Econintersect: Harvard professor Kenneth Rogoff gave an under-reported talk at the 08 November 2013 IMF conference because Larry Summers got all the attention. But a few did notice and a discussion that has possibly far more lasting import than the Summers created conversations has started. Rogoff broached the idea of opening the Fed to accounts for the general public and expanding the credit creation process to more than “plain vanilla debt” that is created today by the banking system.
An Opinion piece by Global Economic Intersection editor John Lounsbury earlier today summarized some of the issues raised by Rogoff. The piece also includes some of the discussion by Barnard/Columbia professor Rajiv Sethi that both preceded Rogoff’s talk and was amplified following it. Among the extensions from Rogoff’s discussions suggested by Sethi and Lounsbury are:
- Move all depository banking to the Fed. (Sethi)
- Use prefunded accounts at the Fed for every individual as a countercyclic monetary policy tool to push money into the real economy when needed. (Sethi)
- Operate the Fed as a true public bank for all federal transactions. (Lounsbury)
- Include within the Fed the operation of a postal savings bank system. (Lounsbury)
The possibilities discussed by Sethi and Lounsbury have the potential to permanently separate depository and investment banking operation, returning to a de facto Glass-Steagall condition. No matter how large, no private banking institution would be too big to fail because any such failure would not interefere with the general payment system within the economy.
These discussions have most likely gone far beyond what Rogoff was contemplating when he gave his talk. It could be said that he has has opened a can of worms.
But the big fish in the sea, U.S. banks, have unknowingly* taken the bait – hook, line and sinker. An article in the Financial Times tonight (24 November 2013) leads with:
Leading US banks have warned that they could start charging companies and consumers for deposits if the US Federal Reserve cuts the interest it pays on bank reserves.
So the banks threaten to charge people who have been leaving their money in banks and receiving no interest? What better time to separate deposit and investment banking?
What better time to get depository and commercial payment systems into a reformed Federal Reserve public bank and away from the speculative arena of investment banking?
* We say “unknowingly” because it is extremely doubtful that anything from Rogoff’s 08 November talk was on the minds of bank officials when they issued their “service charge” threats.
References:
- A Nonpareil Public Bank: The Fed (John Lounsbury)
- The Payments System and Monetary Transmission (Rajiv Sethi)
- Why Should Banks be the Only Ones with Accounts at the Fed? (Yves Smith, Naked Capitalism) Sethi post with additional commentary.
- IMF Economic Forum (Conference presentations, 08 November 2013)
- US banks warn Fed interest cut could force them to charge depositors (Tom Braithwaite, Stephen Foley and Robin Harding, Financial Times, 14 November 2013)
