Event: Central Bank Digital Currency--Efficient Innovation or the End of the Private Banking System?

Hosted by the Federalist Society.

Central Bank Digital Currencies (CBDC) are the subject of a global debate.  In one version, individuals and businesses would hold deposits directly with the central bank.  Critics point out that the Federal Reserve would then control how these deposits are used, allocating credit to private-sector borrowers and to government spending, arguing that CBDCs would eviscerate the private banking industry and create government surveillance of all financial transactions in the accounts. An alternate version is that CBDCs take the form of a tokenized dollars, distributed through the banking system and operating in parallel with paper currency and bank accounts.  Supporters say this could yield lower transaction costs and more rapid settlement of payments, and could strengthen the international role of the U.S. dollar.

Featuring:

Bert Ely, Principal, Ely & Company, Inc.

Chris Giancarlo, Senior Counsel, Willkie Digital Works LLP; Former Chairman, US Commodity Futures Trading Commission

Greg Baer, President & Chief Executive Officer, Bank Policy Institute

Moderator: Alex J. Pollock, Senior Fellow, the Mises Institute

Why You Can Bet on Another Bubble Popping

Published by Gold Newsletter.

Why do bubbles still prevail in an era of ubiquitous information? Alex J. Pollock, a senior fellow with the Mises Institute, makes the case that fundamental uncertainty in finance and economics is unavoidable.

Recommended Links

• Visit Alex’s website.

• Purchase his books:

  • Finance and Philosophy: Why We’re Always Surprised.

  • Boom and Bust: Financial Cycles and Human Prosperity.

• “What Intellectuals Resent about Laissez Faire,” by Fergus Hodgson.

• “Why Financial Genius Will Fail Again,” by Fergus Hodgson.

• Purchase the book: Manias, Panics, and Crashes: A History of Financial Crises.

Hazlitt, Hayek, and How the Fed Made Itself into the World's Biggest Savings and Loan

Hosted by the Mises Institute and full text also available here.

Recorded at the 2022 Austrian Economics Research Conference hosted at the Mises Institute in Auburn, Alabama, March 18–19, 2022.

The Henry Hazlitt Memorial Lecture, sponsored by Yousif Almoayyed.

The Austrian Economics Research Conference is the international, interdisciplinary meeting of the Austrian School, bringing together leading scholars doing research in this vibrant and influential intellectual tradition. The conference is hosted by the Mises Institute at its campus in Auburn, Alabama, and is directed by Joseph Salerno, professor of economics at Pace University and academic vice president of the Mises Institute.

Transcript:

Many thanks to the Mises Institute and to sponsor Yousif Almoayyed for this opportunity to be with you all today, as we consider one of the truly remarkable developments in the history of American central banking, money printing, and credit inflation.

On a personal note, “the pursuit of clarity” has long been a goal of mine, and it’s a particular pleasure to present a lecture in honor of Henry Hazlitt, whose work is marked by such clarity of style, meaning and logic.

Taking up our topic, “Hazlitt, Hayek and How the Fed Made Itself into the World’s Biggest Savings & Loan,” we begin with Hazlitt’s Economics in One Lesson.  Central to this book is the key problem of government policies which “benefit one group only at the expense of all other groups.”

The Federal Reserve’s huge investment in, and monetization of, residential real estate mortgages is a striking example of this eternal political propensity.

“The group that would benefit by such policies,” Hazlitt wrote, “having such a direct interest in them, will argue for them plausibly and persistently.  It will hire the best buyable minds”—a great phrase that: “the best buyable minds”—“to devote their whole time to presenting its case,” with, he adds, “endless pleadings of self-interest.”

Such pleadings have characterized the housing and mortgage lending industries over many decades, in Hazlitt’s day and in ours, with notable success, and resulted in the massive involvement and interventions of the U.S. government in housing finance.  Through Fannie Mae, Freddie Mac and Ginnie Mae, the government guarantees about $8 trillion of mortgage debt. (That’s $8 trillion of credit risk for account of the taxpayers.) In the latest radical expansion of this involvement, we now find that mortgage funding, cheap mortgage interest rates, and inflated house prices have become dependent on the Federal Reserve.  Getting mortgages into the central bank’s balance sheet was a fateful step.

As of March, 2022, the Fed owns $2.7 trillion of mortgage securities.  This means about 23% of all the mortgages in the country are on the central bank’s balance sheet--23% of the residential mortgages, which are the biggest loan market in the world.  Moreover, mortgages have become 30% of the Fed’s own inflated total assets.  These are truly remarkable numbers, which would certainly have astonished the founders of the Federal Reserve System.  (I am enjoying imagining the architects of the Fed in financial Valhalla, in a lively but puzzled discussion of how their creation came to be a giant mortgage funder.)  These developments are not astonishing, however, to students of Hazlitt, Hayek and Mises, who expect governments and central banks always to try to expand their power.

Since March 2021, one year ago, the Fed has added $557 billion to its mortgage portfolio, increasing the balance by $46 billion a month on average.  It had to buy a lot more than that in order first to replace the repayments and prepayments of the underlying mortgages and then increase the outstanding holdings.  The Fed has been the reliable and market-distorting Big Bid in the market, buying mortgages with one hand and printing money to make the purchases with the other.

During this time, there has been in an amazing house price inflation.  U.S. house prices shot up 17% in 2021, as measured by the median sales price, and by 18.8%, as measured by the Case-Shiller national house price index.  In January 2022, average house prices rose at the rate of 17%.  House prices are far over the 2006 peak which was reached during the infamous Housing Bubble. When adjusted for consumer price inflation, they are still over that previous peak, following which, house prices fell for six years, from 2006 to 2012.

So the giant U.S. housing sector, representing perhaps $38 trillion in current market value of houses, again has runaway asset price inflation.  Faced with this rapid escalation in house prices, the Fed unbelievably kept on stimulating the housing market by buying ever more mortgage securities. It thus further inflated the asset price bubble, subsidizing mortgages and distorting house and land prices.   This makes a perfect example of the dangers of central bank behavior and its effects as seen by Austrian economics.

By acquiring $2.7 trillion in mortgages on its balance sheet, the Federal Reserve has made itself far and away the biggest savings & loan institution in the world.  Like the savings & loans of old, the Fed owns very long-term fixed-rate assets, and it neither marks its investments to market in its financial statements nor hedges its extremely large interest rate risk.

Like the saving and loans of the 1970s, it has loaded up on 15 and 30-year fixed rate mortgages, just in time to experience a period of threateningly high inflation, principally of its own making, in which the increases to the cost of living include the effects of the high house prices it has induced.  These prices make their way into the Consumer Price Index through the “Owners’ equivalent rent of the primary residence.”

Were he with us in 2022, with inflation running at almost 8%, Hazlitt would not be surprised that we again face the problem so prominent during his own lifetime.  In spite of recurring costly inflationary experiences, as he observed:

          “The ardor for inflation never dies.”

Here, by the word “inflation” the ardor for which never dies, he means inflation in the sense of excessive credit and monetary expansion, the cause of the subsequent inflation in the sense of a rapid rise in prices, which is the effect.  Human nature being what it is, central banks and politicians think maybe they can have the cause without the effect.  They can’t, but they try, alas.

Writing in 1978, in his book, The Inflation Crisis, And How to Resolve It, republished by the Mises Institute, Hazlitt wrote:

          “Inflation, not only in the United States but throughout the world, has…not only continued, but spread and accelerated.  The problems it presents, in a score of aspects, have become increasingly grave and urgent.”  

Sounds familiar.

Hazlitt pointed out a central irony which has often struck me:

          “No subject is so much discussed today…as inflation,” he wrote.  “The politicians in Washington talk of it as if it were some horrible visitation from without…something they are always promising to ‘fight.’ … Yet the plain truth is that our political leaders have brought on inflation by their own monetary and fiscal policies.”  

I think also of Friedrich Hayek, who in his lecture upon accepting the Nobel Prize in economics in 1974, observed:

           “Economists are at the moment called upon to say how to extricate [us] from the serious threat of accelerating inflation which, it must be admitted, has been brought about by policies which the majority of economists recommended and even urged governments to pursue.”

And now, here we are again. 

It is superfluous to say, while speaking at the Mises Institute, that among the economists urging inflationary policies were not those of the Austrian school, then or now.

The people with the hottest ardor for inflationary policies in recent times have been the advocates of so-called Modern Monetary Theory or MMT.  In my view, this needs to be written, “Modern” Monetary Theory, or “M”MT, because it is far from a new thought— there is no notion older than that if the government is running short of money, it should just print some up.  This MMT might equally, of course, be called ZMT, for Zimbabwe Monetary Theory, or reflecting classic monetary adventures, JLMT—that’s John Law Monetary Theory.

Hazlitt has a fine term for those of this persuasion, “the paper money statists.”  Indeed, the real agenda of “M”MT is a political one: to have no limits on the government’s ability to spend.  Needless to say at the Mises Institute, this is an illusion.  The most fundamental of all economic principles is:  

          Nothing is free.  

We know it, but it is good to repeat it.  “Nothing is free” ought to be put up over the door of every economics department.  Printing up vast amounts of money has a heavy cost indeed.  

With the galloping inflation we’ve got now, we shouldn’t be hearing too much from the MMT rooters, and I hope that we can write, at least for this political-economic cycle:  “MMT, RIP.”

Combine the current 7.9% year-over-year inflation to nominal interest rates on savings accounts of 0.1% or so, the real interest rate on savings is negative 7.8%.   The Federal Reserve is expropriating 7.8% a year of your savings or your money market fund account.

Compared to that, in a true market, what would the real interest rate on savings be?  We don’t know, because you need a free money market to find out, and we don’t have one.  But it would most assuredly not be minus 7%.  To get that, you must have a central bank.

Of course, the inflation is being made worse by the effects of the war in the Ukraine—the kind of war that many people thought could not happen again in Europe. Unfortunately in this case, “Many things which had once been unimaginable, nevertheless came to pass,” in physicist Freeman Dyson’s memorable epigram.

The United States is waging a pervasive economic war to accompany the shooting war, with tumultuous volatility in financial markets and as yet developing, but surely very large, economic effects.  We know that increases in the prices of energy, wheat and other commodities will push essential consumer prices up even further.  The spike in the price of nickel has caused a crisis on the London Metal Exchange, and many people expect that defaults on Russian government debt are coming.

Big wars are the single most important financial events in history and the most important source of runaway inflation.  Thinking of this history, I found this vivid description the post-World War I economic world when Hayek was in his early 20s and Mises about 40:

     “Austria lost everything in the war; Vienna became a capital without an empire. … There was no way to measure effectively the cost of all the conflicting financial claims”—which later resulted in massive defaults.  “[There] was rampant inflation—hyperinflation in Germany and Austria which ruined the holders of bonds, particularly the class to which Hayek belonged--followed by a steep deflation, especially in the United States, which left commodity prices and production in disarray throughout the world.”

Long before the present war began, the Fed was completely surprised by the emergence of the inflation its own actions had created.  A far better forecast of what was coming was made by Charles Goodhart and Manoj Pradhan, who based on the analogy of war finance, wrote in 2020:

     “What will then happen as the lock-down gets lifted and recovery ensures, following a period of massive fiscal and monetary expansion?  The answer, as in the aftermaths of many wars,” they said, “will be a surge in inflation, quite likely more than 5%, or even on the order of 10% in 2021.”  5% to 10% inflation for 2021—an excellent forecast, while the Fed was forecasting 1.8%, an egregious miss.  

Goodhart and Pradhan went on to say:  “What will the response of the authorities be?  First and foremost, they will claim this is a temporary, once-for-all blip.”  This was a perfect prediction of the by-now embarrassing “transitory” line taken by the Fed and the administration.

This raises a much larger issue about central banks in general, and the Fed in particular—a question very much in the Austrian spirit:  

     Does the Fed know what it’s really doing?

The answer is of course No.  The Fed does not know with any confidence what the results of its own actions will be. 

Let us go further:

     Can the Fed know what it’s really doing?

Again the answer is No.  The Fed will always have the central banking theory currently in fashion, as central banking fashions change, it will have hundreds of economists, and as many computers as it wants, but it cannot ever have the knowledge it would need to be the centralized manager of a complex financial system, let alone of an enterprising market economy.  The inevitable lack of knowledge, combined with great power, is why the Federal Reserve the most dangerous financial institution in the world.

The father of the Fed’s giant mortgage portfolio is Ben Bernanke.  In 2012, when he had been Chairman of the Fed for six years, Bernanke expressed its knowledge problem with admirable intellectual honesty:

      “The fact is that nobody really knows precisely what is holding back the economy, what the correct responses are, or how our tools will work,” he told his Fed colleagues, furthermore characterizing the next round of asset purchases he was recommending as “a shot in the proverbial dark.”  

Of course, this was an inside communication, not a candid confession to the outside world.

One needs hardly say to this audience that this nicely portrays the inescapable problem of knowledge, the lesson of the impossibility of centralized possession of the requisite knowledge, and therefore the impossibility of successful socialism—or of dirigiste central banking-- immortally taught by Mises and Hayek.  To maintain otherwise requires, in Hayek’s fine phrase, a “pretense of knowledge.”

Let’s think for a minute about the metaphor of a “mechanism.” Central to the knowledge problem is the fact that an economy with its intertwined financial system is not a mechanism, and cannot be predicted and controlled as a mechanism. It is notable how widespread the misleading metaphor of a machine is in economics—economists talk of the “monetary policy transmission mechanism,” or the “European financial stability mechanism,” for example. Yet in fact we are not dealing with mechanisms, but with a different order of reality, a different kind of reality.  But what kind of reality is it then?  Well, as many of you know already, it’s a Catallaxy.

Naming that which is not a mechanism, Hayek wrote in 1968:

“It seems necessary to adopt a new technical term to describe the order of the market which spontaneously form itself.  By analogy with the term catallactics [used by Mises in Human Action, for example] we could describe the order itself as a catallaxy.”  Hayek’s footnote adds, “The ends which a catallaxy serves are not given in their totality to anyone”—not to any economic actor, to any macroeconomist, to any central bank or to any other would-be philosopher-king. 

This proposal for a profound and useful new word was made more than 50 years ago.  It has obviously not succeeded in becoming popular and would elicit in most companies blank stares.  We must admit it has a rather unattractive sound and seems obscure.  But what is the fundamental reality we are trying to name?  An infinitely complex, recursive, expectational interaction of human actions and values, shot through with feedback and reflexivity, self-referential, marked by fundamental uncertainty, in which ideas become reality, previously unimaginable innovations appear, and experts are frequently surprised, cannot be thought of in any simple way.  It is much easier to think of a mechanism or an algebraic formula than to picture or intellectually grasp a catallaxy.  Too bad the word hasn’t caught on to express this fascinating type of reality we all work to understand.

Back to our story: Into the American catallaxy strode the Federal Reserve, its pockets filled with newly printed dollars and its printer handy to create more, and bought up the biggest pile of mortgage assets than anybody ever owned.  It bought even more Treasury securities, too, accumulating $5.8 trillion of them, so that its balance sheet has reached the memorable total of $8.9 trillion.  This is another development not imagined by anyone beforehand, including the Fed itself.

$8.9 trillion is twice the Fed’s total assets at the beginning of March 2020, and ten times the $875 billion in December 2006.  The Fed’s $2.7 trillion in mortgage securities is double the level of March 2020, but more to the point, infinitely greater than the zero of 2006.  

From the organization of the Federal Reserve in 1914 to 2006, the amount of mortgages it owned was always zero.  That defined “normal.”  What is normal now?  Should a Federal Reserve mortgage portfolio be permanent or temporary?   Can the mortgage market now even imagine a Fed which owns zero mortgages?  Can the Fed itself imagine that?

Should the Federal Reserve’s mortgage portfolio not just shrink some, but go back to zero?

I would say, and I suspect most of you would, too, that it should go back to zero. 

In the beginning of its mortgage buying, this was clearly the Fed’s intent.  As Chairman Bernanke testified to Congress about his bond and mortgage buying program (or “QE”) in 2011:

     “What we are doing here is a temporary measure which will be reversed so that at the end of the process the money supply will be normalized, the amount of the Fed’s balance sheet will be normalized, and there will be no permanent increase, either in the money outstanding, or in the Fed’s balance sheet.”

Obviously, that was bad forecast, but that does not mean the intentions were not sincere at the time.  “I genuinely believed that it was a temporary program and that our balance sheet would go back [to normal]” said Elizabeth Duke, a Fed Governor from 2008 to 2013. 

The recent book, Lords of Easy Money, relates that:

     “As far back as 2010, the Fed was debating how to normalize.  Credible arguments were made that the process would be completed by 2015, meaning that the Fed would have sold off the assets it purchased through quantitative easing.”  

A formal presentation to the Federal Open Market Committee in 2012 projected that the Fed’s investments “would expand quickly during 2013 and then level off at around $3.5 trillion after the Fed was done buying bonds.  After that, the balance sheet would start to shrink, gradually, as the Fed sold off all the assets it bought, falling to under $2 trillion by 2019.”

Any of us, certainly including me, who have tried our hand at financial forecasts will not be too hard on these mistaken projections, having made so many mistakes ourselves. But how clear it is that the Fed has no greater ability than the rest of us to foresee the financial and economic future, including where its own actions are headed.

Early on, the Fed realized that if it did sell assets, and interest rates had normalized to higher levels, and the prices of bonds and mortgages had therefore fallen, it could be realizing significant losses on its sales.  We will come back to this problem.  Of course, the Fed has made no sales as yet.

Over the last few decades, U.S. financial actors have believed in, and experienced, the “Greenspan Put,” the “Bernanke Put,” the “Yellen Put,” and the “Powell Put.”  This is the belief that the Fed will always manipulate money to save the day for financial markets and leveraged speculators.  These “puts” of risk to the Fed have themselves over time induced higher debt and inflated asset prices, including house prices, making the whole system riskier and more in need of the “puts.”

Speaking of needing puts, two years ago today, on March 18, 2020, we were in the midst of the Covid financial panic.  As everyone will remember, prices of all kinds of assets were dropping like so many rocks.  Fear and uncertainty were rampant.  The Federal Reserve and all other major central banks, having adopted Walter Bagehot’s famous theory that central banks need to lend freely to financial actors to stem a panic, applied Bagehot’s theory to the max.  The central banks also monetized the huge fiscal deficits run by governments to offset the steep economic contraction which followed their lockdowns.  They printed however much money it took.

The panic did end, normal financial functioning was restored, and bull markets resumed in mid-2020, fueled by the monetary expansion.  Then came, as it always does, the question:  What do you do when the crisis is over?  What the Fed did was to keep right on buying mortgage securities and Treasury bonds by the hundreds of billions of dollars.

This demonstrates an abiding problem.  How do you reverse central bank emergency programs, originally thought and intended to be temporary, after the crisis has passed?  The principle that interventions made to survive in times of crisis, should be withdrawn in the renewed normal times which follow, I call the Cincinnatian Doctrine.

You may recall the ancient Roman hero, Cincinnatus, who was, as it is said, “called from his plow to save the State,” made temporary Dictator, did save the State, and then, mission accomplished, left his dictatorship and went back to his farm.  Similarly, two millennia later, George Washington, a victorious general and hero who saved the new United States, and could perhaps have made himself King, instead in a deservedly celebrated moment, resigned his commission and went back to his farm, thereby becoming “the modern Cincinnatus.”

In contrast, emergency central bank interventions, however sincere the original intent that they would be temporary, can build up economic and political constituencies who profit from them and want them to be continued.  For central bank monetization of government debt to finance deficits, the biggest such constituent of all is the government itself.

The difficulty of winding emergency actions back down, once they have become established and profitable to their constituencies, is the Cincinnatian Problem.  There is no easy answer to this problem.  How, so to speak, do you get the Fed to go back to its farm when it has become the dominant bond and mortgage investor in the world?

Will it go back to the farm and withdraw from being a giant savings & loan?  Two days ago, on March 16, the Fed announced that it “expects to begin reducing its holdings of Treasury securities and agency debt securities and mortgage-backed securities at a coming meeting.”  For now, it will keep buying to replace the runoff of the current portfolio, but shrinkage may be “faster than last time.” The Fed is already very late.

The 10-year Treasury yield touched 2.2% this week and long-term mortgage rates are up to about 4.25%.  These rates now seem high, but they are still very low rates, historically speaking, especially compared to the current inflation.  Historically, more typical rates would be at least 4% for the 10-year Treasury, or more, and 5% to 6% for mortgages, or more.  The interest rate on 30-year mortgage loans was never less than 5% from the mid-1960s to 2008.

If the Fed stops suppressing mortgage interest rates and stops being the Big Bid for mortgages, how much higher could those interest rates go from their present, still historically very low level?  When the mortgage interest rates rise, how quickly will the runaway house price inflation end?   

This leads to an interesting question about the Fed itself: As interest rates rise, how big will the losses on the Fed’s vast mortgage portfolio, and on its even vaster portfolio of long-term Treasury bonds, be?  Could the losses be big enough to make the Fed insolvent on a mark-to-market basis?  Yes, they could.

Let’s take a minute to do a little bond math.

The duration of the Fed’s $2.7 trillion mortgage portfolio is estimated at about 5 years.  That means that for each 1% that mortgage interest rates rise, the portfolio loses 5% of its market value.  So a 1% rise would be a loss in market value of about $135 billion, and a 2% rise in mortgage rates, a loss of value of $270 billion.

With the $5.8 trillion of Treasury securities on the Fed’s balance sheet, it owns about 24% of all Treasury debt in the hands of the public.  Remarkable.  Of these securities, only $326 billion, or 6%, are short-term Treasury bills.  On the other end of the maturity spectrum, it owns $1 trillion with maturities of 5 to 10 years, and $1.4 trillion with maturities of more than 10 years.  I tried to estimate the duration of the portfolio and came up with about 5 years.  A Wall Street contact said 7 years, but let’s use 5. Then on a 1% increase in rates, the market value loss to the Fed will be $285 billion and on a 2% rise, $570 billion.

Add the mortgage results and the Treasury portfolio results together and you get these market value losses in round numbers: for a 1% rise in rates, over $400 billion; for a 2% rise, over $800 billion.

Compare that to the net worth of the consolidated Federal Reserve System.  Does anybody know what it is?  The answer is $41 billion. Compare $41 billion to a potential market value hit of $400 billion or $800 billion. It is easy to imagine that the Fed may become insolvent on a mark-to-market basis.

But does mark to market insolvency matter if you are a fiat currency central bank?  Most economists say No, and maybe they are right.  If the Fed were mark-to-market insolvent, probably nothing would actually happen. You would still keep accepting its notes in payments. The Fed would keep accounting for its securities at par value plus unamortized premium, and the unrealized loss, however massive, would not touch the balance sheet or the capital account.

Now suppose the Fed actually does sell mortgages and bonds into a rising rate market, and takes realized, cash losses.  Suppose they bought a mortgage security for the price of 103, and sell it for 98, for a realized loss of 5, and that 5 is gone forever.  Wouldn’t that loss have to hit the capital account, and if the losses were big enough, force the Fed’s balance sheet to report a negative capital—that is, technical insolvency?

It may surprise you to learn, as it surprised me to learn, that the answer is that this realized, cash loss would not affect the Fed’s reported capital at all.  No matter how big the realized losses were, the Fed’s reported capital would be exactly the same as before.  That ought to be impossible, so how is it possible?

It is because in 2011, while considering how it might one day sell the mortgages and bonds it was accumulating, the Fed logically realized that if interest rates returned to more normal levels, it would be selling at a loss.  What to do?  It decided—do you know what?-- to change its accounting.  The Fed has the advantage of setting its own accounting standards.  It decided to account for any realized losses on the sale of securities not as a reduction in retained earnings and capital but as an intangible asset!  This was clever, perhaps, but hardly upright accounting.  I would certainly hate to be the CFO of an SEC-regulated corporation who tried that one.

But here is a great irony:  This is precisely what the old savings & loans, facing insolvency, did in the early 1980s.  So the new, biggest savings and loan in the world, potentially faced with the same problem as the old ones, came up with the same idea.

Let us shift to how the Federal Reserve fits into the whole American mortgage finance system, a market with about $11 trillion in residential mortgage loans. As mentioned, about $8 trillion or 70% of these loans are guaranteed by the government in some way, principally by Fannie Mae, Freddie Mac and Ginnie Mae.  Does the government have to guarantee 70% of all mortgage credit risk?  Does that make sense?  Of course it doesn’t. But so it is.

American mortgage finance is dominated by a tightly linked government triangle.  The first leg of the triangle is composed of Fannie, Freddie and Ginnie (with its associated Federal Housing Administration), what we may call the Government Housing Complex.

The second leg in the government mortgage triangle is the United States Treasury, which is fully on the hook for all the obligations of the 100% government-owned Ginnie.  The Treasury is also the majority owner of both Fannie and Freddie and effectively guarantees all their obligations, too.  Through clever financial lawyering, it is not a legal guarantee, because that would require the honest inclusion of all Fannie and Freddie’s debt in the calculation of the total U.S. government debt.  It does not surprise us that this was and is not politically desired.

The same politically undesired, but honest, accounting result would follow if, in addition to owning 100% of Fannie and Freddie’s senior preferred stock, the Treasury owned 80% of their common stock.  That is why Treasury controls 79.9%, not 80%, of the common stock through warrants with an exercise price of nearly zero.  For historical perspective, to get Fannie’s debt off the government’s books was the main reason for restructuring it into a so-called “government-sponsored enterprise” in 1968, so that Lyndon Johnson’s federal deficit did not look as big.

The Fed didn’t used to be, but it has become the third leg of the government mortgage triangle, as the single biggest funder of mortgages.  Its mortgage security holdings are limited to those guaranteed by Fannie, Freddie and Ginnie, but those guarantees are only credible because they are in turn backed by the credit of the Treasury.

However, there is curious circle here. How can the Treasury, which runs constant deficits and runs up its debt year after year, be such a good credit?  An essential element in the credit of the Treasury itself is the willingness of the Fed always to buy government debt by printing up the money to do so.  This is why having a fiat currency central bank of its own is so useful to any government.  The credit of these two financial behemoths is intriguingly mutually dependent on each other, while they both support Fannie, Freddie and Ginnie. 

It is most helpful to think of the Fed and the Treasury as one thing—one combined government financing operation, whose financial statements should be consolidated.  Then all the government debt owned by the Fed would be a consolidating elimination.  With this approach, we can see the reality more clearly.  The Fed buys and monetizes Treasury debt.  Consolidate the statements. The Treasury bonds disappear. What do we have?  The consolidated government prints up money and spends it.  It is still taxing to spend, but taxing by inflation, without the need to vote in taxes.  This arrangement must be loved by, to use Hazlitt’s term again, paper money statists.

We need to bring Fannie, Freddie and Ginnie into the consolidated picture. They issue mortgage securities and the Fed buys and monetizes them.  Consolidate the statements, and the mortgage securities bought by the Fed also disappear as a consolidating elimination.  What do we have?  The consolidated government prints up money and uses it to make cheap mortgage loans, inflating the price of houses.  This arrangement must be loved by paper money housing lobbyists.

In principle, there is no limit to the kinds of assets a fiat currency central bank can buy and monetize, although there are limits of law and policy.  The Swiss National Bank has a large portfolio of U.S. stocks, for example.  The Fed in the Covid financial crisis, along with the Treasury, devised ways to buy corporate debt and even the debt of the nearly insolvent state of Illinois.

Another good example is that in the 1960s, some members of Congress thought, with the encouragement of the savings & loan industry, that the Fed ought to buy bonds to provide money to—you’ll never guess—housing.  Fed Chairman William McChesney Martin pointed out that this was a bad idea:

     It would, he testified, “violate a fundamental principle of sound monetary policy, in that it would attempt to use the credit-creating powers of the central bank to subsidize programs benefitting special sectors of the economy.”

That was the right answer, entirely consistent with Economics in One Lesson.  But it did not please the politicians involved.  Senator William Proxmire threatened the Fed:

     “You recognize, I take it” he said to the Fed Vice Chairman in 1968, “that the Federal Reserve Board is a creature of the Congress?... the Congress can create it, abolish it, and so forth?...What would Congress have to do to indicate that it wishes…greater support to the housing market?”

Proxmire died in 2005.  He’d be very surprised, I imagine, at how much money the later Fed put into the housing market.

Following the 1960s discussions, a new Fed Chairman, Arthur Burns, arrived. In 1971, he decided it would be a good idea for the Fed to “demonstrate a cooperative attitude.”  The Fed bought no mortgages in those days, but it did begin to buy the bonds of federal housing and other government agencies.  It ended up buying the bonds of Fannie Mae, the Federal Home Loan Banks, the Federal Farm Credit Banks, the Federal Land Banks, the Federal Intermediate Credit Banks, the Banks of Cooperatives, and—believe it or not—the debt of the Washington DC subway system.  There were suggestions it ought to buy the debt of New York City, when it nearly went bankrupt in 1975.

The Fed fortunately managed (under the leadership of Paul Volcker) to get out of this program starting in 1978, but the liquidation of the portfolio lasted until the 1990s.  Will it really get out of its vastly bigger mortgage program now? 

In sum, we have a Federal Reserve which at the amazing size of $8.9 trillion is also the biggest savings & loan in the world, in addition being the most dangerous financial institution in the world, which does not and cannot know what the results of its own actions will be, and which faces the Cincinnatian Problem in the midst of runaway inflation, and is always, to use a typical quote from Hazlitt as our last word, “swindling its own people by printing a chronically depreciating paper currency.”

Thank you.

Upcoming March 30 event: The Federal Reserve and the everything bubble

Hosted by the American Enterprise Institute (AEI). Register here.

In response to the COVID-19 crisis, the Federal Reserve has expanded its balance sheet at an unprecedented rate, buying almost $5 trillion in US Treasury bonds and mortgage-backed securities in a single year. That buying has occurred in frothy equity, housing, and credit markets, and inflation has surged to levels not seen in almost four decades. With the Federal Reserve set to begin policy normalization this spring, questions remain on how the Fed will balance financial market stability and a brewing inflation crisis.

Please join AEI for a discussion on the constraints that elevated asset and credit market prices place on the Federal Reserve’s ability to regain control over inflation. The panelists will examine what might be done to break the recurrent boom-bust asset price and credit market cycle.

LIVE Q&A: Submit questions to John.Kearns@aei.org or on Twitter with #AskAEIEcon.

Agenda

2:00 PM
Introduction:
Desmond Lachman, Senior Fellow, AEI

2:05 PM
Panel discussion

Panelists:
Jason Furman, Aetna Professor of the Practice of Economic Policy, Harvard University
Desmond Lachman, Senior Fellow, AEI
Kevin Warsh, Shepard Family Distinguished Visiting Fellow, Hoover Institution

Moderator:
Alex J. Pollock, Senior Fellow, Mises Institute

3:15 PM
Q&A

3:30 PM
Adjournment

Contact Information

Event: John Kearns | John.Kearns@aei.org
Media: MediaServices@aei.org | 202.862.5829

Register here.

Event: Austrian Economics Research Conference 2022

Hosted by the Mises Institute.

MARCH 18, 2022 – MARCH 19, 2022, AUBURN, ALABAMA

Important notice for international travelers: The Biden Administration requires foreign international travelers to be fully vaccinated to enter the United States. All international travelers must submit proof of a negative covid test result prior to entry. For more information, please see here or contact your local embassy.

The Austrian Economics Research Conference is the international, interdisciplinary meeting of the Austrian school, bringing together leading scholars doing research in this vibrant and influential intellectual tradition. The conference is hosted by the Mises Institute at its campus in Auburn, Alabama, and is directed by Joseph Salerno, professor emeritus of economics at Pace University and academic vice president of the Mises Institute.

The conference begins on Thursday, March 17 at Auburn University Hotel with an informal welcome session from 5:30 – 7:30 p.m. central time. This welcome session is limited to paid event attendees and presenters. Attendees and presenters may bring one guest (reception guest ticket required). No children under 16 are allowed at the event. Tickets can be purchased below and are only valid for the welcome reception. Registration is for paid attendees only and takes place throughout the day on Friday, March 18, at the Mises Institute, 518 West Magnolia Avenue. Sessions begin Friday at 9:30 a.m. at the Mises Institute and continue throughout the day Friday and Saturday.

Named Lectures

Ludwig von Mises Memorial Lecture: Dr. Andrei Znamenski
Murray N. Rothbard Memorial Lecture: Dr. Paul F. Cwik
Henry Hazlitt Memorial Lecture: Dr. Alex J. Pollock
F.A. Hayek Memorial Lecture: Dr. Francis Buckley
Lou Church Memorial Lecture: Dr. Jason Jewell

Learn more here.

AEI Event: Will digital currencies and fintech shape the financial system of tomorrow?

Hosted by the American Enterprise Institute.

Event Summary

On January 28, AEI’s Paul H. Kupiec hosted an event delineating the roles and risks that stablecoins, central bank digital currencies, and other fintech developments might develop in our financial system. Panelists also discussed the actions financial regulators might take to manage financial markets.

Oonagh McDonald of Crito Capital outlined her reservations with the claim that stablecoins will improve upon the financial system. Current fintech developments already are sufficient to increase financial inclusion and efficiency in payments systems.

Charles Calomiris of Columbia University, however, foresees a useful role for stablecoins in the future economy. Stablecoins can develop a more safe, efficient, and rich payment system. For fintech developers, Dr. Calomiris urged that stablecoins should look less like bank deposits and more like perpetual preferred stock. However, large banks have much to lose if fintech companies expand their economic importance.

The Mises Institute’s Alex J. Pollock described the conflict between the government’s monopoly on currency and the issuance of private stablecoins. If a digital currency is tied to the dollar, one is merely creating a new payment system, not a new currency. Dr. Pollock is doubtful a currency not backed by an asset or cash flow can succeed.

— John Kearns

Event Description

Cryptocurrency, stablecoins, central bank digital currency (CBDC), and other fintech technologies are vying to change the way we borrow, lend, and pay one another. Pending financial regulation and potential CBDC issuance will shape the financial system’s evolution and shift the importance of central banks, banks, investment banks, cryptocurrencies, stablecoins, and related exchanges.

Will banks, mutual funds, and traditional broker-dealer exchange markets continue to be the systems we rely on to save, borrow, and make payments? Or will new nonbank fintech ventures and blockchain transactions displace them?

Join AEI as a panel of experts discusses the innovations, regulations, and other factors that will shape the future financial system and affect the broader economy.

Agenda

10:00 AM
Introduction:
Paul H. Kupiec, Senior Fellow, AEI

10:10 AM
Panel discussion

Panelists:
Charles Calomiris, Henry Kaufman Professor of Financial Institutions, Columbia University
Oonagh McDonald, Senior Adviser, Crito Capital
Alex J. Pollock, Senior Fellow, Mises Institute

Moderator:
Paul H. Kupiec, Senior Fellow, AEI

11:30 AM
Q&A

12:00 PM
Adjournment

Fireside Chat: Alex Pollock and Fifty Years Without Gold

Hosted by the Federalist Society.

Fifty years ago, on August 15, 1971, President Richard Nixon put the economic and financial world into a new era. Through his decision to "close the gold window," he fundamentally changed the international monetary system into the system of today, where the whole world runs on pure fiat currencies. "The dollar was the last ship moored to gold, with all the other currencies on board, and the U.S. cut the anchor and sailed off." Nobody knew how it would turn out. Fifty years later, we are completely used to this post-Bretton Woods monetary world with endemic inflation and floating exchange rates, and take it for granted. Nobody thinks it is even possible to go back to the old world: We are all Nixonians now. How shall we judge the momentous Nixon decision in its context and since? A fundamental question with pluses and minuses remains. Is the international monetary system now permanently open to more money printing and more monetization of government debt, making faith in central banks misplaced, and expectation of an ideal monetary policy foolish?

Featuring:

• Alex J. Pollock, Distinguished Senior Fellow, R. Street Institute, Author of Fifty Years Without Gold

• Moderator: Hon. Wayne A. Abernathy, Chairman, Federalist Society Financial Services & E-Commerce Practice Group

Event Transcript

[Music]

Dean Reuter:  Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group Teleforum calls, become a Federalist Society member today at fedsoc.org.

Evelyn Hildebrand:  Welcome to The Federalist Society's virtual event. This afternoon, September 16, we are holding a fireside chat with Mr. Alex Pollock to discuss his recent article published last month and entitled, "Fifty Years Without Gold."

      My name is Evelyn Hildebrand, and I'm an Associate Director of Practice Groups at The Federalist Society. As always, please note that all expressions of opinion are those of the experts on today's call.

      Today we are fortunate to have with us Mr. Alex Pollock and Mr. Wayne Abernathy. I will introduce Wayne, who will be moderating this afternoon's discussion. Wayne is a former U.S. Treasury Assistant Secretary for Financial Institutions, and he's also the chair of The Federalist Society's Financial Services and E-Commerce Practice Group Executive Committee. We're very pleased that he's agreed to moderate this afternoon. He will introduce Mr. Pollock.

      After our speaker gives opening remarks, we will turn to audience questions. If you have a question, please enter it into the Q&A feature at the bottom of your screen. You can enter questions at any time during the program, but we will handle those towards the end of this afternoon. And again, if you have a question, please enter it at the bottom of your screen in the Q&A tab.

      With that, thank you for being with us today. Wayne, the floor is yours.

Hon. Wayne A. Abernathy:  Thank you very much, Evelyn. And very much appreciate all of those who are joining with us, and most especially, I would say, opportunity -- and a pleasure. Whenever you have the chance to sit and have a chat with Alex Pollock, you’ll always learn something and you'll enjoy it. So I think you'll enjoy this conversation today.

      Alex Pollock is a Distinguished Senior Fellow at the R. Street Institute in Washington D.C. He was the principal deputy director of the Office of Financial Research at the U.S. Treasury from 2019 into 2021. I'd also point out that the depth of experience that Alex has is very much hands-on. He was president and chief executive officer of the Federal Home Loan Bank of Chicago from 1991 through 2004 -- a very eventful period of time in the transition and the evolution of the policies of the Federal Home Loan Bank system, and a lot of opportunities to learn, with hands-on -- working with the financial system.

      He is the author of the book, Finance and Philosophy: Why We're Always Surprised -- much as we were in 2020. I had the privilege, shortly after that book was published, of having an interview like this with Alex on The Federalist Society's tab where we talked about the book and were able to discuss some of the really very important, but also very interesting, points there. And so that's -- if you want, you can go onto The Federalist Society page and probably go and look up Alex Pollock, type in that book, and you might even find that conversation that we had. It was wonderful.

      He is also the author of numerous articles in a variety of different publications and frequent testimony before Congress. Today, we will be discussing some very important issues. I also want to mention -- I thought this was interesting. I was not aware of this, Alex. Alex serves as a director of the Great Books Foundation, where he was chairman of the board from 2006 to 2014.

      Now, as the introduction to what Mr. Pollock is going to talk to us about -- in the class of important anniversaries nearly missed, the most recent August was the 50th anniversary of the day in 1971 when the financial and monetary world changed by the unilateral action of the president of the United States and the U.S. Treasury. Alex Pollock is here today to help us remember, and also to understand why we need to remember, that important event, as well as to understand why it continues to affect the lives of all of us today.

      Alex will offer a few remarks to set the table, then he and I will engage in a bit of a conversation, after which we will turn to the questions that you have submitted to us. Evelyn has explained, you can submit those at any point by just going down to the Q&A tab. The chat tab is, frankly, for you to communicate with other listeners. But if you want to give us a question, use the Q&A tab, if you would do that. We will draw from that Q&A tab and bring those questions to the fore and share them with all of you. And most importantly, Alex will share his answers. And that's the opportunity we'll have. And now let me turn to Mr. Alex Pollock.

Alex J. Pollock:  Thank you, Wayne, very much. As always, it's a real pleasure to have a discussion with you and to be here with The Federalist Society thinking about this 50th anniversary of a truly fundamental and definitive event in the monetary system of the whole world. The system President Nixon created in 1971 is our system of today, and tomorrow, as well, and for as many tomorrows as we can now foresee. And the issues it entails are -- and did entail, starting in 1971 -- are very much still with us in the debates we're having now.

      The title of this essay, "Fifty Years Without Gold" was not what I called the essay for, as you know, the editors get to pick the title of publications. The "Without Gold" title stresses what we don't have. But what I wanted to really stress about the anniversary of August 15, 1971 was what we do have, and still have, and that is to say, a worldwide pure fiat currency -- that is to say, pure paper and accounting entry money system -- everywhere in the world, with floating exchange rates among fiat currencies, hugely powerful central banks, which operate as part of their respective governments. Along with this has come, and continues, endemic inflation, and indeed, central banks, which promise to give us inflation forever -- that is, they promise to depreciate their fiat currencies without limit.

      Now, this is a remarkable contrast. And it all comes from that eventful Sunday announcement in 1971. It's a remarkable contrast to the idea of what was previously called "honest money," which classic central bankers thought they were responsible to maintain. "Honest money" meant money with a stable value, not a constantly depreciating value. But now, we all take for granted as normalcy the system that comes from 1971—a pure-fiat-money, pure-paper-currency system with endemic inflation. That just seems like normal to all of us, whereas before 1971, this world would have been considered extremely abnormal. But nobody now thinks it's possible to go back to that old Bretton Woods system, or before it, a gold-standard-of-one-kind-or-another system. And it probably isn't possible to go back.

      So this brings me to the title of what I called the essay originally -- and the title I like better -- which is, "We Are All Nixonians Now." Yes, when it comes to the world's monetary system, at least, we are all Nixonians now. Now, this is, you will recognize, a play on Nixon's own statement that we are all Keynesians now, as he said. But whereas, in fact, we're not all Keynesians, in fact, we are all Nixonians everywhere in the world, practically everybody who -- at least who thinks about the issue on this topic.

      Now, what does it mean that we're all, everywhere in the world, Nixonians now? Well, part of what we might think about is it's interesting to consider the price -- or what is really more appropriately thought of as the exchange rate -- of gold and the dollar. You will remember that at the time of Bretton Woods, the United States had promised to redeem in gold any outstanding dollar liabilities in the hands of foreign governments. Long before that, they had taken away the ability of US citizens to redeem dollars for gold. But they still promised it for foreign governments at $35 an ounce. So for $35 in dollars, you got one ounce in gold, or alternately stated, for a dollar, you got 1/35 of an ounce of gold.

      Now, of course, it's now about $1,800 an ounce, or alternately stated, about 1/1800 of an ounce of gold for a dollar. And you will see, if you do the math, this represents a 98 percent -- 98 percent -- devaluation of the dollar with respect to gold since Nixon's speech on that Sunday evening in 1971.

      Now, how ironic, in retrospect, is the claim of the principal US negotiator at the Bretton Woods conference, Harry Dexter White, that, as he put it, "The United States dollar and gold are synonymous"? That statement from 1944 sums up nicely the vast gulf between the intellectual world of Bretton Woods and the Nixonian world and the Nixonian beliefs of today. But more important than the role of gold in this discussion -- just as I mentioned in talking about the titles of what one might call this essay -- is the monetary role of central banks as part of their governments, now everywhere in the world.

      As the invitation to this webinar asks, is the international monetary system now permanently open to more money printing and more monetization of government debt, making faith in central banks misplaced and an expectation of an ideal monetary policy foolish? Now, the answers to this series of questions are, yes, yes, yes, and yes. Yes, the international monetary system is now permanently open to more money printing. Yes, the international monetary system is now vastly more open to the monetization of government debt, as we're experiencing these days. We might note it's also open to the monetization of real estate mortgages by the federal reserve big time -- for a couple of trillion dollars -- and to other assets, such as equity securities by the Central Bank of Switzerland, for example.

      And yes, faith in central banks, should you happen to suffer from it, is misplaced. And yes, the expectation of an ideal monetary system is foolish. Such a thing does not exist. There is no ideal. There are only trade-offs. As usual in economics and in politics, everything has a cost and nothing is free. So we should note, for example, while Nixon's decision and announcement of 1971 avoided the default by the United States when people were demanding gold and they would run out of gold, well -- but they could avoid that default only by defaulting on their commitment to redeem dollars at all.

      The next big cost of the decision was the so-called great inflation of the 1970s which was immensely destructive and maybe is a little hard to remember for many people now. But the runaway inflation was the dominant financial reality of the time. Following the inflation of the 1970s came a series of financial crises. First, a disastrous series of crises in the 1980s, and then another series of crises in the 1990s, and then in the 2000s and then in the 2010s, and then, of course, in 2020. So the monetary system of pure fiat currencies and floating exchange rates, which had strong and serious financial theoretical support and practical reasons to do it, has gotten us into -- we might have had them anyway, who knows -- but we have had a whole series of credit and foreign exchange and financial crises—about one a decade.

      Now, what would have happened if President Nixon had made a different decision 50 years ago? First, of course, we have to remember that Nixon and his advisors, as you may remember, went for several days to Camp David to debate all this and work this out. And they knew at the time -- and we should remember that nobody knew what would happen after this announcement. They decided what they were going to do, but then nobody really knew how it would turn out. But they did know that they had to do something. It looked like there was a building run on gold, and of course, like any fractional reserve system, the United States had many multiples of dollar liabilities outstanding greater than the amount of gold they had as people started to demand their gold back. And France is a particular example.

      In retrospect, it's a great decision they made to take the gold instead of the rapidly depreciating dollar. Other countries at the time did not demand gold, particularly the ones that were most dependent on United States military protection and were big dollar holders— namely Germany -- West Germany, at the time -- and Japan, were loyal holders. And they took the losses when we reneged on Bretton Woods. But certainly, others were demanding gold. And France, notably, was demanding gold. And they could see the gold running down. So they had to do something.

      Secretary of the Treasury Connally, at the time, said, "We're sending out our gold by the bushel full," or words to that effect. We've got to do something and we've got to do it now. So that's what they decided to do. So they had to do something, but they didn't have to just cut off the redemption in gold. They could have devalued the dollar in terms of gold. And they knew that. That had various problems with it. One, it's very politically unpopular to announce you're devaluing your currency. Now, note, what they did resulted in devaluation, but it wasn't formally a devaluation.

      And the uncertainty is also hard. If you devalue, you have to devalue to some other number, but what is it? $70 an ounce? The Prime Minister of England suggested a decade before, to President Kennedy, "You're at $35 an ounce, just go to 70." Well, that would be a 100 percent rise in the gold price or fall in the dollar. Would it be -- one of my academic friends suggested to me recently, they should have gone to $100 an ounce in '71, and that would have been better. But nobody knows. You can't even know in retrospect, let alone for them at the time, what the right number was.

      Now, two of the participants at Camp David before the 1971 announcement -- namely, the chairman of the Federal Reserve, Arthur Burns, and a future famous chairman of the Federal Reserve, Paul Volcker -- both favored trying to keep Bretton Woods going, effectively devaluing, working it out with the other countries. But that was not the decision. The decision was to stop redemption of gold. However, even then, in his speech, President Nixon -- and I remind you this was a Sunday evening at prime time and on TV. They cut off other popular programming to bring you this announcement announcing the suspension of gold convertibility, along with other things -- and by the way, blaming it all on the international money speculators.

      But what Nixon said, specifically, was, "I've ordered Secretary Connally, temporarily, to cease redemption of gold." Temporarily. Well, of course, it turned out to be permanent, and maybe will always be permanent. But at the time, they thought maybe it would be temporary and they'd work something else out. So you have all this uncertainty. They had to do something. They could have done other things, but this is what they did choose at the time. And it's a choice that we still have today. So what did happen was, for the first time ever in history, in peacetime, there was a worldwide fiat currency system. Note that it was common in wars to debase your currency and print up however much money you needed to pay the soldiers and to buy the ammunition and the tanks. But in peacetime, this is the first time ever.

      And so here we are now, with this system. Now, and going forward, we’re all Nixonians. And they have these problems, like, if it's just up to the central banks, as part of the governments that they are, to print up however much money they want, well, where does the discipline come from? Why don't you print up any amount and have as much inflation as somebody might be surprised by? But you caused it anyway. And there's, of course, the temptation of politicians who always want to spend to make their constituents happy. Suppose you can spend without taxing. It's kind of a political dream to just have the central bank print up what you need.

      Borrow the money from the central bank, which is really just borrowing the money from yourself, which is really not borrowing at all. It's printing it up. This opens the temptation to so-called modern monetary theory. I write that "modern" monetary theory because printing up the money is an exceptionally old financial idea. And so we have all these temptations. We're living them now. How much printing can there be without doing serious damage? And it all goes back to Sunday evening, August 15, 9:00 p.m. Eastern time, President Nixon's famous announcement, which we need to remember because it's so important for now and in the future. Thanks, Wayne.

Hon. Wayne A. Abernathy:  Thank you, Alex. Plenty of interesting things there. And not knowing quite where to begin, let me go back to a historical question to help this conversation go forward. And I want to really go back to the Bretton Woods system. This was created -- the system -- in the midst of World War II. And it was, supposedly, to be something that was going to last as far as the eye could see. It was supposed to be a new way of dealing with the issues of how the countries exchanged with one another and traded with one another, and so forth.

      And so the question I have -- was the Bretton Woods system doomed to, eventually, the kind of failure where you would get a significant country like the United States -- or maybe a France or another country -- that would have its currency so far out of whack that the only way that you could address the problem would be to suspend that system? Or could they actually have muddled along?

Alex J. Pollock:  Bretton Woods, as you say, Wayne -- and that's a really good question -- was created -- it wasn't quite in the middle of the war. It was 1944 when they could see the end coming. And they wanted to avoid the mistakes that had been made after the First World War and then led into the 20s and the 30s. And I think they did a pretty good job. When you think Bretton Woods didn't last very long, as a historical idea -- I mean, it was approved by the Congress and became law, or became an agreed-upon international treaty, in 1945. It lasted until 1971. So that's 26 years—not very long. But on the other hand, as a human creation, maybe 26 years is pretty good.

      It survived through the amazing rebirth of economic growth and rebuilding of the world after the unbelievable destruction of World War II. So it had a good day. But did it have a fatal flaw? The fatal flaw -- you said that some country -- they knew that any time you set parities -- because under Bretton Woods, you had a fixed exchange rate between major currencies -- everybody had a say. Alright, it's four pounds to the dollar -- four dollars to the pound, or four Deutschmarks to the dollar, as it was, or four Swiss francs, and so on. But they knew that those would need to be adjusted from time to time, that things would change, some people would do better than others, some people would have more inflation, some would be more competitive, and you'd have to change them. And so they built the changing the parities into the system.

      And then they built in, through the original meaning of the international monetary fund, a kind of bank to finance the period of tension when things had to be changed. But what couldn't be changed in Bretton Woods was the unique position of the United States. Everybody pegged their currency to the US dollar, and the US promised to redeem dollars in gold. And that, as it became clearer -- as the 1950s and 1960s progressed -- and it seemed especially clear to the French who described this arrangement as the exorbitant privilege given to the United States because it meant the United States could run up its foreign debt the way no one else was allowed to. And the French resented this greatly. And perhaps others did as well, but the French were very vocal about it.

      Anyway, so you had this unique position of the United States. Now, did that mean the system had to fail? I don't -- it certainly meant that you’d have to have a big change someday when it turned out that the parity set for the dollar was not sustainable. Would that have happened without the Vietnam War and the Lyndon Johnson guns and butter inflation? Maybe not. So it depended on the -- you might say on the international geopolitics of the world and the American role. But it certainly did give a unique role for the United States. As I said before, could it have been fixed by just adjusting the parity—the dollar—so you depreciated the dollar against gold? After all, whether you have enough gold or not depends on the price. I mean, if you make the exchange rate in dollars -- on enough dollars per ounces of gold, you'll always have enough gold. Those are all imponderables. But it certainly had -- Bretton Woods, like all human creations, had built-in tensions and problems just like the current Nixonian system does.

Hon. Wayne A. Abernathy:  It sounds like, from what you're saying, Alex, that the Bretton Woods system, as it was put in place, given the prominent role of the United States, was that it was to act as a discipline on United States economic policy.

Alex J. Pollock:  Yes, that's true. Yes.

Hon. Wayne A. Abernathy:  And Nixon, in essence, decided, rather than face that discipline, "I'm going to throw it off." Is that correct? Would you say that's right?

Alex J. Pollock:  I think that's right, although it was too late by then. By the time Nixon was looking at this problem -- and his very smart and top-class set of advisors all gathered out there at Camp David -- by that time, it was too late to face that this would -- the dollar was going to go down one way or another because the lack of discipline all happened during the 1960s with the run-up of US foreign obligations and US inflation. But yes -- and that's, of course, one of the things the French really resented was that everybody else was disciplined by the system, but not the United States in the short run although the system was intended, as you so rightly say, to be a discipline in the long run. And the redeemability of a currency is always a discipline on the central banks printing, and on the government spending.

      Well, of course, governments and central banks don't like to be disciplined by something outside themselves, like a need to redeem. And the United States didn't either. And as I said, you have to think about it in the context -- the Cold War is on, there’s world geopolitical competition going on, you have the amazing recovery of the European and Japanese, in particular, economies by this time. So there are going to be these stresses. I don't think Bretton Woods could have survived without major changes, like in the US dollar parity. Whether it could have been adjusted, of course, is one of those things that you can always debate because no one knows what the true counterfactual would have been.

Hon. Wayne A. Abernathy:  Taking a step from then into today -- still, the significant role of the United States -- the United States dollar in the global economy continues, maybe not quite as much as it was in '71, but it still predominates. What is the discipline on the US dollar today? Or on US economic policy, vis-à-vis the global community? We understand the disciplines we have within the United States. What acts as a discipline globally? Or does the rest of the world basically just have to take how US economic policy is affecting the dollar and affecting them?

Alex J. Pollock:  Yes. That is a key point. I think one of the surprises out of 1971 and the cutting off of redeemability was the dollar continued right on as the world's dominant currency in spite of the fact that it depreciated a lot. I mentioned -- well let's think of the Swiss franc, since it didn't turn into the euro -- four Swiss francs to the dollar in 1971. Today, less than one Swiss franc will buy you a dollar; 360 Japanese yen in 1971 -- today, less than a hundred or so. So the dollar did have tremendous depreciation. But its amazing role as dominant international currency continues. And along with that, the ability -- the exorbitant privilege, as the French said, to get other people to finance you by holding your liabilities, continues.

      Well, the reason for that is the underlying, enterprising strength of the American market economy and its huge size relative to other people. But note -- put all the euro countries together; they're about as big as the United States. They don't have that dollar, so there are some other things in there as well like the deficit in the financial markets. But I think it is a surprise that, having cut off what -- at least if you were Harry Dexter White -- you thought was an essential idea, as did most people at this time -- this link of gold to the dollar -- now suddenly, that went away. But the dollar is still dominant, and we still maintain our exorbitant privilege. So now believers in cryptocurrencies and bitcoins think that those might change it, but that's another discussion.

Hon. Wayne A. Abernathy:  That is another discussion, and certainly one that we can look at another time. I do note, though, that at least for the last several years, there's been, at least, talk at the European community that they would like to see the euro be something of a challenge to the dollar in terms of its international role. So far, that hasn't gone very far. I was at a meeting a few years ago in Beijing where we had -- through translation, I heard -- I presume the translation was fair -- we had a speaker from the Chinese Communist Party, making a very impassioned speech about how the role of the US dollar had to end. But I haven't seen anything that's really done that. But I think, to the extent the Bretton Woods system assumed that the US role was permanent, is it a mistake to assume that the US dollar role today is a given, or can't actually -- or could actually become a troubled thing?

Alex J. Pollock:  Well, if we were having this webinar in, let's say, July 1914, instead of August 1914 -- in July 1914, we would’ve assume that the dominant worldwide role of the pound sterling -- which was the king currency of the whole world and the currency of the capital markets capital of the world, namely London -- looked pretty solid. And it wasn't, as it turned out. It was basically destroyed by the First World War, which gave the dollar the chance to assume its then-dominant role in New York to replace London, basically, all as a result of the printing that all of the countries involved in the First World War did to finance the war and to destroy the value of their currencies while they were at it.

      So no, nothing is permanent. We know that. All things are tradeoffs. And certainly, both Chinese and Europeans and bitcoin enthusiasts and whatnot think, "Well, couldn't we replace the role of the dollar?" And I don't think you should always -- you should never assume such things can't happen because the world has a way of surprising us. As an author of a book once said, "We’re always surprised." And our imaginations do not limit the possibilities of the world, just like, I think, the world was surprised by Nixon's action in 1971 -- still with us today. I don't think there's much chance we're going back to pre-1971, but in the fullness of time, it seems to me, we certainly could go to something other than we've got.

      You asked me before, Wayne, and I didn't answer, "What is the limit, or what is the discipline?" And of course, the limit of money-printing -- whether you call it modern monetary theory or something else -- is always destruction of the value of the currency, otherwise known as rapid inflation. And that will destroy wages and destroy savings. It does it slowly if the inflation is fairly low. But it does it rapidly and noticeably if the inflation is high. The Federal Reserve, in December last year, predicted 2021 inflation would be 1.8 percent. That was another of their completely mistaken forecasts, of which there are many over the years.

      And one of the reasons why it's so hard to have discipline on central banks is that nobody, including the central banks themselves, really knows what the results of their actions will be. But the discipline is, I believe -- and the most important one -- the [inaudible 00:36:19] between, as I said, what they used to call "honest money" -- that is to say, money that maintained its value versus a money -- which it becomes clear, both to the domestic population and to the international holders -- is rapidly depreciating in value. And that is an ongoing discipline, which, I believe, cannot be avoided.

Hon. Wayne A. Abernathy:  That brings me to the other question I'd like to ask. And perhaps, as I ask this question, and Alex answers it, you may have some questions you wish to point. But this is -- as you're mentioning, the discipline sounds like there is, in a sense, a market discipline there, that whatever you try to do to avoid the markets, the markets assert themselves. And I'm wondering, wasn't it better to replace the Bretton Woods system of government-pegged values with a system where the markets, by and large, decided the values of currency? We, in essence, have that domestically, but we didn't have that internationally. But now, don't we have both?

Alex J. Pollock:  Well, domestically, we have, of course, vibrant markets. We hope to keep them vibrant under the various pressures of the day. But we also have a mandated single currency. Now, if you were really a total free-market thinker, you might like to have, as Friedrich Hayek proposed in 1974, multiple currencies operating within a domestic economy, as well. That’s one of the foundational ideas of the cryptocurrency -- the multiple competing currency.

      Now, at the time, in 1971, of course there were strong voices. Milton Friedman was the leading thinker of this, saying, "Well, of course you have to have floating exchange rates because nobody knows what the right exchange rate is." George Schultz, who was one of the principal advisors at the Camp David meetings leading up to Nixon's announcement, favored floating exchange rates. And theoretically, it's appealing, isn't it? You say, "Well, we don't know what it should be, so we'll let the market decide." And that's what most people still think. As I said in the article, if you ask almost any economist, "Was this a good thing that Nixon did in 1971?" they say, "Absolutely. Get rid of this outmoded link to the barbarous relic, as Keynes called gold, and we just have a market."

      And you know, that's an argument, but it doesn't get you to the point I'd like us all to understand. It doesn't get us to the ideal world. It gets us to a world where there's still plenty of problems -- like, where, then is the discipline because it really isn't just a market. It's a market plus the manipulations of the central banks. That's what the exchange market is, just like interest rates. We don't have an interest-rate-free market. In fact, everyone runs around saying, "Well, the Federal Reserve sets interest rates." That's the opposite of a market idea. You don't have the market setting interest rates. Same is true of exchange rates. There is a market, but there is also the interventionist manipulative activities of all the various central banks in this market. And that's one reason why we can be sure that we won't ever reach the ideal world.

Hon. Wayne A. Abernathy:  One of our participants has a question now, if I can put that to you. And I think it ties into this discussion where we are. It reads as follows, "Some historians to Roman times link debasing the currency -- Roman times of printing money, or as they would make impure gold -- to the need to tax capital to tackle inequality. Do you see any linkage to these three issues—inequality, capital taxation, and the non-gold free printing of money by the global superpower?" That's the question.

Alex J. Pollock:  Well, I'll just start off by saying, I mentioned that "modern" monetary theory is one of the oldest ideas. And this questioner, by bringing up the Romans -- and before that, the Greeks -- depreciating the currency was an idea that was already there. I have to just take a minute to tell one of my favorite stories, which is the story of the tyrant Dionysius of Syracuse, who borrowed money from his subjects, found that he was unable to pay in silver, as he had promised. So his response was simply to expropriate all the silver coinage—the drachmas—from the citizens. They had to turn them in to the government on pain of death. And after they turned them in, he melted them down, and restamped, according to the story, each one drachma coin, two drachmas, and then paid off the debt. Well, that's exactly what governments and central banks do now. And that's a form of taxation.

      So if your idea is that you want to take money from some people and give it to other people, well, debasing the currency is one way to do it. It's a very handy way for politicians to do it because you don't have to enact any legislation. You just do it through your central bank. It's a sneaky way of taking some people's money and giving it to the people who vote for you. I have to tell, in this context -- thank you, whoever you are, for the great question -- do you know the difference between banking and politics? You may have heard this before, Wayne. I don't know. What's the difference between banking and politics? Banking is borrowing money from the public and lending it to your friends. Politics is taking money from the public and giving it to your friends. And debasing the currency is one way to do that.

Hon. Wayne A. Abernathy:  Another question, here. And actually, this is -- if you're willing to take something -- a cryptocurrency question, if I may.

Alex J. Pollock:  Oh, sure.

Hon. Wayne A. Abernathy:  Someone has asked that.

Alex J. Pollock:  Sure.

Hon. Wayne A. Abernathy:  Here's the question. "So, are cryptocurrencies a new step away from monetary discipline, or a step back toward them? And depending upon the nature of the cryptocurrencies to those which countries would benefit, and so forth, under what we see out there, are there certain countries that benefit more than others?"

Alex J. Pollock:  Well, I think that a pure cryptocurrency, like Bitcoin, is an ultimate fiat currency because although we have fiat currencies pure paper, they are hooked to governments who have armies and force and the ability to make people do things. A Bitcoin is a pure fiat currency. It isn't redeemable in anything. It gives its holder no right to any collateral or redemption, and also, it doesn't have any force behind it. So, that's maybe even a purer fiat currency, a privately issued -- a key theoretical point in all this is, can a privately-issued fiat currency, as opposed to a government-issued fiat currency, actually serve as a currency? And I think the answer to that, actually, is no, but we're still experimenting with that in the market.

      So-called stable-value currencies are, themselves, backed by other fiat currency. They're just a dollar substitute—a kind of payments mechanism. And some of them, at least, say, "Well, we are backed by the so-called dollar reserves." But they're pretty reticent about saying what those dollar reserves consist of. But note, the currency does not give you the right to redeem in dollar reserves, at least in some cases. And depending on what reserves -- as so-called -- you choose to hold -- let's say you'd like to have some junk bonds in your reserves, or Russian debt, or whatnot, what you have is exactly a bank, and the problems of any fractional reserve bank. Maybe the assets won't be sufficient to cover your liabilities. And there -- you're just going to repeat banking.

      Now, as to what countries could benefit -- I think if you talk about cryptocurrencies and countries, then you shift into this very current debate, on which I have written, about whether central banks themselves should issue cryptocurrencies or digital currencies. I guess you can't call them, really, cryptocurrencies if they're issued by the central bank, but it's the same idea. Should there be a pure digital currency issued by various central banks? And then some people say, "Well, this is another way that China wants to create a more powerful currency for itself, and therefore, a more powerful government, by having a Chinese popular central bank or government-issued digital currency." Should the Federal Reserve issue its own digital currency?

      What you might think -- just build on the -- if it succeeded -- on the already existing dominance of the US dollar in international payments. It would certainly make the central banks more dominant than the private banks, which is one of the big drawbacks to them. Remembering that, a long time ago, central – I say, take the Bank of England -- was set up as a special bank with special privileges, but it was a general bank. It did business with the public and made loans. Well, a central bank, which became the dominant deposit-taker through its digital currency, and thereby had all this money, which it had to do something with, and so it made loans. It would be kind of a retrogressive movement backwards in central bank history to central banks, which are competitive with all the private banks as opposed to having a particular role.

      So none of these things are clear, as always, in economics and finance. And I have a saying, which is, "In every economic question, you can always find numerous economists on both sides, or perhaps on all sides, of the issue." Which only shows, it's not a science. It's a kind of philosophical theory. And that's certainly true of all these questions of cryptocurrencies and how this will or should play out.

Hon. Wayne A. Abernathy:  I think it also shows that, really, many of these questions -- certainly with regard to currencies and money and so forth -- they aren't as new as we may think them to be.

Alex J. Pollock:  Oh, for sure.

Hon. Wayne A. Abernathy:  They are really quite old, aren't they?

Alex J. Pollock:  Yes, for sure.

Hon. Wayne A. Abernathy:  Here's a question I think relates to that. "Would you be in favor" -- this is one we've received here from one of our participants -- "Would you be in favor of a return to a gold-based monetary system if it ever became politically possible. And would this require a change in legal tender laws to allow gold to legally compete with the central bank fiat money?"

Alex J. Pollock:  Yes. Well, I think what I would be in favor with, in lines of Hayek's theory, is competitive currencies. If you had a currency, redeemable in gold at a given rate -- you know, get such and such an ounce of gold for whatever unit of this currency is -- that might be a very interesting experiment to let it compete with the fiat currency issued by the government in the form of its central bank -- and used to finance potentially limitless deficits through monetization, as I said before, let alone mortgages, through monetization.

      However, there's very little chance that any government would like this idea of allowing competitive currencies. On the issue of legal tender, that's a really important one, historically. At one time, 150 years ago in this country, the issue of legal tender was one of the hottest topics. And there were a series of interesting cases which ended up in the Supreme Court about whether it was constitutional for the United States government to have made its non-redeemable paper currency during the Civil War a legal tender that you had to take if you had previously entered into a contract requiring payment in gold. And as you may remember, the Supreme Court first held that it was unconstitutional, and then President Grant appointed a couple more justices, and the next time around, they held that it was constitutional. But it was a big issue in the day.

      And that's an issue we've sort of forgotten about, the forcing of currency on the public -- which is a fiat currency through legal tender. Of course, that had a rerun in the 1930s, when the United States government -- what seems amazing now -- confiscated all the gold of its citizens, gave them paper money -- depreciated paper money, instead. It happened in 1933. That ended up in the Supreme Court, too. And the Supreme Court held, by a vote of 5-4, that the government, being a sovereign, had the power to do this because if you're a sovereign, you can do these sorts of things.

Hon. Wayne A. Abernathy:  As I recall, then --.

Alex. J. Pollock:  Even for The Federalist Society, a fundamental philosophy, Wayne.

Hon. Wayne A. Abernathy:  Oh, absolutely. And I think these constitutional questions are important. That's why you have a constitution, is to try to deal with these perennial questions. And in that case that you mentioned, I think there is also the issue of whether the paper, or debt, of the government, that said it was to be paid in gold -- and the government said, "Well, we're not going to pay that in gold anymore" -- whether that was unconstitutional. As I recall, the courts upheld that as well.

Alex J. Pollock:  No, you're absolutely right. That was. They used the same cases. And you're absolutely right. Nobody disputed, including the government itself, that the clear and unambiguous commitment of the government to pay in gold on its bonds had been made. But I like to summarize this in the following saying, "What does it mean to be sovereign when it comes to debt? It means if you don't feel like paying, you don't have to. You just default, just like Nixon in '71." Well, I know we entered into these Bretton Woods agreements saying we would redeem these dollars, if you're a foreign government, for gold. But by the way, we're not doing it.

      And of course, this was extremely controversial at the time. A lot of other foreign countries and their governments were up in arms about this. And you may remember, there's a well-known -- I was going to say famous, but maybe it's notorious -- statement of the Secretary of the Treasury, John Connally, at the time, who said to the Europeans, who were upset, "It's our currency, but it's your problem."

Hon. Wayne A. Abernathy:  That reminds me of the Pollock law of finance, as I recall, which is, "Debts that cannot be repaid, will not be repaid."

Alex J. Pollock:  Thank you. Absolutely right.

Hon. Wayne A. Abernathy:  It's a matter of who bears the loss, really.

Alex J. Pollock:  That's exactly right. Exactly right. And we're going through that again now, in the aftermath of the Covid crisis and its financing. Now, it's going to be all about who bears the loss. Well, one of the ways you force people to bear the loss is by inflating, is by monetization, and putting the loss on the holders of your currency or savings denominated in your currency.

Hon. Wayne A. Abernathy:  And now, a question here. As we've been talking about the role of gold, one of our participants asked this question, "What about other commodities being the support for currency? Doesn't a floating exchange rate system just replace gold as a reference commodity with currency itself, or are there other commodities that could compete with gold and be, maybe, more broadly accepted domestically or internationally?"

Alex J. Pollock:  That's a classic question, as well, and a good one. And many people have proposed some kind of a basket of commodities that might be a basis for a currency. Theoretically, you could certainly imagine it. You know, you get some kind of a generalized commodity index or something. It's hard to do practically because how do you form the index? And what are the weightings? And the world changes and -- just like it did for the Bretton Woods parities -- but it’s certainly, theoretically, conceivable. Gold is handy, as we know, because it lasts forever and it doesn't rust, and it's fairly small, if you want to carry some coins around as one family of famous investment bankers who got out of Germany in time -- 1938 or so -- said, "The only real wealth is what you can take with you inside a toothpaste tube or sewed inside your clothes." And gold qualifies there.

      But this is a classic and perfectly sensible idea. As I remember, Irving Fischer, who wrote a wonderful book on the money called The Money Illusion -- the difference between the real inflation-adjusted value of money and the nominal value of money -- back in, I don't know, 1910, or something like that, later on, was one of the followers of central banks trying to stabilize prices, as they used to do, as opposed to constantly inflating prices. And he, as I recall, had some kind of an idea like this, of a basket of commodities you're trying to stabilize against. I think it's one of those things it's harder to do in practice than in theory.

Hon. Wayne A. Abernathy:  And I have a short question that's been asked here, but I presume the answer is not short. But, "Do you have a definition of 'the dollar?'"

Alex J. Pollock:  Well, yeah. That's an easy definition. It's a unit of account on the books of the Federal Reserve. It's sometimes represented by a piece of paper that says, "This is one dollar." Or you can exchange that piece of paper. It interchanges with the books in the Federal Reserve for an accounting entry called "the dollar," whereas, of course, before, at least if you were a foreigner, the definition of a dollar was 1/35 of an ounce of gold.

Hon. Wayne A. Abernathy:  In essence, what fiat currency has done is made it a flexible definition.

Alex J. Pollock:  Yes. Well, and of course, if you're a central banker or a politician, that's what you like. You know that, Wayne, having worked on legislation.

Hon. Wayne A. Abernathy:  We're getting near the end of our time, but I do want to -- this further question, which goes to one that I've had for a while. As you know, a question I've had is, "When the Bretton Woods system disappeared, why did the Bretton Woods institutions remain?" And someone -- one of our participants is asking the question -- is maybe the IMF special drawing rights work as some kind of basis for global currencies?

Alex J. Pollock:  Well, that's what they thought in the 1960s, when these were created, the special drawing. Of course, the special drawing rights are only a basket of fiat currencies. But that's what they were hoping at the time because, already in the 60s, one of the things that President Nixon said in his speech in 1971 was, "We keep having these dollar crises, one a year." And this was all during the 60s as the US deficits were higher and inflation was higher, and the dollar was under pressure, and people were building up large-dollar claims in foreign hands. And SDRs were meant to be a potential way around it. It never seemed to have worked too well, but it definitely was the theory at the time.

      Can I just stick in one more comment? I meant to say this before. In the 1971 speech, of course, it wasn't only about stopping to redeem dollars for gold. It was also an amazing thing, really, for what you would have thought a basically market-oriented administration to do -- was to put in wage and price controls. And you, before, Wayne, said something -- "Well can't you just control these things? But does the market ultimately overcome them?" And of course, that's what happened in the early 70s. They put in wage and price controls. It turned into a vast bureaucracy. It didn't succeed in the end. And when they finally had to be taken off, then the inflation exploded in the mid-1970s and on. So, yes, you try these control mechanisms, but in the end, they won't work either.

Hon. Wayne A. Abernathy:  Well, as with all very fascinating conversations, the clock is against us. And it would pretty much run out of the time we've allocated. But this conversation, of course, will continue. One that we really didn't get into as much, and we'll certainly save that for another day, is how the end of Bretton Woods opened up the door for just, almost, limitless deficit spending all around the world, for economies all around the world.

Alex J. Pollock:  Oh, yes. And what we have today -- that's why this is so relevant. What we have today -- deficit spending is made possible by monetization, which is the freedom of the central banks, which as I suggested, you should not foolishly have faith in -- all created by the action of President Nixon 50 years ago. So this is history, but it's also very lively today and going forward. We’re living in this Nixonian world with all of the problems that go along with it.

Hon. Wayne A. Abernathy:  Where do we find the discipline? And that's, of course, the question.

Alex J. Pollock:  Yes.

Hon. Wayne A. Abernathy:  Any final words before we conclude?

Alex J. Pollock:  Well, that's a great final question. So let's work on that. Where do we find the discipline? We know that under the Constitution of the United States, the discipline is supposed to come from the Congress. The money power is clearly vested in the Congress. And one of the astonishing acts of arrogance, really, was the Federal Reserve saying, on its own, it could set an inflation target, and depreciate the currency infinitely. Now, can we get such discipline from the current Congress? Doesn't seem too likely. But one might hope that there would be a Congress, someday. These are deep and hugely important, but classical, problems. Unfortunately, answers aren't that easy.

Hon. Wayne A. Abernathy:  Thank you very much. Wonderful discussion. And certainly, as we say, the conversation will continue. Evelyn, I think the time is back to you— Evelyn Hildebrand, from The Federalist Society.

Evelyn Hildebrand:  Yes. Thank you very much to you, Wayne and Alex, for this great discussion. Thank you to our audience. You sent in questions and comments and participated. Very grateful for everyone's time this afternoon. If you have any questions or comments for The Federalist Society, please send those to us at info@fed-soc.org. And we welcome your comments. And I would only add our gratitude to our speaker and our moderator this afternoon. And with that, we are adjourned. Thank you, everyone.

[Music]

Dean Reuter:  Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at fedsoc.org.

Podcast: A Webinar on Central Bank Digital Currencies

Hosted by the Federalist Society.

With expressions ranging from enthusiasm to serious interest, central banks from China to Europe have been actively exploring the potential for Central Bank Digital Currencies (CBDCs).  On June 28, Federal Reserve Board Vice Chairman for Supervision Randal Quarles offered comments that, far from equivocal, expressed great doubt about the feasibility and desirability for the Federal Reserve sponsoring such a currency.

On July 29 at 2 PM ET the Federalist Society hosted webinar of CBDC experts to comment on Vice Chairman Quarles’ remarks.  What were the key points he made, what did he not say, what is the significance of his comments, what issues remain?  Most important of all, what are the prospects for CBDCs, abroad as well as in the U.S.?

Controversies focus on CBDC implications for privacy, greater personal financial inclusion, government control of credit, innovation, government assumption of banking activities, broadening the tax base, and more.

Featuring:

• Bert Ely, principal of Ely & Co. Inc., long-time expert, consultant, and commentator on financial services institutions and developments, including conditions in the banking industry and the FDIC, monetary policy, the payments system, and the growing federalization of credit risk.

• Chris Giancarlo, former Chairman of the Commodity Futures Trading Commission, and currently senior counsel at Willkie Farr & Gallagher. On June 9, 2021, he testified on CBDC before the Senate Banking Committee’s Economic Policy Subcommittee.

• Peter C. Earle, economist and writer with the American Institute for Economic Research, with 20+ years as a trader and analyst at a number of securities firms and hedge funds, his research focuses on financial markets, cryptocurrencies, monetary policy-related issues, the economics of games, and problems in economic measurement.

• Moderator: Alex J. Pollock, Distinguished Senior Fellow, R. Street Institute; former Principal Deputy Director, Office of Financial Research, U.S. Department of Treasury; author of Finance and Philosophy–Why We’re Always Surprised

Listen here.

Event: What might cause the next financial crisis?

Hosted by the American Enterprise Institute.

Panelists:
Rebel A. Cole, Lynn Eminent Scholar Chaired Professor of Finance, Florida Atlantic University
Gerald P. Dwyer, BB&T Scholar, Clemson University
Edward Kane, Professor, Boston College
Alex J. Pollock, Distinguished Senior Fellow, R Street Institute
Ehud I. Ronn, Professor, University of Texas at Austin
Richard Christopher Whalen, Chairman, Whalen Global Advisors LLC

Moderator:
Paul H. Kupiec, Resident Scholar, AEI

More than 60 countries and multinational organizations produce financial stability reports. All are political documents that rarely identify actual financial crises in advance, especially if risks arise from government-regulated institutions or are linked to government policies that promote financial excesses such as lax lending standards, over-stimulative monetary policy, or unsustainable exchange rates.

Financial activities believed to be fail-safe frequently are not. Successfully identifying the activities that result in disastrous losses before they materialize requires imagination, intuition, and luck. Statistical models rarely predict economic turning points.

Join AEI as six financial-sector experts use data, statistics, and their keen intuition and in-depth knowledge of our financial system to propose risks that could trigger the next financial crisis.

Video: Is inflation back?

Hosted by the American Enterprise Institute.

The recent increase in US inflation numbers has shocked the stock market and begun a debate about whether an inflationary period is starting. This surge comes while the Joe Biden administration engages in the country’s largest peacetime fiscal stimulus, monetary policy remains highly accommodative, and demand has been pent-up due to social distancing and COVID-19 restrictions.

Join AEI and a distinguished panel of economists for an event evaluating whether there is an immediate inflationary risk to the US economy, the longer-run inflation outlook in light of anticipated demographic changes in China and elsewhere, and what the implications might be for future monetary and fiscal policy.

The New Monetary Regime – Debt and The Inflation Crisis: A Special Panel Presented by The Liberty Fund and The RealClear Foundation

Hosted by Real Clear Politics.

The roundtable is moderated by Alex J. Pollock of the R Street Institute, and the panelists included Law & Liberty senior writer David P. Goldman of the Claremont Institute, Veronique de Rugy of the Mercatus Center, and Christopher DeMuth of the Hudson Institute.

Video: The New Monetary Regime: An Expert Panel Discusses Government Debt and Inflation

Hosted by Law & Liberty.

For decades, the U.S. Government has been charging a credit card with no limit, running up previously unimaginable trillions of dollars on the balance sheet at the Federal Reserve, leaving future generations as the guarantor—and the bill may be coming due sooner rather than later. What will be the effects of this Fed/Treasury alliance on our economy and our society?

Law & Liberty and the Real Clear Foundation hosted a distinguished panel of experts who discussed the growing crisis of inflation and debt in our government.

The discussion was moderated by Alex J. Pollock of the R Street Institute, and the panelists included Law & Liberty Senior Writer David P. Goldman of the Claremont Institute, Veronique de Rugy of the Mercatus Center, and Christopher DeMuth of the Hudson Institute.

Government policies reshape the banking industry: Changes, consequences, and policy issues

Hosted by the American Enterprise Institute.

On April 12, AEI’s Paul H. Kupiec hosted a panel discussion on recent changes in the banking industry and their consequences for the wider economy. He reviewed how the industry has consolidated, is lending less to the private sector, and is relying more on federal guarantees.

Richard E. Sylla of New York University summarized the history of the banking industry. Aside from a 50-year period of stability, US banking has trended toward a system characterized by a few large banks with extensive branch systems, branch systems that are now in decline themselves.

Charles Calomiris of Columbia University summarized more recent trends in the banking industry as a “three-legged stool”: extreme consolidation, extreme dependency on government support, and reliance on real estate lending. Alex J. Pollock of the R Street Institute added that the greater “banking credit system” is increasingly influenced by the Federal Reserve and government-sponsored enterprises.

Bert Ely of Ely & Company enumerated the industry risks. Depository institutions are intermediating deposits into government debt. Low interest rates have also squeezed bank margins and reduced the cushion to absorb losses that may arise from the pandemic.

— John Kearns

Event Description

The federal government response to the 2008 financial crisis, including new laws, prudential regulations, and Federal Reserve monetary policies, has left a lasting impact on the banking industry. Not only has the number of independent depository institutions almost halved since 2000, but the industry has also become much more concentrated in a few large “systemically important” institutions. Moreover, the characteristics of the largest banks have changed dramatically according to incentives established by heightened prudential regulatory requirements and the Federal Reserve’s long-lived zero interest rate environment.

Join AEI as a panel of banking experts discusses postcrisis changes in the banking industry and their consequences for the wider economy.

Event Materials

• Paul H. Kupiec: “20 years of banking history in 67 charts and tables”

• Richard Sylla: “From exceptional to normal: Changes in the structure of US banking since 1920”

• Alex J. Pollock, Hashim Hamandi, and Ruth Leung: “Banking credit system, 1970–2020”

• Charles W. Calomiris: “Introduction: Assessing banking regulation during the Obama era”

Agenda

10:00 AM
Introduction and opening remarks:
Paul H. Kupiec, Resident Scholar, AEI

10:15 AM
Panel discussion

Panelists:
Charles Calomiris, Henry Kaufman Professor of Financial Institutions, Columbia University
Bert Ely, Principal, Ely & Company
Alex J. Pollock, Distinguished Senior Fellow, R Street Institute
Richard E. Sylla, Professor Emeritus of Economics, New York University

Moderator:
Paul H. Kupiec, Resident Scholar, AEI

11:30 AM
Q&A

12:00 PM
Adjournment

Pollock participates in a discussion with Professor Mark H. Rose

Hosted by the American Enterprise Institute.

R Street Distinguished Senior Fellow Alex J. Pollock took part in a March 27 panel at the American Enterprise Institute to discuss economic historian Mark Rose’s new book, “Market Rules: Bankers, Presidents, and the Origins of the Great Recession.” Other panelists were Rose himself, Richard Sylla of the National Bureau of Economic Research and moderator Paul H. Kupiec of AEI.

Global financial market risks: Entering unchartered territory

Hosted by the American Enterprise Institute.

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AEI Event: Eliminating Fannie Mae and Freddie Mac without legislation

Hosted by the American Enterprise Institute.

A panel of housing finance experts met at AEI last Tuesday to discuss how the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac could be eliminated without legislation.  Moderated by R Street’s Alex J. Pollock, the panelists detailed the distortions of the current housing finance system dominated by Fannie and Freddie, and proposed a reform plan that protects homebuyers and taxpayers and does not require Congress to act.

The Bubble Economy – Is this time different?

Hosted by the American Enterprise Institute.

Two decades after Alan Greenspan’s famous “irrational exuberance” speech at AEI in 1996, Dr. Greenspan spoke at AEI again, addressing record-high global stock and bond market prices following unprecedented central bank balance sheet expansions.  Following Greenspan’s keynote address, R Street’s Alex J. Pollock led an expert panel that discussed whether the world economy is now experiencing an asset market price bubble and what might be done about it.

AEI Event: Is the Bank Holding Company Act obsolete

Hosted by the American Enterprise Institute.

Most of America’s 4969 are owned by holding companies, so the Bank Holding Company Act of 1956 is a key banking law. But do the prescriptions of six decades ago may not still make sense for the banks of today. The act for most of them creates a costly and arguably unnecessary double layer of regulation. Its original main purpose of stopping interstate banking is now completely irrelevant. One of its biggest effects has been to expand the regulatory power of the Federal Reserve–is that good or bad? Does it simply serve as an anti-competitive shield for existing banks against new competition? Some banks have gotten rid of their holding companies–will that be a trend? This conference generated an informed and lively exchange among a panel of banking experts, including the recent Acting Comptroller of the Currency, Keith Noreika, and was chaired by R Street’s Alex Pollock.

Pollock before Oversight Subcommittee

Here’s more from R Street Distinguished Senior Fellow Alex Pollock’s testimony before the House Committee on Financial Services on the arbitrary and inconsistent non-bank SIFI designation process.

Pollock testifies on CHOICE Act before House Financial Services

Published by the R Street Institute.

R Street Distinguished Senior Fellow Alex J. Pollock testified July 12, 2016 before the House Financial Services Committee about the CHOICE Act, legislation that proposes to loosen regulatory controls on banks that choose to hold sufficient capital to offset their risk to the financial system. Video of Alex’s testimony, as well as Q&A about the Volcker Rules and other reforms to the Dodd-Frank Act, is embedded below.