Fed Chair Jerome Powell Has ‘Serious Concerns’ with Facebook Libra Proposal
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With the banks we're used to there's a potential tragedy of the commons in that their separate decisions all affect the shared money supply, which is indistinguishable, so one reason to have a central bank is to get some overall control of those distributed decisions. A distinct competing currency already under a single decision maker doesn't so obviously need that extra governance. I don't know, maybe it does, but I'd like to see the reason spelled out.
(Hayek raised this point in his Denationalisation of Money.)
That would be a problem from the governments perspective. Any theory that starts by assuming normal economic forces forces where money is concerned is risky.
The supply of money is actively managed by governments in response to various things. That ability to exchange serious amounts of money is not usually tampered with but is generally required to flow through systems which a national government controls (usually the US Government) and there are gate-keeping fees to get involved. The ability to make loans or do creative accounting at scale is also locked down with regulations and requirements.
It is an interesting situation because the distortions don't directly generally stop anyone doing anything directly; but the way winners are chosen doesn't function exactly like a theoretical free market. Facebook is unlikely to be selected as a winner if they just jump in feet first; and particularly if they want to expose the monetary system to supply-demand forces that aren't under government control.
(I'm not sure if the plan is that those dollars have to sit in reserve like some gold standard, but presumably eventually the temptation to use a fractional reserve would be too great.)
- Libra screws up and its value is unstable. Pissed-off customers switch to other currencies, at a loss.
- Libra turns out to be a great stable currency while the Fed screws up so badly that everyone scrambles to get out of dollars. It's a giant disaster, but not one I'd describe as "Libra destabilizing the financial system" -- I'd call it them offering a lifeboat -- a well-run firm outcompeting a poor one. (This seems unlikely, and I'd hate to see Facebook become this powerful because I can't stand Facebook. It's just, in this scenario they'd have done a useful thing.)
- Libra is so successful they gain a new effective monopoly, and then they fail or exploit their position.
Is the worry something else? I don't understand money very well, for all that I've read multiple books, took ec in college, etc. There's so much BS around it.
National central banks in the modern era have two functions: manage the money supply and make sure that the economy is running well. It's true that Libra would be the only direct impact, but then you have people who have debts in dollars and revenues in Libra, and if they can't pay back their dollar debts then their lenders are now short of dollars and can't pay back their obligations, and now we have a financial crisis.
Examples of this include 1997 in Asia: https://en.wikipedia.org/wiki/1997_Asian_financial_crisis
But yeah, that point of view is a lot more mainstream and could well be more right.
Very much not true.
Quantitative easing, the process of minting money to inject liquidity into the economy, was a core tenet of the Obama administration’s* response to the Great Recession. Literally trillions of dollars created to purchase bonds and mortgage backed securities to prop up the economy.
Edit: It was during the Obama administration but implemented by the Fed, which is independent of the White House administration (thank god.)
I was half-listening to Jerome Powell (Fed Chairman) testify before congress today and one congresswoman (CW) asked him (JP) something like:
CW: Are there any tools you need that we can give you?
JP: No, we have all the tools we need at the moment.
CW: Well what about directly purchasing municipal bonds? I learned you aren't allowed to do that.
JP: That type of activity is outside the scope of our mandate.
CW: Well there are many cities going bankrupt that need someone to buy the bonds so if we give you the power to do that will it help if you can buy them?
JP: The best thing you can do to help is have a sane fiscal policy and reduce the deficits.
I think it was probably in the last half of it.
Edit: Found it. Starts at 1:33:45
> was a core tenet of the Obama administration’s response
Quantitative easing is a monetary policy, not fiscal policy. A central bank dictates monetary policy. An administration dictates fiscal policy.
Would recommend you read this: https://en.wikipedia.org/wiki/Quantitative_easing
?? The parent comment is correct that about the 'actual minting of money' not being a huge factor, in the sense of printing dollars and coins. Quantitative easing increases the money supply, but not via physically printing money.
Banks and credit issuing institutions are heavily regulated and have a variety of criteria that must be met to legally operate in that capacity.
Except the banks and other regulated financial institutions involved in Libra aren’t the entities that will be issuing Libra coin. A separate (I believe non-profit) entity, Libra, is. The financial institutions have “donated” $5 million and will have the ability to appoint a seat on Libra’s board. Do you know which regulator will oversee that entity? Do you know what regulations will apply to that entity? I certainly don’t.
As near as I can tell, we're in agreement about the situation.
This is unlike a fractional-reserve bank, which can turn those most of those $10 into loans of any sort and still pretend it's cash that's available at any time.
Why is a Libra loan to the government different to a fractional reserve loan of any sort?
That is very far from correct.
And I still don't think the risk differential is enough to make them 2 different things.
Fair enough, that was poorly phrased. For practical purposes, buyers of such bonds operate under the assumption that the country won't default on its debt, because it can always service it nominally by creating the money. Of course that has a risk of depreciation, but so does holding the currency itself.
> And I still don't think the risk differential is enough to make them 2 different things.
You don't think a junk bond, a mortgage and a government bond are different things? I never said that a government bond is not a loan. Of course it is a loan, but in terms of risk and (more importantly) liquidity these are all very different.
What asset has lower risk than a short-term government bond? If you know, tell the banks in Europe that are currently paying negative interest on German bonds all the way up to 10 years.
The Eurozone would offer a counter example.
I suppose if a nation issued enough inflation linked bonds it could also get itself into trouble that way. In general though you're right, inflation is the big risk.
"You don't think a junk bond, a mortgage and a government bond are different things? "
That's actually the example I was thinking of.
I think they're both bonds. To take it back to your original comment, I don't think something stops being fractional reserve banking just because the money is put into low risk loans, its the same overall business model, paying out less in interest then you get in.
"What asset has lower risk than a short-term government bond?"
Good question, depends on the risk though. Theres a very high risk that you'll lose out to inflation in the long term, so there's a argument that stocks are safer in the long term. Bank deposits in my country are govt backed up to a certain amount and pay slightly more, so that's as safe as, and has a better chance of beating inflation.
The Eurozone is special case, because the Euro is not any countries "own" currency. I'm not an expert on the modalities, but as far as I'm aware Euro member states can print their own money, but that would of course cause conflict with other members. In any event, the ECB did avoid defaults of its member states.
> I don't think something stops being fractional reserve banking just because the money is put into low risk loans, its the same overall business model, paying out less in interest then you get in.
Fair enough, we're having an argument over semantics. To be precise, what Facebook is doing is neither banking nor fractional reserve banking and I'm really just looking to draw a parallel here.
As far as actual banks and their reserve requirements are concerned, domestic bonds may well be "as good as cash", but it depends on the particular monetary policy. Whether that's good policy is debatable of course.
> Good question, depends on the risk though. Theres a very high risk that you'll lose out to inflation in the long term, so there's a argument that stocks are safer in the long term. Bank deposits in my country are govt backed up to a certain amount and pay slightly more, so that's as safe as, and has a better chance of beating inflation.
It's not a "good question", it's a rhetorical question. The answer is none, especially not stock. Bank deposits don't count, as they're limited. Imagine you're a bank yourself and you need minimize your risk exposure.
If all the Libra association members are willing to be bound by the same laws, then cool: but do you trust Vodafone, or Facebook, or Andreessen Horowitz, to not try to bend the rules so they can make more money?
""" How will the reserve be invested? Users of Libra do not receive a return from the reserve. The reserve will be invested in low-risk assets that will yield interest over time. The revenue from this interest will first go to support the operating expenses of the association — to fund investments in the growth and development of the ecosystem, grants to nonprofit and multilateral organizations, engineering research, etc. Once that is covered, part of the remaining returns will go to pay dividends to early investors in the Libra Investment Token for their initial contributions. Because the assets in the reserve are low risk and low yield, returns for early investors will only materialize if the network is successful and the reserve grows substantially in size. """
What Facebook is proposing is merely to have assets equal to the deposited funds. For a bank, that is called teetering on the edge of insolvency. If a bank's assets ever dip below its liabilities, it is insolvent and either has to raise equity capital or be wound down by the government. This is why banks have capital requirements, so that they have a buffer against loans going bad.
A huge float invested very conservatively still makes a lot of money. That is how most insurance companies actually profit.
History has shown us that unregulated banks, and regulated banks that push the limits or evade regulations fail and cause damage to the entire economic system.
I have no interest in protecting banks from businesses that act just like banks, and then get punished for doing those things, only because they are not legally considered banks. The last time banks pushed the limits, failed, and caused damage to the entire economic system, it was 2007-2009, and no one was ever held individually responsible for it. I haven't forgotten or forgiven.
So yes, please. Hurt banks. Protecting them just turns them into privileged asses. The "tight regulations" function mainly as their cartel membership rules.
Split tally sticks worked as privately-issued financial instruments for centuries, before banking lobbied to have them outlawed. Banking works better (for the banker) when there are no lawful alternatives to the bank's notes. A cryptographic equivalent to a split tally stick is very acceptable from a historic perspective.
Secondly, banking regulation does nothing to mitigate the risk of fractional reserve banking. Your average bank holds maybe 10% of deposits, the rest is loans way into the future. No such bank can survive a bank run.
What does mitigate the risk (for the average bank customers) is the government insurance for bank deposits. A government can always print the money necessary to bail out a failed bank. What such a bailout could do to a currency is another story. Let's just say we got lucky.
In any event, the government wants the banks to loan out all this money, because that's economic stimulus. You can't have both tight regulations and easy money.
I think a better description would be: Facebook says that right now they're not planning to do fractional reserve. There's nothing holding them to this promise. There's also no control that their partners in Libra will keep it.
It may well be the same situation as tether (or worse).
There may be, the exact terms aren't clear yet. Of course the terms might just say "you have no rights whatsoever". The market will price those terms in.
> It may well be the same situation as tether (or worse).
I don't think that's a good argument against Libra. Tether is still trading around 1.00$, despite its reserves being at best 74%. The market is pricing the risk of ending up as bagholder as next to nothing.
Nobody is arguing that holding large amounts of Libra as a "store of value" is a wise thing to do. Neither is storing large amounts of cash under your bed.
Having said that, if you want to issue worthless tokens backed by nothing in exchange for real money, you can do that. That's your average initial coin offering. Laws still apply and you need to do due diligence, but it's possible.
Basically, for assets less than $124 million, the reserve requirement is 3%.
For more than $124 million, the requirement is 10%.
In other words, for every $100 on deposit at a bank, it can create "out of thin air" $90 and loan it out.
If someone then gets that $90 and puts it in a checking account at the bank, the bank can create and loan out $81, then $72, than $64, $57.6, $51 etc.
[0] https://www.federalreserve.gov/monetarypolicy/reservereq.htm
https://en.wikipedia.org/wiki/Reserve_requirement#Required_r...
Tier 1 capital is not cash reserves, it's risk-adjusted assets, which may or may not be made up of assets that are as liquid as cash.
What happens when someone wants to make a withdrawal?
Fractional reserve in general isn't really a thing in modern banking. The US still does have a reserve requirement but pretty much the rest of the world relies on capital adequacy ratios (some capital is usually stored as reserves in exchange settlement accounts but it doesn't have to be).
Facebook isn't actually acting like a bank, but if they claim that their tokens are backed by real assets when they aren't, that's just plain fraud.
And even though Libra claims the tokens will be backed by a basket of global currencies they’re still acting like a bank. That basket of currency will fluctuate in value. Libra is basically offering a riskier and unregulated money market account.
I think there are not clear laws yet about this kind of backed stablecoins. However, their reserve will be 100% , which is way more than any bank.
> the assets in the Libra Reserve will be held by a geographically distributed network of custodians with investment-grade credit rating to provide both security and decentralization of the assets.
And BTC is not backed by anything, it has intrinsic value now so it's wrong to call it a scam.
I can't eat it, use it to heat my house. It has value, most of it isn't intrinsic though.
From Wikipedia: "In finance, intrinsic value refers to the value of a company, stock, currency or product determined through fundamental analysis without reference to its market value."
This sounds dangerous and wrong, but the same thing happens if you buy a gift card or deposit cash into a checking account.
Now you have an Amazon gift card or bank debit card for $100 _and_ Amazon or your bank has $100 that they'll put back into circulation.
It's just how money works, it's nothing new with Libra.
Second of all, it IS accountable to far more than just "rich people". There's many times of democracies... and one way of breaking it down is democracy by vote vs. democracy by exit. The US Government is a democracy by vote. Starbucks is a democracy by exit. You have no control over how Starbucks makes their coffee, but if you don't like it...then you can just go across the street to another coffee shop. That way, Starbucks is extremely accountable to their customers...because if they stop meeting customer demand then they'll go out of business. I'd personally argue Starbucks operates much more efficiently than the US Government (but that's a separate issue). Libra works the same way. Right now, you're forced to use the US Dollar to pay. With Libra, you're under no such compulsion. If you don't like the way Libra is being operated...use some other currency to do your transactions. This will cause less money to be in Libra reserves... resulting in less money to Libra shareholders... and on and on. Therefore, Libra IS democratically accountable.
Likewise, when corporations become too powerful and monopolistic, they are technically "democracies by exit." But, much like some countries, they are not democratic in the important sense.
When such companies exercise too much power, most ordinary people do not have any control over the forces that most significantly impact their lives. And it is this sort of distributed control which makes a system democratic or undemocratic.
I have no idea what you're trying to say with this. Just because you don't need an exit visa to leave doesn't mean other countries will just take you in.... That's why you have refugee crises.
You're going off on a completely different tangent. When corporations become too powerful and monopolistic then it's the government's job to break them up and preserve competition.
We're specifically talking about Libra right now. Libra will have competition with the US Dollar. Unless you're suggesting Libra will become so powerful as to replace the US Dollar...then your point is completely invalid. Additionally, if Libra is extremely successful, you can almost certainly bet that other companies will come out with their own digital currency.
Lets not confound the capacity to build a token with the capacity to levy taxes. The latter is the scary one. The former is just playing with casino chips and airline miles.
Once FB creates services that people want and then FB decides that they will only accept its currency as payment then people will have the confidence to accept it and use it. There is no doubt in my mind that FB will create services since all companies eventually create them as part of their business.
There is nothing new about the general idea. It's happened in the past and it will happen in the future.
If not then I see a lot of problems with handing even more power from democratically elected governments to the corporate black box.
Over the centuries we have built up a very elaborate currency system. It complex with elaborate protections yet is simple for your average person to use.
It's also very expensive for what it does. Today money is represented by a few bytes on a disk. Transferring it takes a few smallish IP packets and minimal CPU cycles. Ergo, the cost of doing these things should be fractions of a cent. Yet if I buy something using paywave, it costs someone about 1% of the transaction. If I by something over the internet it's more than 1%. If I transfer $1K overseas it costs $20 or something. With costs like that its ripe for disruption.
This system is firmly cemented into our society with lots of law, and this inflow of those huge quantities of cash has created a legion of formidable vested interests who will defend it to the death (most because if it disappears they will too).
This is what Uber was up against in the taxi industry, albeit this is at much larger scale. Uber got around it by just ignoring the law, and in the process bankrupting the species those laws protected - the taxi licence holders. It caused enormous pain for them, and they were most innocent bystanders.
It's going to take a special kind of hubris to take that on, and a enormously talented person to pull it off. Zuckerberg may be that person. I can't say I like his chances, but given he's seen WeChat's success in China I don't doubt his motivation.
There are things happening in Africa right now that make me think FB won't be a major player in Africa in the future. The Africans have been smitten by the Chinese protectionist model. That new free trade agreement they have actually specifically excludes your company from benefiting if you're using goods or services from outside the zone where options exist inside the zone. Don't misunderstand me, I get it, they need to get their economies going. Get jobs for their people. Etc. Just pointing out that this stipulation has some obvious consequences for companies outside the zone.
And it's not just Africa, I'm betting the future will see a balkanization of the internet. I could be wrong though? But I doubt it. A lot of corruption in Africa and everywhere else, and corrupt people are exceedingly greedy. I think we can count on them taking the whole pie wherever possible. As well as aggressively working to expand the number of places it's possible to take the whole pie.
All I'm saying is that after reading through some of those regs, clearly it'd be prudent to bet on African properties for those playing the long game.
This is naive. Breaking governments’ holds on currency would be supremely lucrative for bankers. See the American free banking era.
Clearly they got something right.
Facebook just becomes an unregulated central bank.
Isn't the federal reserve in the United States a private corporation that is not part of the government?
FB has been the subject of several congressional and parliamentary hearings around the globe recently. Why would they not question Libra?
I think it's interesting that while crypto was a bunch of hobbyists and startups, it was just a bunch of folks wasting their money, but now that FB is involved it's a threat to the global monetary order. (Personally, I think the threat of FB is overblown - I'd bet that it'll make some significant noise over the next 2-3 years but fail over the next 10 - but the threat of startups and new crypto projects is underestimated. While the government is obsessed with FB's 2 billion users, someone else will come up with a cryptocurrency that's actually useful and take those 2 billion users for themselves.)
You named 8 different digital coins. Why aren’t any of them useful? Why do we need other ones?
Speaking of the platform coins (Ethereum, EOS, Tron), I can think of few critical features they're missing. Scalability is one of them, which Ethereum is working on and EOS has - the network has to support more than 10 TPS. The ability to host a pretty, intuitive UI on the blockchain itself (so that you don't also need to run a website that listens to blockchain events for average users to run your DApp) is another. Discoverability is another, letting ordinary users find useful apps and spread them around.
One of the interesting things about the cryptocurrency space is that it's challenging one of our fundamental assumptions about economics, namely that currency is a winner-take-all market and everything works better if there's a single currency used for everything. Instead we're seeing that currencies can actually have different properties, and that this can actually affect which currency you'd chose to use in which circumstance. Want to do things that you don't want the government to know about? Use a privacy coin like ZCash or Monero. Want to let your computer programs transact economically? Use a platform coin like Ethereum, EOS, or Tron, and select which based on whether you want to write your smart contracts in Solidity, WebAssembly, or Java, respectively. Want to define a marketplace and create a utility coin to mediate transactions in it? That's what coins like BAT (Brave), Kin (Kik) and now Libra (Facebook) do.
The primary functions of a currency (store of value, medium of exchange, and unit of account) are also now getting unbundled: Bitcoin is used as a store of value, but not as a medium of exchange, while something like Monero or BAT is much more a medium of exchange than a store of value, and stablecoins like Tether or USDC are filling the unit-of-account role. That trend has been going on for decades - stocks and bonds are stores of value, but not mediums of exchanges or units of account, while in-game currencies are units of accounts but not a good store of value or unit of exchange - but the crypto space has made it explicitly clear.
* porn?
* child porn?
* drugs?
What else?
Like all other so-called "decentralized" coins, Bitcoin rewards economies of scale. That means that it tends towards centralization.
Though of course Bitcoin has its own unique problems, like being deflationary (which is evil).
Do you think it is "evil" to buy commodities?
This is all about freedom of choice. If you don't like the properties of certain products, then buy the one that you like.
But lots of people would apparently prefer to spend their own money on deflationary assets. Who are you to say it is evil to do this with assets that one owns?
You're welcome to your opinions, and I'm going to have mine. As you said, freedom of choice.
Personally I think that modern fractional reserve banking and the Fed are great, and bitcoin maximalists are overall not very smart.
Instead I was calling your opinion bad and in opposition to free choice.
How is owning crypto any different than just owning a commodity, which can be deflationary?
And why would owning a commodity be "evil"?
Extraordinary claims require extraordinary evidence
Show me a so-called "decentralized" coin that is designed to not just be dominated by a handful of miners. It's a natural consequence of proof of work, isn't it? Large-scale miners will always be able to buy electricity for cheaper than your average person.
If we define "decentralized" as "the ability to send transactions that are unlikely to be censored", then pretty much all cryptos fulfill this requirement.
Transaction censorship just isn't something that is happening on most cryptos. You can send whatever transactions that you want, and it almost certainly isn't going to be stopped by any centralized parties.
A truly decentralized currency would have built-in protections against any sort of concentration of power, whether it's based on the ability to buy electricity in bulk cheaply or based on the ability to censor transactions. To date no currency is decentralized.
Satoshi considered this scenario.
It is also a public ledger, ie even if you don’t mine it is easy to track everything.
it's not just decentralization, it's competing decentralized currencies in a free market.
I think you can either say that no currencies are decentralized or that all currencies are. In practice any currency gives up some axes of decentralization.
Yes, i m positive on Libra as long as it is possible to exchange it for any other crypto. I 'm afraid it's not going to be the case.
Might be the same with crypto money where they'll be under the same laws as real money and trading.
Cryptocurrency and blockchain technology have opened up permissionless innovation in an industry that has been so choked by regulation that previously only the largest, most well-connected players could get in the door: finance. You can, right this second, create a smart contract that allows extremely sophisticated financial instruments and attract real users. The initial shoots of innovation are already happening, such as MakerDao's Collatorized Debt Positions (CDPs)[0] and Compound Finance for money market crypto instruments.[1]
Regulators and governments can stick their fingers in their ears, outlaw the technology, and drive everything offshore or underground. The point is that these technologies are permissionless and unstoppable. As long as the internet exists, you can't eliminate such technology and behavior.
Rather than knee-jerk outlaw progress in the industry by projects such as Libra, governments need to let the industry mature and eventually pass laws that protect consumers without stifling innovation. HN users especially need to embrace their so-called "hacker" roots and stop lobbying for the state to crush such innovative technology in its infancy.
Seriously - the outrage to blockchain and crypto on HN is entirely absurd. This is cool, interesting technology and entrepreneurs should be analyzing it for its disruptive potential rather than whining that there aren't enough licenses and bureaucrats involved.
Laws link the real world (a thing or action) to an intangible concept (a transaction or a contract).
Without a guarantee of that link (ultimately, via force), you're left with joke monopoly money.
And if you leverage the existing system to accomplish that link (e.g. via writing legally valid smart contracts), then you're again beholden to governments.
People don't use government-backed currency because they have to: they use it because it's useful and reliable.
You don't have to outlaw cryptocurrency to make it useless: all you have to do is deny its use of existing legal guarantees.
This is the myth that will apparently never die in the crypto community. Yes, the people with badges and guns and court orders absolutely can prevent crypto from being widely adopted if they want to:
In the case of Libra, regulators like the Federal Reserve can simply say 'no'. Unless the Libra Association hires a private army that can defeat the world's current best in a standing battle, there's not much they can do about it.
In the case of crypto in general, while I agree they probably can't prevent the .1% of the population who are tech savvy enough to manage their own wallets:
1. That's nowhere near enough people to get mass adoption
2. Much more importantly, the Feds can prevent businesses from accepting crypto for payment. If crypto can't be used for payments for legit goods (i.e. not drugs/hitmen), it's useless except as a means of pure financial 'bigger fool' speculation (wait, that's what it is now!) No one who operates a legitimate business is going to risk catching a felony if the US says 'bitcoin is illegal, 3-5 year sentence if you use it', etc. No payments for legit goods = no broader network effect. Instead you simply own the 21st century equivalent of a penny stock.
I'm not militantly anti-crypto, but the community is really naive about how much power regulators & law enforcement really has if they want to exercise it. If crypto becomes a 'thing', it will be another highly regulated finance product offered by Huge Company, like Libra. The libertarian (frankly populist) dream is not in contact with reality
The truth is that crypto is very scammy and that its value run-up in 2018 was a massive bubble, but that doesn’t mean the tech behind that bubble is worthless. Anyone who got rich off of crypto essentially got lucky, but that says nothing about how good that technology is or is not. Crypto can be good technology and a bad investment while still allowing risk takers to make millions.