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Should President Biden keep Jay Powell? Americans have cause to worry who leads the Fed

Because of its outsized impact on the economy the choice of Fed leadership is enormously consequential. If the Fed were less powerful, if it exercised less discretion in monetary, fiscal, regulatory, and operating policies, it would matter less, much less.

President Biden’s upcoming Fed appointments should concern every American. It’s up to him whether to replace Chairman Jerome Powell, Vice Chairman of Supervision Randal Quarles, and Vice Chairman Richard Clarida, and to fill an open governorship. The decision to reappoint or replace Powell in February will be the most consequential at least since President Carter replaced Bill Miller with the legendary inflation fighter Paul Volcker.

The looming dangers of inflation, deficit monetization, and accelerated pollicization of regulation and credit allocation, underscore its importance.

The Left wants the Fed to continue the gusher of easy money and monetization of the mushrooming Federal deficit, use regulation to starve the fossil-fuel industry of capital, further racialize banking, and, as a totem of progressive piety, flail banks. Centrist Democrats and many Republicans have accommodated themselves to forever-easy money, if not to hyper-politicized regulation.

The Senate should reject nominees who it suspects aren’t serious about crushing inflation, want to expand the Fed’s fiscal footprint, or intend to politicize credit allocation and banking. In the movie ‘Ronin’ Vincent, played by Jean Reno, asks Robert DeNiro’s character Sam how he knew they would be ambushed. Sam replied “When there’s doubt, there’s no doubt.” That’s the test senators should apply to Biden’s Fed nominees.

Ideally the central bank would narrowly hew to its mandate: to pursue stable prices, maximum employment, and moderate long-term interest rates. A stable price regime is the sine qua non of maximum long-term employment and wealth creation. Clinton appointed former Vice Chair Roger Ferguson observed “a stable level of prices appears to be the condition most conducive to maximum sustained output and employment, and to moderate long-term interest rates.” Dovish former Fed Chair Ben Bernanke wrote “In the long run, the central bank can affect only inflation, not real variables such as output.” Stable prices send the clearest signals, facilitate optimal decision-making to consume, save or invest, enabling maximum sustainable wealth and job creation.

Republican Powell was originally appointed to the Fed board by President Obama. President Trump elevated him to Chairman. Powell has tried to maintain the Fed’s assiduously-cultivated – and not entirely deserved, reputation for apolitical, technocratic competence. To Powell’s credit he’s resisted efforts to politicize regulation.

While Powell wasn’t dovish enough for Trump’s taste, he’s a dove. He’s repeatedly promised the administration and markets easy money for the foreseeable future, and been stubbornly blind to inflation’s danger.  Paraphrasing Upton Sinclair, it is difficult to get a man to understand something when keeping his position depends upon him not understanding it.

There are eminent and more hawkish alternatives to Powell who would stick narrowly to the Fed’s statutory mandate. Stanford economist John Taylor, former Philadelphia President Charles Plosser, former Fed governor Kevin Warsh, and former House Financial Services Committee Chairman Jeb Hensarling, would be superb Fed chairs. Biden, however, isn’t going to nominate any of them.

 

Democrat eminence grises and eponymous sponsors of Dodd-Frank, Barney Frank and Chris Dodd, and Senator Jon Tester have called on Biden to renominate Powell. He is likely the least-bad politically-viable option.

If Biden instead decides to replace Powell, woke Fed Governor Lael Brainard would be the odds-on favorite. While Powell and Brainard have been of one mind on monetary policy, Brainard’s urged a harder line regulating banks, endearing herself to progressive heartthrob Senator Elizabeth Warren. Warren’s blasted Powell for putting the economy at risk by being too protective of big banks. But banks aren’t underregulated. Thanks to Dodd-Frank, quite the contrary. And under Powell no major bank has failed. They’ve increased their capital. The point seems to be, one must ritualistically bash banks, to attest to one’s progressive virtue.

Brainard wants to advance policies progressives have been unable to legislate, by regulatory diktat. She’s urged the Fed to weigh anthropogenic-climate-change risks in bank regulation. Banks have been pricing the risk of hurricanes, floods, and droughts for centuries. By making energy more expensive Fed climate-change regulation would genuinely put the economy at risk. Powell rightly holds that whatever one believes about the climate-change bogeyman, it’s a matter for Congress, not the Fed on its own prerogative.

Brainard is also keen for a retail Fed digital dollar.  The US payments system is already largely digital and works well. A Fed digital currency would compete with commercial banks and stifle private-sector innovation in money and payments. Quarles and Governor Waller have suggested there’s no compelling case for one. Powell has remained neutral and insisted it would require Congressional authorization.

While since its 1913 creation the Fed’s been a masterful political actor, it’s avoided appearing political. If progressives score a quadfecta of appointees, the Fed will become a brazenly political and more dangerous actor.

The Senate can and should reject any nominee inclined to act beyond the Fed’s statutory mandate.

Will Covid-19 sound the death knell of cash?

In January NYC lawmakers banned merchants banning cash. Last year SF mandated merchants accept cash. They may rue the day.

Covid-19 is hammering vulnerable populations and the economy. It’s also making consumers and merchants increasingly leery of transacting in dirty, potentially contaminated cash. On Visa’s April 30th earnings call CEO Al Kelly warned “Currency is a germ-carrying mechanism.” While the coronavirus will be vanquished, the economy recover, and Americans return to a semblance of normalcy, diminished cash use will be a lasting legacy of the coronavirus pandemic.

The payments industry has battled cash since Diners Club’s 1950 inception. In 2018 15.1% and 24.6% of US consumer-payment volume and transactions, respectively, were in cash, excluding mortgage payments. In most countries cash is still the leading retail-payment system.

To fight the coronavirus in March France’s storied Louvre museum stopped accepting cash. In the US Amazon’s Whole Foods has started restricting cash payments.

ATM withdrawals in the UK fell 60% yoy in the month ended April 27th.

Short-term demand for cash in some markets, however, has surged, not for transacting but as a hedge.  In Russia, about 1 trillion rubles ($13.6 billion) was withdrawn from ATMs and bank branches since the beginning of March, more than during 2019. Withdrawals spiked after President Putin extended self-isolation measures and imposed a tax on bank deposits over 1 million rubles. In the Eurozone circulating banknotes rose by €41.2 billion to €1.33 trillion, the largest increase since the 2008 financial crisis.

Fear of Covid-19 will spur greater interest in digital currencies.

Facebook and the Libra Association scaled back ambitious plans announced last year to launch a global digital currency and payment system, which provoked a din of hostility from regulators and politicians. Their rethink will keep Libra’s transaction ledger permissioned, making it less likely bad actors will get access. And Libra stablecoins will be backed by each jurisdiction’s national currency – dollars, pounds, euros, et al, rendering them akin to electronic banknotes. That won’t threaten government monopolies creating money. The coronavirus has created a signal opportunity for the social-media giant’s ambitions in payments.

Signature Bank and Chase already have digital dollars for business-to-business payments. Wells Fargo Digital Cash will launch this year. Banks could repurpose their digital dollars to replace physical cash at grocery stores, restaurants and barbershops.

The Peoples Bank of China is rolling out a digital-currency pilot in 4 cities:  Shenzhen, Suzhou, Chengdu, and Xiong’an, a satellite city of Beijing.

Fear of touching will change the familiar experience of swiping or inserting credit cards and signing, to pay for goods and services.

For a quarter of a century the US payments industry half-heartedly tried to spur contactless payments. In 1996 Mastercard in Manhattan and Visa at the Atlantic Olympics ran pilots. The experience wasn’t compelling for consumers or merchants. Swiping cards was habit and nearly frictionless.

Google Wallet, Apple Pay and Samsung Pay launched in 2011, 2014, and 2015, respectively. Mobile-wallet evangelists enthused they would usher in an era of contactless payments at NFC-enabled merchants. Joe Cardholder and Jose Merchant, however, didn’t bite.

Covid-19 is more persuasive. Cardholders and merchants don’t want physical contact. Banks are rushing to put contactless credit and debit cards in consumers’ leather wallets and purses. Mastercard’s contactless payments increased 40% in the first quarter.

Time-honored signatures at the physical point of sale will disappear. March 23, 2020 Mastercard reminded merchant processors that payments at the physical pos by card or mobile phone don’t require signatures.

In the lockdown online retailers like Amazon are booming. In April, 2020 e-commerce surged to 50% of Mastercard’s transaction volume. While vaccinated Americans will return to bars and restaurants, fly to Europe for business and holidays, and again take cruises, e-commerce will continue its multi-decade trajectory, taking share from in-person commerce.

The Covid-19 pandemic will pass, having put a damper on consumers’ and merchants’ appetites to handle cash, and changed the experience of paying face-to-face.