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If you believe that government meddling in financial markets was responsible for the last recession and the lackluster recovery, you might be right. But probably not in the way you think.
Imagine what would happen in a free market if everyone suddenly decided that future economic growth would be very slow. The price of safe assets such as U.S. government bonds -- assets that pay off even in a low-growth environment -- would rise sharply. As a result, the real (inflation-adjusted) interest rate, which always moves opposite to the price of safe assets, would fall. In principle, if the demand for safe assets was strong enough, the real interest rate could go deep into negative territory.
Yet two government mechanisms prevent real interest rates from getting too negative. The first is cash: As long as people can hold currency, which loses its value only at the rate of inflation, they won't buy safe assets that yield even less. The second is the central bank's promise to keep the inflation rate low and stable -- at about 2 percent in most developed nations. As a result, people have little reason to hold any asset that yields less than negative 2 percent (perhaps negative 3 percent, considering that cash is bulky and hard to store).
In other words, governments -- by issuing cash and managing inflation -- put a floor on how low interest rates can go and how high asset prices can rise. That's hardly a free market.
[...] The right answer is to abolish currency and move completely to electronic cash, an idea suggested at various times by Marvin Goodfriend of Carnegie-Mellon University, Miles Kimball of the University of Colorado and Andrew Haldane of the Bank of England. Because electronic cash can have any yield, interest rates would be able go as far into negative territory as the market required.
[...] If cash were abolished, I would support the adoption of two complementary measures. First, instead of targeting a positive inflation rate, central banks could target true price stability by aiming to keep the level of prices constant over time. (To be clear, this would be disastrous unless cash were eliminated first.)
Second, currency does provide a service beyond being a store of value and a medium of exchange: It's anonymous and thus ensures the privacy of transactions. In its absence, governments would have to allow the private sector to offer alternatives with the same attractive features.
We've endured a deep recession and a miserable recovery because the government, through its provision of currency, interferes with the proper functioning of financial markets. Why not ensure that doesn't happen again?
Narayana Kocherlakota is a Bloomberg View columnist. He is a professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.
(Score: 2) by tangomargarine on Tuesday September 06 2016, @01:55PM
If cash were abolished, I would support the adoption of two complementary measures. First, instead of targeting a positive inflation rate, central banks could target true price stability by aiming to keep the level of prices constant over time. (To be clear, this would be disastrous unless cash were eliminated first.)
Second, currency does provide a service beyond being a store of value and a medium of exchange: It's anonymous and thus ensures the privacy of transactions. In its absence, governments would have to allow the private sector to offer alternatives with the same attractive features.
So let's get rid of cash, but come up with some alternative that fills the same niche? Okay, I'm no economist and this guy is, but damn.
"Is that really true?" "I just spent the last hour telling you to think for yourself! Didn't you hear anything I said?"
(Score: 3, Insightful) by Anonymous Coward on Tuesday September 06 2016, @02:38PM
In my experience, "I am an economist" generally doesn't mean "I know what I'm talking about." It's more like "I kind of know what I'm talking about sometimes but more importantly oh boy do I have this bridge to sell you."
If it's doesn't make sense and sounds like bullshit, that's either because it IS bullshit, or it's really fucking impressively high level shit. Note the latter may still be bullshit.
(Score: 4, Insightful) by Runaway1956 on Tuesday September 06 2016, @02:49PM
The presumption is that someone will have to be "in charge", and the author imagines that he might be part of that group of someone. Basically, he wants to get rid of the Fed, and hopes to be in a position to take their place.
(Score: 0) by Anonymous Coward on Tuesday September 06 2016, @07:16PM
Bad news, the Fed has a good chunk of private involvement. State controlled central banks seems to be a thing of the past (see also ECB).
https://en.wikipedia.org/wiki/Federal_Reserve_System [wikipedia.org] "Thus, the Federal Reserve System has both private and public components to serve the interests of the public and private banks.[17][18][19][20] The structure is considered unique among central banks. It is also unusual in that the United States Department of the Treasury, an entity outside of the central bank, prints the currency used.[21] The Federal Reserve System considers itself "an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms."
https://en.wikipedia.org/wiki/European_Central_Bank [wikipedia.org] "The Community institutions and bodies and the governments of the member states may not seek to influence the members of the decision-making bodies of the ECB or of the NCBs in the performance of their tasks."
So at best he wants to change who is in charge to someone else, like him (new boss, old boss, etc). Or he doesn't know how things are currently.