February 11, 2016 4:40 PM
Improvisation can be a wonderful thing when performed by talented hands—Charlie Parker, Miles Davis, and the like. The Federal Reserve, especially for the past several weeks, has fancied itself an improvisational talent on that level. But like most humans, Janet Yellen is no Charlie Parker. They should consider a return to the Paul Volcker/early Alan Greenspan adherence to a defined rule. But that isn’t the end of the story—any substantive Fed reforms will fail unless they are coupled with a thorough program of regulatory reform reaching through the entire executive branch. This post will examine a few worthwhile Federal Reserve reforms, then some regulatory reforms, most of which have already passed the House.
The rest of the executive branch has a similar lesson to learn—more complexity and an ever-increasing stock of rules means less predictability and more uncertainty for businesses, investors, and consumers. Agencies’ increasing tendency to regulating through non-transparent “dark matter” means only makes the problem worse.
As far as the Fed goes, the point is not so much which rule a central bank should adopt, but that it must have a rule in the first place, and follow it consistently. Here are three possibilities.
One is a Taylor rule, which the U.S. Federal Reserve followed for the better part of the 1980s and 1990s, with good results. A Taylor rule raises interest rates when growth and inflation are high, and lowers interest rates when growth and inflation are low. In other words, if the economy looks like it might be overheating, the Fed automatically touches the brakes a little bit. And if it looks sluggish, the Fed pushes the gas pedal a little bit, by predictable, predefined amounts.
December 1, 2014 2:59 PM
Is it possible for opposite policies to both be wrong? Over at the Washington Examiner, I argue that it is. The U.S. is ending its quantitative easing program just as Japan is ramping its up. Those seemingly opposite policy paths are rooted in the same mistaken philosophy. I argue instead for a humbler monetary policy:
Both Yellen and Kuroda should move their focus away from stimulus, exchange rates and constant tinkering, and toward stability, honesty and predictability in their price systems. Easing of $1.66 trillion has had almost no effect on the U.S. economy. How reality will stack up against the Bank of Japan’s predictions, no one knows.
Along the way there are discussions of Keynesian liquidity traps, the Taylor rule, NGDP targeting, and Bitcoin. The larger point is that central bankers are barking up the wrong tree. Instead of manipulating various economic indicators with activist policies, they should concentrate on creating a stable, predictable, and honest price system that enables more investment, better investment decisions, and more innovation. That, not interest rate tinkering, is what causes economic growth and mass prosperity.
September 9, 2014 10:13 AM
The phrase “if you can’t beat them, join them” seems so applicable in light of the Commonwealth of Dominica announcing plans to distribute bitcoins to all of its citizens. This is a wonderful attempt to integrate people into a burgeoning market. The timing could not have been better, as Ecuador also announced it will introduce its own cryptocurrency. The key difference between Ecuador and Dominica’s plan is that Ecuador plans to implement its currency through its central bank, whereas Dominica plans to disperse bitcoins directly to its citizens. Perhaps fearing competition, Ecuador is also banning Bitcoin, so the central bank’s cryptocurrency will be the only game in town. It’s a fascinating natural experiment in the making.
Forbidding competition is a mistake on Ecuador’s part because competition is what truly allows the best goods and services to develop, so it looks like Dominica’s experiment will be more successful for it citizens.
Moreover, Bitcoin was created to resist centralized institutions, according to the original white paper by Satoshi Nakamoto, the currency’s creator. These cryptocurrencies represent the potential for non-fiat currency to be used on a global scale. This potential should be nurtured, not squandered by governments.
July 28, 2014 9:58 AM
A recent piece in American Banker magazine explores how Bitcoin and other cryptocurrencies can help the underprivileged, particularly the millions of unbanked people who do not have bank accounts. This is an area where digital currency could do much good.
In fact, the online microfinancing platform Kiva has already begun a peer-to-peer service, known as Kiva Zip, whose model resembles some of the features in Bitcoin. Microfinancing is a form of lending for lower-income people that provides smaller loans than commercial banks are typically able to offer. Kiva Zip’s peer-to-peer structure means that users interact directly with each other, without administrators or other institutions acting as a middleman.
Another service known as Swarm is already proposed to implement crowdfunding based on the Bitcoin protocol. Crowdfunding is a service where persons or companies propose a project or service they wish to develop and create a campaign to solicit funds for development. It is typical for campaigners to offer prize incentives for larger contributions, such as earlier access to the product or other perks.
These new innovations represent just the initial adaptations of the Bitcoin protocol. In order for these technologies and services to continue to develop—and to help people—it is imperative that new regulations not be prematurely implemented. Otherwise, it will not be just Bitcoin businesses that suffer. Those at the bottom of the economic ladder could suffer as well, as they would lose precious opportunities to access capital.