Central Banking for All: A Public Option for Bank Accounts (2018) [pdf]

This is an interesting proposal.

Private banks have two very important functions in society: they provide the infrastructure for the payment system and they control credit.

This proposal would disentangle those functions making, I think, a more robust financial infrastructure.

The payment system is, by its characteristics, a natural monopoly, and it's so important that makes sense that it become public. If that was the case, the main function of private banks would be to control the issue of credit.

The Bank of England used to do this to some extent - it was only four years ago that they closed these, which were available to government departments, companies and employees. They concluded that these customers would better served by conventional and online banking services, and that their resources were better spent on their main purpose.

Who is gong to provide the account services in this scenario?

I suspect if the Fed is supposed to do it, they will outsource it to regular banks which will then add on restrictions, fees and other hurdles there by making it the same as today's bank accounts.

1. I question whether this role lies within the charter of the Fed, and whether they are equipped to do so.

2. I worry that this might threaten the political independence of the Fed, which is something that I think is really important to maintain.

There's an excellent Fintech Beat podcast that covers the cons for a proposal like this in detail (centered around CBDC, but many of the arguments remain): https://pca.st/episode/e06c5ca7-df90-4fcf-86da-5ba2d5f0ead1

The next step would be allowing citizens to vote directly on the laws that govern central bank policy.

I have been thinking about something similar except that my idea is a little more extreme. I believe that citizens should be able to deal with the central banks directly or not at all. by effectively making every single person their own central bank, and thus they can choose to avoid country banks entirely.

People who thing this is a good idea do not understand how our money works. A central bank isn't a bank at all it does not have the function of a bank. It just has bank in its name. If you let banks compete against a central banks you may as well just close them all.

You could probably just keep interchange fees on debit card transactions and still a lot of the other benefits. It would help pay for the services and support and make the banks less suspect that everyone would switch over.

I imagine the underbanked and unbanked individuals that would want this service aren't actually craved by the private banks right now.

Building out an ATM network though would probably be ridiculously expensive. You could probably just build them into the USPS though. I think Japan does this?

Imagine trying to reach customer service.

The US had "postal banking" from 1911 to 1967, but it was all paper based.

So "Great Democracy" is how they are going to wrap this, huh. "This" being helicopter money AKA digital dollars AKA direct fiscal injection into private Americans' bank accounts.

Been a long time coming.

Who is The Great Democracy Initiative, and where does their funding come from?

Banks as private middlemen providing society with a payment system is an outdated and baroque system. Today, the whole payment system of an average nation can work over a single cluster of computers in the basement of the central bank, there is absolutely no reason not to provide this service for free to all citizens and businesses since it's a critical part of living in a society. The whole superstructure of banks, credit card companies, payment processors etc. can be vanquished with one blow, by issuing every citizen with a digital identity card which can be then used to access his free accounts provided by the government, no other paperwork necessary. Some resources should be spent on preventing laundering and fraud with the system, but this needs to be done in the banking system as well, with the costs passed on to the consumers.

I disagree with some of the other claimed benefits. Central bank accounts holding monetary base would not offer interest, just like paper money, and will always offer negative real interest when considering inflation. The government pays interest when borrowing from the banking system, and you can certainly use your central bank account to buy these securities (just like banks do today) but then you are no longer holding the risk free monetary base, you have a security with some non-zero risk of sovereign default.

The stability of the system is also not a given. Commercial banks run the payment system as an ancillary to their main function, and that is to match un short term liquidity, that is temporary savings and surplus of people and firms, and redirect those resources to long term investments. This is a critical economic role and for the economy to work it will still need to be provided in some other fashion, for example by a credit market.

This already happens to a large degree, for example banks offer mortgages and package them into securities that are sold on markets. This whole MBS process was behind the financial melt-down in 2008, since these practices were less scrutinized than the direct loans and deposits of banks. In fact, both are the same process: monetary base increases in velocity and is multiplied in the form of interest bearing securities that represent investments in the productive economy. The stability of the whole financial system is predicated on the quality and diligence of these investments, and credit markets proved to be notoriously bad at discovering this.

One thing to note though, is that when a "bank run" happens in the "shadow banks" of the credit markets, the bad securities are wiped out but the goods ones quickly recover. So the central bank can ride a financial storm by blanket buying paper with fresh money and let the market discover the winners and losers. Bank runs are self-limiting because securities drop to a value where they become enticing to value investors. When commercial banks are involved though, you have massive contagion since bank runs are self-fueling, once a bank is in trouble every investors starts to request their money, even if the fundamentals of the loans made by that bank are sound in the long run.

Something like this would such a profoundly good change I shed a tear knowing it won't happen for years at a minimum.

Sigh

So who would be making consumer and commercial loans under this model?

A Fed-sponsored digital currency is probably already on its way...as the "fourth branch" of government, this may be as close as you ever get to "public banking".

The public will soon learn that public banking means your personal account is a policy instrument. Need to stimulate the economy? Just tell everyone that no accounts will be permitted to have a balance over $2k by Friday at midnight. Either spend the rest or lose it, up to you.

Or maybe you owe child support. Or maybe you haven't paid a parking ticket. Or maybe you attended a "riot". All of which may be "legal" reasons to deduct funds. Its all digital so you can't stop it. The possibilities are endless.

I suppose the upside is it will require a phone, so you'll get a free burner Android phone if you want one.

this seems like the wrong direction. I'd prefer to get rid of the Fed. No reason for the Federal Govt to borrow money it can print itself. Opening up what it means to be a bank makes sense though.

This is interesting in the context of this recent article on Zerohedge: https://www.zerohedge.com/markets/loretta-mester-hints-fed-p...

In short, three Fed officials (two former, and the current President/CEO of Fed Bank of Cleveland) are speculating on a product like this. Most interesting is the idea of directly sending cash payments to individual citizens using this product.

Is there a place in the US, outside maybe some really rural areas, where a credit union isn't available that doesn't offer accounts to the general population? In my experience credit unions' checking accounts are free.

(I realize that this proposal is something slightly different, but I wanted to preempt the inevitable "poor are unbanked because of fees" claims.)

This is an obvious trojan horse for totalitarian central planning. Easier to enact negative interest rate policy when everyone is holding an account at the Fed and no one can take out their money since cash is either banned or made severely inaccessible (like in some EU countries).

In my opinion private banks are perfectly fine, the problem isn't the idea of independent banks, the problem is government and central banks subsidising losers by bail-outs and the "lender of last resort" mandate while also enacting enormous regulatory barriers that make it impossible for new banks/financial institutions to compete with incumbents.

Commercial banking, together with the Intellectual Property system, is one of the greatest Rentier swindles of all time. We are literally renting the money we use, for extortionate prices [1].

"The dollar as a reserve currency transfers wealth from the rest of world to the USA

One final way in which money works today that has a substantial effect on the workings of the global political economy is the use of the US dollar as the international reserve currency. This follows the decision of the OPEC countries shortly after the end of the Second World War to accept only dollars for their oil. Today, the dollar is used for trade in many other commodities.

This acts as a huge subsidy to the US economy, since countries elsewhere in the world sell goods and services to the US, but instead of buying back from US companies, they keep the dollars so as to be able to trade among themselves — as well as to be able to protect their currencies from speculative attack. This effective transfer of wealth from the rest of the world to the US permits the US to be easily the world’s largest debtor nation, while driving the unprecedented widening of wealth disparity within the global community (Douthwaite, 1999)." [2]

[1] https://www.youtube.com/watch?v=ZzCegQVljdY

[2] https://medium.com/insurge-intelligence/impacts-of-our-curre...