Kenneth Kalczuk – October 10, 2021 @ American Institute for Economic Research
Wouldn’t it be strange if the government director of an industry
wanted to end that industry? Like if the Secretary of Education wanted
to close schools, or if the Secretary of Agriculture hated farming?
The implications of President Biden’s recent nomination for the head
of the Office of the Comptroller of the Currency (OCC), Saule Omarova,
reach far beyond “stricter financial rules.” In a forthcoming article for the Vanderbilt Law Review,
Omarova expresses her desire to “end banking as we know it” by
replacing all private bank deposits with central bank accounts.
Omarova’s proposal, dubbed “FedAccounts,” would replace private
deposits with central bank accounts as part of her larger plan to
“democratize finance.” However, such a restructuring would result in
greater authority in the hands of unelected officials and an overall
loss of financial privacy with no guarantees of greater policy
effectiveness.
Endless Restructuring and Reallocation
On September 23rd, 2021, President Biden announced his intent to
nominate Cornell Law Professor Saule Omarova as the next Comptroller of
the Currency. As Comptroller, Omarova would head the Office of the OCC,
which regulates and supervises all national banks. Omarova is an ardent
critic of both the current banking system and cryptocurrencies.
Her forthcoming article “The People’s Ledger: How to Democratize Money
and Finance the Economy” pushes for “more equitable and inclusive modes
of finance” through the issuance of a Central Bank Digital Currency and the creation of a National Investment Authority (a modern-day equivalent of the Reconstruction Finance Corporation.)
Yet, perhaps most jarring is Omarova’s advocacy for an “ultimate
end-state,” where FedAccounts fully replace private bank accounts. The
proposal comes as a part of Omarova’s plan to restructure the Fed’s
entire balance sheet into “the People’s Ledger.” Combined with an
expansion of the Fed’s liabilities with FedAccounts, the People’s Ledger
involves a corresponding expansion of its assets to include new types
of securities and loans. Simply put, the People’s Ledger is presented as
Omarova’s plan to expand and restructure the Fed’s balance sheet to
restore the public-private balance in the financial system.
Under the People’s Ledger, Omarova stresses that access to financial
services and resources would be democratized and the financial system
would be in a better position to support productive economic activity.
Attractive as this may seem, however, implementing the People’s Ledger
would cause more harm than good.
Effective FedAccounts?
Omarova embraces an expanded balance sheet and a more interventionist
regime as crucial to Fed efficiency. Such enhancements, however, are
not necessary to achieve more effective monetary policy.
The Fed’s pre-2008 corridor system serves as an example of greater
monetary effectiveness without such tradeoffs. Prior to 2008, the Fed
managed interest rates and the money supply according to a corridor operating system.
Whereas in the corridor operating system, the Fed primarily relied on
open-market operations to achieve its interest rate target, under the
current floor operating system, the Fed now relies on adjusting the interest rate it pays on reserves. As open market operations are rendered ineffective
by the current floor system, the Fed can significantly expand its
balance sheet without worrying about typical inflationary pressures.
The corridor system thus represents the possibility for effective monetary policy to be conducted without
a dramatic expansion of the Fed’s balance sheet (the likes of which
Omarova would find favorable), by ensuring that open-market operations
will have a substantial impact on the federal funds rate. It is the
substantive track record of the corridor system that ultimately
demonstrates an alternative to the People’s Ledger.
The People’s Political Problems
Omarova recognizes how her plan for the People’s Ledger could raise
questions regarding the Fed’s political independence. She argues that
the Fed’s supposed neutrality is merely a veil that hides the fact that
“central bankers’ investment choices have immense distributional
consequences. However, instead of attempting to limit or reduce the
Fed’s reach, Omarova doubles down by insisting that public policy
priorities (e.g., job creation, combating climate change, and reducing
racial inequities) be incorporated into the Fed’s operations.
Combined with the fundamental loss of privacy involved with the
issuing of FedAccounts, Omarova’s plan for the People’s Ledger echoes
the underlying distrust of the public (and religious reverence for
experts), present in many proposals which claim to be based in
“democracy” and “the public benefit.” Paradoxically, Omarova’s plan to
“democratize” finance results in an overall loss of individual choice
and financial autonomy for all of those who would prefer to remain unbanked or simply prefer the privacy offered to them under the current financial system.
Should Omarova be confirmed, her position as the head of the OCC
would not allow her to adjust the operations of the Fed and establish
the People’s Ledger. Nevertheless, it is important to recognize just how
drastic the implications of her nomination are. Neutering private
banking and reforming the entire financial system to align with public
policy priorities are not normally floated by would-be financial
regulators. Such ideas, instead, would seem to be an unfortunate side
effect of politicians and regulators embracing politically driven policy
making, and the never-ending search for interventionist panaceas.
Omarova is right to point out the deficiencies in central banking.
Nonetheless, ending traditional banking to fix central banking would be
like closing schools to improve student retention.
There are easier ways forward.
Kenneth Kalczuk is a recent graduate
in economics from the Wilkes Honors College of Florida Atlantic
University in Jupiter, Florida.
He is currently an intern at the American Institute for Economic
Research where he works with senior research faculty to advance work on
financial regulation, monetary policy, and the macroeconomic
implications of public policy measures.
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“When a clown enters a castle, he does not become a king; rather the castle becomes a circus …” — Turkish Proverb
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