Friday, 30 July 2021

Feeble criticisms of CBDC by Stephen Cecchetti and Kim Schoenholtz.

That’s in their Financial Times article, 28th July 2021, entitled “Now is not the time for central bank digital currencies”.

One of their arguments is that “By their nature CBDCs risk disintermediation…”. Well what of it? In other words what’s so wonderful about intermediation?

For example anyone can buy bonds in a corporation or alternatively they can buy a stake in a mutual fund which invests in those corporate bonds, in which case the mutual fund acts as an intermediary between them and the corporation. Now there’s nothing inherently wrong with mutual funds: they suit some people rather than buying bonds or shares DIRECT, i.e. without intermediation. But if there is a general move away from intermediation, what of it? That’s a choice which consumers / savers are fully entitled to make.

Next, Cecchetti and Schoenholtz say “Suppose there’s a bank run. It’s not hard to imagine that uninsured deposits would flee from private banks to the central bank, exacerbating the strains on the financial system.”

Now wait a moment. One of the promises that commercial banks make to their depositors,  with a view to making depositing money at a bank a more attractive proposition, is that those banks will turn deposited money into central bank issued money whenever those depositors so wish. Indeed, you exercise your right to turn money in your bank account, or some of it, into central bank issued money whenever you go to an ATM and withdraw £10 notes, $100 bills etc.

What on earth is wrong with people exercising a right they have under any contract they have with a bank or any other entity? Absolutely none! If banks want to make themselves less prone to runs, they are always free to place restrictions on withdrawals: there is no obligation on government to skew public policy in such a way as actually help commercial banks in that process.

Of course the result of a mass exodus from commercial bank accounts into CBDCs could well “exacerbate strains on the financial system” as the FT authors say. But that’s the fault of commercial banks for allowing customers a quick exit.

Next, the FT authors claim a big inflow of funds to CBDCs would tempt central banks to LEND OUT funds. Well that’s a strange argument. Central banks do not normally lend to private sector entities, and as for central banks buying up GOVERNMENT bonds, central banks only do that when they think stimulus is needed (which equals QE of course).

Next, they say “Finally, there’s the issue of privacy. As using CBDC means everything we do becomes traceable, it poses serious threats to personal liberty. In theory, outsourcing compliance to “narrow banks” holding CBDC could secure privacy, but that wouldn’t stop authoritarian states.”

Well the latter “outsourcing”, as the authors rightly say, does stop states having immediate access to details of account holders’ accounts – indeed, that sort of system where accounts fully backed by central bank money are actually administered by commercial banks has long been advocated by supporters of full reserve banking, e.g. Positive Money and Lawrence Kotlikoff.

But what on earth is the very vague phrase “that wouldn’t stop authoritarian states” supposed to mean? Obviously technical adjustments to how the bank system works does not stop some sort of Stalin or Hitler coming to power. Is that what they mean? Darned if I know.

The important point surely is that “outsourcing” makes CBDC similar to existing bank accounts where, at least in most countries, government or its agencies can spy on people’s bank accounts, though the state has to get permission first from a judge or magistrate and provide a good reason for wanting that access, e.g. a suspicion that the account holder is engaged in tax avoidance.
And the FT authors last sentence is “In our view, that means stopping well short of issuing universal, unlimited, interest-bearing CBDC.” Er – whence the assumption that CBDC accounts pay any interest? MMTers and Milton Friedman argued that ideally the state should pay NO INTEREST on its liabilities. I agree.

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