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Comment by TheRealPomax | Hacker News Reader

My main concern about libra is that, by being strongly tied to real currencies, libra issuers (not just facebook, all of them) have effectively assumed the role of unsanctioned mints, with the ability to damage the stability of each currency because libra is not tied to the international exchange system: if you pay facebook, or anyone else, $10 and they convert that into libra, now they have $10 that they will absolutely put back into circulation to make additional money on, _and_ $10 worth of libra have been created, which can be converted back into real dollars with the original $10 already gone.

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There's a difference that could be important: Libra is effectively a bank, and like other banks creates money, but the new money is not denominated in dollars, it's in Libra. If American banks create too many dollars, that's a problem for every American, since Americans up to now have been pretty much stuck with using dollars. If Libra mismanages their supply and reserves, the main effect will be on the market price of Libra, right? Am I understanding things correctly?

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.)

I think the plan for Libra is always to have its value tied to something stable (USD for sake of argument, but more complex in practice). Each libra would be backed by 1 dollar or whatever.

(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.)

OK, but we're talking about cases where something goes wrong. What are some somethings?

- 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.

> but the new money is not denominated in dollars, it's in Libra

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.

> the main effect will be on the market price of Libra, right?

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

Thanks. I'm skeptical that this management of the economy on net makes it go smoother -- I can't understand what they're doing even as well as they do without far more study, but I can e.g. notice that respected economists were seriously starting to think the "great moderation" had been achieved by the years just before 2008. (Not just hindsight bias, since I was reading them at the time.)

But yeah, that point of view is a lot more mainstream and could well be more right.

Love or hate what the Fed is currently doing, it's a known quantity that has managed to avoid a serious run on the dollar since the '80s. Libra at this point is a proposal that has yet to be anywhere remotely close to battle-tested. Better the devil you know than the devil you don't.

Every bank and credit card is also an unsanctioned mint. It works fine. The actual minting of money has not been a major factor in managing the money supply in a long time. It's all done by setting interest rates.

> The actual minting of money has not been a major factor in managing the money supply in a long time.

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.)

>> Very much not true

?? 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.

That's because interest rates were already at zero. Look over to what BOJ did - they straight up bought equity ETFs as a part of their qe, even more hardcore. Still, not much inflation!

QE controlled inflation by reducing the fractional reserve rate, thereby counteracting the minting of money with the reduction of credit-money.

> Very much not true.

> 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

Yes you’re right, I should have said the Fed.

> "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.

How did she respond to that last statement? Do you have the transcript?

That was all paraphrased from memory, sorry. It is somewhere in this: https://www.youtube.com/watch?v=HoWM7KpkAmY

I think it was probably in the last half of it.

Edit: Found it. Starts at 1:33:45

Setting interest rates AND THEN? come on you have to be able to complete that sentence, and when you do it will negate the prior sentence.

And then lend at that rate.

A short article about money creation in the modern economy by the Bank of England that will probably answer your questions https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

Insofar as this rhetorical framework is concerned, they're actually sanctioned, not unsanctioned.

Banks and credit issuing institutions are heavily regulated and have a variety of criteria that must be met to legally operate in that capacity.

> 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.

What are you objecting to exactly?

As near as I can tell, we're in agreement about the situation.

The original 10$ aren't "gone", they're held in reserve in the form of bank deposits and government bonds. If you hold Libra, you supposedly have a claim against those.

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.

Not just one loan, like 10 loans.

You know a bond is a loan?

Why is a Libra loan to the government different to a fractional reserve loan of any sort?

Short term US government bonds are extremely liquid and low risk; unlike other loans they are easy to convert into dollars. Presumably any other government bonds in the libra reserve (e.g. german bunds for euro?) would be selected to have the same property.

A government bond issued in the countries own currency has no risk of default and is highly liquid. An ordinary loan such as a mortgage has poor liquidity and a high risk of default in case of turmoil.

"A government bond issued in the countries own currency has no risk of default"

That is very far from correct.

And I still don't think the risk differential is enough to make them 2 different things.

> That is very far from correct.

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.

"because it can always service it nominally by creating the money"

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 would offer a counter example.

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.

This is how every bank works.

Fractional reserve banking usually requires some non-zero percentage of deposits to be withheld.

In virtually all developed nations, the requirement is either zero or single-digit percent.

zero?

What happens when someone wants to make a withdrawal?

The operative word there is requirement. Banks in 0% reserve countries don't have to keep cash around but do to serve as their actual functions as banks.

What countries are we talking about here? As far as I'm aware most developed nations have capital requirements for the banks. Whilst maybe not stating a minimum % reserve, in practice they do need to keep reserves for those capital requirements.

I don't know I was just answering your question about deposits.

Banks can borrow reserves from other banks or the lender or last resort. They usually do keep some reserves around for liquidity, but as little as possible because reserves don't make as much return just sitting in an exchange settlement account as they do if they lend them to other banks or buy Government bonds with them.

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).

No there are strict tier 1 and tier 2 capital ratios that banks are required to uphold.

The fractional reserve requirements for cash and equivalent are in the single digits, as I said:

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.

The requirement is between zero percent and ten percent. [0]

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

Yes, and banks are bound by incredibly tight laws, including laws around not being allowed to recirculate all the money you get as part of an exchange operation.

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?

Banks follow fractional reserve so they have to keep 10-20% of the deposits in cash. Libra and most stablecoins keep 100% reserves so it's even stricter. Libra claims that every coin is backed by fiat currency so investing the deposits is not how they plan to make money off of this.

> investing the deposits is not how they plan to make money off of this.

A huge float invested very conservatively still makes a lot of money. That is how most insurance companies actually profit.

Where did you see that claim? I see a different claim on their website:

""" 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. """

https://libra.org/en-US/about-currency-reserve/#the_reserve

Libra maintains "100% reserves." How is that money reserved? For a bank, it needs to be either in cash in the vault or on deposit with the Federal Reserve. Either way it's not getting loaned out again. Presumably Libra will be depositing it at (loaning out to) a bank, or putting it in short term bonds, money market, etc. Either way, they're loaning out all of the money, i.e. they have a 0% reserve.

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.

Except banking is highly regulated and the money not held in reserves is invested with oversight on how much risk is taken (that oversight fails sometimes but generally works). If a tech company can jump in and function as a bank without oversight that is going to hurt banks.

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.

Every time someone says "banking is highly regulated", a banking executive does not go to prison for breaking a banking regulation in a way that has quietly cost consumers hundreds of thousands of dollars in aggregate.

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.

First of all, Facebook isn't doing fractional reserve.

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.

> Facebook isn't doing fractional reserve

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's nothing holding them to this promise.

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.

Libra isn't doing fractional reserve, it's full reserve. If you want to do fractional reserve banking, you have to be a bank.

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.

But i thought each libra must be backed by real money? i.e. when they sell 10 libra the 10 dollars go to the libra fund, and cant really circulate (but can be invested)

But without Facebook (or any of the Libra association members that aren't already financial institutions) starting a bank, and then for obvious reasons being forced by law to split that off from their parent company as an independent entity, why would anyone expect banking laws to apply?

It's not banking laws at all, it is the way they set up the association, I presume precisely to avoid fears like this.

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.

I feel like this is E-gold 2.0 maybe 3.0 with BTC being 2.0

https://en.wikipedia.org/wiki/E-gold

E-gold was a scam IIRC, while libra's assets :

> 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.

What is the intrinsic value of btc?

I can't eat it, use it to heat my house. It has value, most of it isn't intrinsic though.

u can convert it to USD, so it must have some value or else people wouldn't buy it

Yes it has value you can trade a bitcoin for $5k/$10k/$20k whatever the exchange rate is at this moment. That isn't intrinsic value 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."

https://en.m.wikipedia.org/wiki/Intrinsic_value_(finance)

alright my bad. i meant some value that is not tied to an underlying asset. But equating it with a scam like e-gold is not valid either. (and no currency or investment commodity has value that is anywhere near its intrinsic value)

You can move it illegaly more easily than cash.

Can you do any of those things with gold?

Banking and securities laws affect non-banks too. You can't just act like a bank or issue a security without following the regulations.

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.

It seems to me that Facebook has structured Libra coin to avoid banking & securities laws. By bringing in 20 of his closest Wall Street friends Zuckerberg is attempting to rely on prior SEC commentary that BitCoin is sufficiently decentralized to keep the tokens outside of securities regulation.

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.

Investment is circulation though. They are no longer holding the $10 you spent to buy 10 Libra but $10 worth of Apple stock say that definitely isn't always worth $10 and Apple or whoever sold that stock now has $10.

They could instead deposit it into their own bank, i.e. full reserve, and let the bank do the investing/recirculation itself which it is accredited to do.

They could be holding it in gold instead, what difference would it make ? You can probably take a loan with 100% gold deposit in any bank legally.

According to the whitepaper at libra.org, they won't hold stocks. The reserve is a "basket of bank deposits and short-term government securities".

There's nothing binding about that proposed setup though. It wouldn't affect the function from the chain side so there's no real way to validate that that is what their doing outside of independent audits.

> now they have $10 that they will absolutely put back into circulation to make additional money on, _and_ $10 worth of libra have been created

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.

the main reason why facebook went the route of stable coin is simple. What is the main reason for a currency holding value is a correlation between the currency and its military strength. Unlike other commodities which hold intrinsic utility , currencies have enforced utility. Facebook understands why most crypto currencies are volatile cause there is no authority to enforce utility, hence the problem of utility is solved. now comming to the reason why the FED is so strongly oposed to this, if enough people start using libra its a big FU to the US fed cause they cant nuke it without hurting themselves hence they want to kill it right now. For some context this is the same FED which allowed countless acts of financial loot run wild for decades. But now when they realise that its there ass thats on the line they flip out.

What about that makes it better to be embargoed by Facebook? That's a dystopia no one needs.

What about Libra is exclusive to Facebook? It's not "their" cryptocurrency, they just pitched the idea. The actual power behind libra is the Libra Association, which has a lot more scary companies participating.

I don't find this at all convincing. I believe Facebook will be managing much of the physical hardware involved, likely in their existing data centers. IMHO, the Libra Association will boil down to Facebook and the payment processors who have signed on. This strikes me as very much Facebook's currency.

Each of the 28 participants will run its own hardware and validator on it (there are hardware requirements on top of the 10M$). FB might control the only wallet, initially, but not the validators.

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