to other stocks including Viveve Medical, Inc. (NASDAQ:VIVE), Stealth BioTherapeutics Corp (NASDAQ:MITO), and Palatin Technologies, Inc. (NYSEAMEX:PTN) to get a better sense of its popularity. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

  • Is At Home Group Inc. (HOME) A Good Stock To Buy?
    Business
    Insider Monkey

    Is At Home Group Inc. (HOME) A Good Stock To Buy?

    There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds' picks don't beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk. At Home Group Inc. (NYSE:HOME) was in 16 hedge funds' portfolios at the end of September. HOME has experienced an increase in hedge fund interest in recent months.

  • Hedge Funds Are Dumping Sangamo Therapeutics, Inc. (SGMO)
    Business
    Insider Monkey

    Hedge Funds Are Dumping Sangamo Therapeutics, Inc. (SGMO)

    It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Conversely, hedge funds' top 20 large-cap stock picks generated a return of 37.4% during the same 11-month period, with the majority of these stock picks outperforming the broader market benchmark.

  • Is Ventas, Inc. (VTR) A Good Stock To Buy?
    Business
    Insider Monkey

    Is Ventas, Inc. (VTR) A Good Stock To Buy?

    Based on the fact that hedge funds have collectively under-performed the market for several years, it would be easy to assume that their stock picks simply aren't very good. This year hedge funds' top 20 stock picks easily bested the broader market, at 37.4% compared to 27.5%, despite there being a few duds in there like Berkshire Hathaway (even their collective wisdom isn't perfect). Is Ventas, Inc. (NYSE:VTR) a good investment right now?

  • Hedge Funds Dropped The Ball On ChemoCentryx Inc (CCXI)
    Business
    Insider Monkey

    Hedge Funds Dropped The Ball On ChemoCentryx Inc (CCXI)

    Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let's take a glance at the smart money sentiment towards ChemoCentryx Inc (NASDAQ:CCXI). Hedge fund interest in ChemoCentryx Inc (NASDAQ:CCXI) shares was flat at the end of last quarter. This is usually a negative indicator.