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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, Interesting) by Anonymous Coward on Tuesday September 06 2016, @09:20PM
Not only is he blaming cash he goes and REINVENTS cash. But his 'magic' cash that can fix everything that is wrong. /sarc
The actual money we have is a value holder of a transitory time. 'digital' cash is the SAME THING.
If you borrow money you had *better* love inflation. It is the only way you get ahead.
The 2008 recession has its underpinings in the removal of glass-stegall (finished off in 1998). After that we had an immediate boom followed immediately by a bust of 2000. About 8 years later on schedule we had 2008. We have a nice 8-10 year cycle going on. You can see it all the way back into the 1800s. It caused huge consolidations in companies through the use of loans. Reducing competition and causing prices to rise. That was the 2001-2004 era. All these banks were able to leverage small amounts of cash into huge sums and buy out all of the competition.
This dude thinks by removing cash we can somehow magically remove loans. Loans/credit are where the real money is. Most of our monetary supply is loans. 'magic digital cash' would be no different.
This is a 30 min video on how our monetary system works. Do not bother with the dudes other videos, he is selling 'how to fix it'. But he describes the problem set very well here.
https://www.youtube.com/watch?v=PHe0bXAIuk0 [youtube.com]
The problem with controlling cash is that it is only 1 part of them market. The market is thousands of things. From running a tab at the bar to buying a car on loan to buying a pack of gum at a gas station.
To fix the 'issue' you have to present risk in such a way to people that the idea of taking on the risk is high. If the risk is low and there is no blowback then you dont care. For example the 2005-2008 housing bubble. They could produce a loan then turn around and sell the risk to someone else. Their risk was 0. They could capture the originating fees and make money on selling the loan. It was literally no risk to the banks to do so. The US gov had put itself in a position where they would pretty much buy any loan. When it became clear that that people could not pay back at the rate that was being loaned out. The whole credit market froze up. No one would buy/get the loans but everything in flight also froze up. Banks ended up with a huge risk that they thought was 0.
Poor risk management leads to bubbles and crashes. The fed has two ways to control it. As you can not properly define risk as a variable or anything you can really control. They do that through the use of money printing and interest rates (its really all the fed has). The governments of the world can also control risk by setting laws saying what sorts of transactions are acceptable and size of institutions.
Here is a neat trick to borrow money at negative interest rates. Use credit cards and pay them off every month. Inflation is real. But over time you borrow money for 'free' and they get the risk.