Category Archives: Uncategorized

Monetary Economists as Policymakers at the Federal Reserve

Several articles in recent years have claimed that more diversity in the sense of fewer economists on the Board of Governors and the Federal Open Market Committee (FOMC) would be a good thing (Fox “How Economics PhDs took over the federal reserve”; Zumbrum “Fed draws on academia, Goldman for recent appointees”; Calabria “Yes Fed has a diversity problem”; Ricketts “The Fed could use less book learning and more street smarts”). This is of some importance. There currently are three vacancies out of seven positions on the Board. One will be filled by the Vice Chairman for Bank Supervision. Several of the twelve bank presidents have turned over in the last few years and more may well turn over in the next few years.

This clamor seems to having an effect or at least reflects an opinion held by Reserve Banks’ boards of directors. The number of Ph.D. economists heading Federal Reserve Banks has fallen in recent years. Three presidents who were professional monetary economists and took strong stands have left, Naryana Kocherlakota, Charles Plosser and Jeffrey Lacker. The first two have been replaced by non-economists and the latter may well be also.

Positions at the Board are different than Reserve Bank presidents. Some positions at the Board are allocated to community bankers or bank supervision (Calabria 2016). The number of professional monetary economists who are community bankers is small and there is no reason to think that such a community banker would know more about monetary policy than other community bankers. The most important qualifications of the Vice Chairman for Bank Supervision concern knowledge about regulation (Davidson and Tracy 2017). There are qualifications for Board members based on geographic distribution that should be taken seriously (Calabria 2016).

These assorted criteria do not apply to Reserve Bank presidents. Furthermore, the operational work at Reserve Banks of clearing checks has disappeared and Reserve Bank’s most important roles concern monetary policy and supervision and regulation. Supervision and regulation at Reserve Banks is a Board function delegated by the Board to Reserve Banks. In the end, the Board is in charge of supervision and regulation.

If there is a reason to have Reserve Banks, monetary policy is it. Reserve Bank presidents have their own economics staff to brief them, a luxury that members of the Board of Governors do not have. Some of the Reserve Bank presidents who are economists have been quite effective at raising issues about monetary policy such as the desirability of the Federal Reserve’s holdings of mortage-backed securities.

Nonetheless, some think monetary policy would be better if fewer Presidents of Reserve Banks were economists. Would it?

There are two aspects of being a policymaker at the FOMC. Monetary economists have some expertise at one and substantial expertise concerning the other.

The FOMC sets the specific goals of monetary policy. The general goals are set by law but the specific goals in terms of inflation and real economic activity are determined by the FOMC. (I think it would be better if specific goals were set by Congress and the Administration but they are not.) Monetary economists have some expertise at determining the goals because they have thought about them more than most people, but staff assisting presidents provide this knowledge to some extent.

The FOMC’s other task is to use monetary policy tools to produce the goals. Whether or not members of the FOMC are economists, economists brief presidents of Federal Reserve Banks before FOMC meetings and monetary economists have particular expertise concerning these issues.

It takes serious economic analysis to understand how monetary policy worked even before the financial crisis. That is more true today.

There is not a consensus among monetary economists about how monetary policy works in the context of current policies such as interest on excess reserves and Quantitative Easing. (Or for that matter, even what the effects of Quantitative Easing are.) A Principles of Economics course is not sufficient to have the economics background to reach an informed judgement about how monetary policy works today and why alternatives are in error. An undergraduate economics degree twenty or thirty years ago is of no more use.

While it is possible for an economic advisor to teach a non-economist enough to understand the issues, it is difficult to imagine a policymaker ignoring the judgement of the economists who brief him or her. Some non-economists have been involved enough in monetary policy issues to have strong opinions before they are appointed. (Quarles is an example of someone who is being considered and has at least one strong opinion about monetary policy (Davidson and Tracy 2017).) Many if not almost all have not.

Economic advisors provide informed analyses and the FOMC meetings are informed discussion of the economy and monetary economics. Some policymakers are comfortable with briefings that reflect different opinions. Some are not. The judgements of the economists providing the briefing will play an important role in the choices made by a president, whether there is one point of view or more than one.

The economists briefing the President will play a far larger role if a President is not a monetary economist. The policymaker’s policy preferences might be different than the staff’s preferences on occasion but even these differences are unlikely to be important.

The argument is to appoint more presidents at Federal Reserve Banks who have no expertise in monetary economics and will be on the FOMC. Such appointments are unlikely to increase the level of discourse or the soundness of decisions at the FOMC. If such appointments have any effect, they most likely will enhance the importance of views held by the Reserve Banks’ economics staffs.

REFERENCES

Calabria, Mark. 2016. “Yes, the Fed Has a Diversity Problem.” Cato at Liberty. June 23, at https://www.cato.org/blog/yes-federal-reserve-has-diversity-problem.

Davidson, Kate, and Ryan Tracy. 2017. “Expected Fed Pick on Collision Course with Current Members on Rates.” Wall Street Journal, April 17, at https://www.wsj.com/articles/expected-fed-pick-on-collision-course-with-current-members-on-rates-1492469900.

Fox, Justin. 2014. “How Economics Ph.D.s Took Over the Federal Reserve.” Harvard Business Review, February 3, at https://hbr.org/2014/02/how-economics-phds-took-over-the-federal-reserve.

Ricketts, Joe. 2017. “The Fed Could Use Less Book Learning and More Street Smarts.” Wall Street Journal. April 10, at https://www.wsj.com/articles/the-fed-could-use-less-book-learning-and-more-street-smarts-1491864871.

Zumbrun, Josh. 2015. “Fed Draws on Academia, Goldman for Recent Appointees.” Wall Street Journal, November 10, at https://www.wsj.com/articles/fed-draws-on-academia-goldman-for-recent-appointees-1447177296.

Payday lending

An early payday lender.
Shylock
The Consumer Financial Protection Bureau (CFPB) has unveiled new rules for payday lenders. Payday lenders are the lenders that everyone loves to hate, modern Shylocks. It is doubtful that anyone grows up thinking “I want to grow up be a payday lender.”

Dave Ramsey, who provides generally excellent financial advice, has a page advising “Don’t do it.” While that is good advice, it is not an option for everyone all the time. His advice not to borrow on credit cards is good advice too.

Payday lenders make loans to people for small dollar amounts for short periods. Indeed, they get their name from a common practice of making a loan to people until their next payday.

Interest rates are quite high compared to say, a car loan. Interest rates on new car loans are in the neighborhood of 1.5 to 3.0 percent and payday lending rates range from 150 to over 500 percent per year. Payday loans are for small sums for short periods of time with a lump-sum payment in a couple of weeks.

If the loan is not rolled over, the annual interest rate is misleading. A two-percent interest rate for a week compounded for a year is 180 percent. If a $300 loan is taken out for a week at two percent, that is $6. That is hardly an appalling amount.

Studies have found that payday lending often is the cheapest source of short-term credit available to people in short-term financial difficulties. They are not stupid; they have an emergency or have fallen on hard times.

The reason for some people’s concern is the failure of some people to pay off the loan, instead borrowing the $306 for another week, and so on until, at the end of year, they owe $840 for the $300. Not a good outcome for sure.

Restricting the availability of these loans means that some people will no longer have this source of credit available. They are worse off as they see it. They have to rely on more expensive sources, miss payments on debts they owe or adjust some other way.

It is of course possible to think that the government and some of its experts know better than low-income people with bad credit. I think that is just arrogance speaking.

If restricting credit is a bad answer, what is a better way to help low-income people with bad credit and financial difficulties?

A better answer is to make more credit available to low-income people with bad credit. This will drive down the interest rates.

More personalized lending can get around some of the difficulties of loans reflected in payday loans. I don’t know how successful it has been, but the Church of England has the right idea. In 2014, they proposed making credit available through churches. (I learned about this in the excellent book For God and Profit: How Banking and Finance Can Serve the Common Good)
Credit unions in the United States used to make short-term loans to members in small-dollar amounts. I know; I got one while in my twenties after a car accident.

The more rules and restrictions are put in place, the more difficult it is for institutions to make loans such as payday loans. The simple economics indicate that increasing the supply of such loans is a solution, not restricting supply.

An economist’s encounter with contemporary theologians

I went to a Lumen Christi conference last week (may 19-20), a meeting mainly of economists and theologians. The general topic was Catholic social thought and the specific topic was the the environment. At breakfast, I was sitting at a table with three theologians. Somehow it went all wrong and I don’t understand it even after thinking it over.

I mentioned that I had been at the Federal Reserve Bank of Atlanta and had left partly because of dissatisfaction with the increases in regulation after the Financial Crisis of 2007-2008. It seemed that they immediately assumed that I thought there should be no regulation of banks or financial markets.

One of the theologians gave a talk later that day at which he said that people should live in smaller, more densely situated homes, ride bikes instead of drive cars, and in general have a standard of living similar to what they had in the 1950s. He mentioned in particular that he thinks it is a waste to have so many resources devoted to improving phones, for example from the iPhone 5 to iPhone 6. He thinks a house of 1500 square feet should be more than adequate for people and decried McMansions of 3000 square feet. (In Atlanta, it takes more like 5 or 6 thousand square feet to get that barb.)

Apparently he didn’t really mean it about the 1950s lifestyle.

At his session, I brought up the comment about a 1950s lifestyle. I used the enormous advances in medical care for heart disease and the general increase in life expectancy of older people as an example of dramatic improvement since the 1950s. I asked him who should decide whether such research is important. He merely replied that it is obvious that medical research is important while some other research (on phones I am sure) is unimportant.

He did not understand that I was asking how his preferences about research would be implemented. That problem is harder if, as I thought, some research would be fine and other research not.

To me as an economist, “who decides” means whose preferences get implemented and how. Some people might agree that some research is more important than other research in some sense. I was not merely asking if some people could agree.

He most likely does not know that those advances are related. Digital imaging is incredibly important in modern medicine including treatment of heart attacks and preventive medicine. My mother-in-law’s pacemaker has digital storage of its activity that is uploaded to the doctor once a month.

I found all of this unsettling in an odd way. One of the theologians commented later about me that “It takes all kinds.” The complete inability to find any way to discuss things despite, at least at the start, some good will is a shame.

Bitcoin and government regulation

Governments are starting to regulate Bitcoin and other cryptocurrencies. Is this good or bad? Why? Norbert Michel and I wrote a Heritage Backgrounder piece on Bitcoin and other cryptocurrencies, Bits and Pieces: The Digital World of Bitcoin Currency. We discuss the main aspects of Bitcoin without getting into technical details. We also discuss some of the possibilities for the future and indicate ways that the government can adapt to stay out of the way.
We don’t really take a stand on whether Bitcoin itself will succeed; time will tell that.
We do point out ways that the growth of Bitcoin and other cryptocurrencies could be throttled by government regulation and laws and suggest ways to avoid that outcome.

Bitcoin mining and monopoly

Bitcoin mining has come under scrutiny recently because one mining pool, GHash, seemed to have more than half the mining resources used in mining Bitcoin. Bitcoin mining is important because the bitcoin protocol relies on competitive mining to authenticate transactions as well as to create and distribute new bitcoins.

The existing discussions of this issue are at best incomplete.

It has been claimed by Eyal and Sirer in their paper “Majority is not Enough: Bitcoin Mining is Vulnerable” that they “show that the Bitcoin protocol is not incentive-compatible.” As a result, they have argued for a “hard fork” because it is possible for a miner to gain more than a proportionate share of earnings – new bitcoins and transactions fees – once it has sufficient computing power under its control.

It is important to note what they actually show. They show that it is possible for a participant in mining with sufficient resources to gain more than a proportionate share of earnings by a strategy of mining privately and revealing its new blocks strategically. Revelation occurs when other miners – call them public miners – find a block. If private mining has not found a block, then the private miner moves to the new blockchain and continues. If the private block has one or more new blocks, then the private mining announces those blocks. The new private addition will contain at least one block and sometimes two or more blocks. The greater-than-proportionate earnings come from having more than one block sometimes. The more mining power, the higher is the probability of adding more than one block.

Currently, such a participant would be a mining pool. The practical example which has accumulated on the order of half of mining power is the mining pool GHash.

In “The Economics of Bitcoin Mining”, Kroll, Davey and Felten argue that Bitcoin is susceptible to attacks from determined adversaries who are willing to expend resources to disrupt Bitcoin. They argue, as a result, that Bitcoin inevitably will have a governance structure which is identifiable.

How would an economist, as compared to computer scientists, approach this issue?

First, mining bitcoins is a dynamic game. Equilibrium occurs for multiple periods. Second, miners are not anonymous in the sense that any miner, let alone a mining pool with a large fraction of total resources, is anonymous. To be clear, the identities of the people who are miners may well be anonymous but the miners, as miners, are not anonymous. It is not the case that all peers in the bitcoin universe are treated the same and are unknown. For example, the Bitcoin Wiki lists a number of fallback nodes considered reliable. It also compares the characteristics of mining pools.

In a reputational equilibrium, participants develop reputations and maintain them. The reputations are maintained because failure to do so results in outcomes that have lower value than maintaining the reputation. This is the situation which confronted GHash recently and the pool behaved as I would have expected, taking actions to continue creation of bitcoins.

Mining can be supported by a reputational equilibrium because the game is dynamic, there are a finite number of participants, and at least some participants are not anonymous,. The identities of the participants matter. Any strategy such as switching addresses to hide any particular strategy (such as superseding existing blocks as in Eyal and Shirer) will be evident quickly. For example, other participants would have an incentive to ignore blocks announced by that miner and move on.

This does not mean that the current protocol deals with known attacks, let alone all possible attacks. It does not. In fact, it is not possible to have a set of rules that provides pre-determined actions in all possible states of the world. There is not enough ink or hard-disk space in the world, and there probably still would be unknown attacks no matter how much effort were devoted to thinking of new ones.

A structure to determine the rules for Bitcoin in unforeseen eventualities is inevitable. And it does exist of course as the Bitcoin Foundation. In part, this echoes a point made by Kroll, Davey and Felten.

Bitcoin is not a completely anonymous implementation of a set of rules that can run forever with no human oversight. But then, this is true for open-source software, so it’s hard to see how it could be true for something as complicated as a digital currency.

I am not, of course, claiming that I have shown there is a reputational equilibrium for mining. I haven’t. I have outlined what it would have to look like. There would be a problem completing this analysis though.

The mining protocol creates the observed tendency toward monopoly in mining. In the next week, I will discuss why on this blog.

 

Bitcoin, Regulation and Bitcoin’s Future

Is regulation the likely downfall of Bitcoin? Last week at the conference for the Association of Private Enterprise Education, a session included speakers with differing points of view about Bitcoin’s future. One speaker pretty clearly suggested that regulation would be the downfall of Bitcoin. Is that plausible?

I interpret regulation as being the setting of rules by administrative agencies which are not courts as commonly understood. The “not courts as commonly understood” here is somewhat convoluted, but many administrative agencies in the United States have branches which resolve disputes in some ways similar to resolution by the judges.

With this definition, contract law and other rules applied by courts are not regulation, even though they are very important. Most importantly, there have been few if any court cases alleging fraud in the Bitcoin community. While not rampant, there have been serious frauds. In addition, criminal law is not regulation. For example, theft – taking something of value from a rightful owner — is a crime in most (all?) countries. While there are well known instances of theft – summarized at Wikipedia – nothing much seems to have been done about bringing the thieves to justice.

It is quite likely that fraud and thefts will be pursued more seriously than in the past. Bitcoins are worth far more than in the recent past. 400 bitcoins are worth $20 at $.05 per bitcoin and $200,000 at $500 per bitcoin.

If someone steals 400 bitcoins when they are $.05 apiece, there is not much point in doing anything about it. Of course, there’s not much monetary gain from stealing them either. On the other hand, when bitcoin are worth $500, stealing 400 bitcoins is no small thing. Similarly, someone defrauded of $20 is not likely to do much about it other than learn from the mistake. $200,000 is quite another matter.

It’s hard to imagine that bitcoins will not be subject to much more legal oversight than in the past. This is not the same as regulation.

Examples of regulation include the application of specific laws before starting an exchange for digital currencies compared to laws which apply to any other exchange, for example for collectors’ postage stamps.

Financial regulations have their own nuances. Before starting a bank in the United States, the backers must show they have the skill and assets to successfully operate a bank. They also must show that there is enough demand for banking services to support existing banks and the new bank. This is far different than opening a new grocery store. Still, this arrangement is better than the situation in many other countries, in which there is no effective way to start a new bank.

No doubt there will be attempts to regulate bitcoins along the lines of other financial enterprises. It remains to be seen how effective that regulation will be. For example, if New York state requires a license before someone starts an exchange for digital currency, the only thing affected is the probability that an exchange will start in New York state. It will be zero. If the United States government requires a license before starting an exchange, the only thing affected is the probability that an exchange will start in the United States. It will be zero, although it is not particularly high anyway.

It strikes me as implausible that regulation will stifle digital currencies in a serious way. It is too easy to get around the regulations. For example, Satoshi Dice is said to block U.S. addresses. Even if they are blocked, it is not hard to use Tor to have an address apparently outside the United States.

Bitcoins probably have the greatest immediate potential in countries such as Argentina, which has serious inflation. Inflation generates revenue from the government at the expense of money holders. Bitcoin is an attractive alternative to Argentinian pesos. While U.S. dollars are attractive also, holding them is illegal and U.S. dollars are harder to conceal than bitcoins. Argentina has dollar-sniffing dogs, but a bitcoin has no smell or other physical presence besides a sequence of numbers and letters.

In short, bitcoins are a way to get around regulations. While that may sound nefarious or evil to some, it doesn’t to me. More to the point, it strikes me as a positive for bitcoin’s continued use.

 

Why did Mt. Gox fail?

Rising U.S. dollar prices on the Mt. Gox exchange

The U.S. dollar prices of bitcoin on the Mt. Gox exchange rose dramatically, from $.05 at the start

It has been a big week for bitcoin. Newsweek claimed they found the creator of bitcoin, who went by the supposed pseudonym Satoshi Nakamoto but actually was born with the name Satoshi Nakamoto. Calls for regulation of bitcoin appeared all over the place, for example at an investment research firm Casey Research. A Canadian exchange dropped U.S. customers because of U.S. regulations already in place. The size of the loss at Mt. Gox became clear with a lot of speculation about how it happened.

How did Mt. Gox manage to lose half a billion dollars? A couple of guys with computers happened to be in Tokyo and half a billion dollars went missing (an observation made by a lawyer in a Wall Street Journal interview). It seems incredible.

Or maybe not?

It is easy to forget how large the increase in the price of bitcoin is over a couple of years. The adjoining chart shows the price of bitcoin in dollars on Mt. Gox from the start of trading in 2010 until the day before trading ended. The first trades were at $.05 per bitcoin. Now bitcoins are trading at about $600 (on other exchanges of course).

Mt. Gox appears to have a loss of about 850,000 bitcoins. Valued at $600 per bitcoin, this is half a billion dollars. Valued at five cents per bitcoin, this is $42,500. The loss changes from huge to smaller than most personal bankruptcies in the United States, depending on the price of bitcoin. It’s the loss in dollars that matters in most ways. Is this small loss at another price just an interesting tidbit?

No, it is an important piece of the puzzle of where the half billion dollars went.

I will suppose that Mark Karpeles did not intend to defraud anyone. I seriously doubt he is the Bernie Madoff of bitcoin. (He’s not as successful for as long; that’s for sure.) It’s more likely that he is what he seems: a programmer who became interested in bitcoin and got involved in exciting developments by running an exchange.

Software issues and fraud by some customers probably did contribute to Mt. Gox’s failure, although it is hard to explain the magnitude of the loss by them alone, a point made by Emin Sirer. Mismanagement probably also played a role.

Based on many episodes in the past, there is a relatively simple and plausible explanation.

Mt. Gox was a startup in 2010. The available evidence indicates it had relatively little capital. In some ways, the whole thing may have been more like a lark than the start of a very big business. Initially there were not all that many trades and negative cash flow was likely. How to pay the bills?

It would be easy and seem harmless to take a small part of the inflow of bitcoins from customers and use them to pay bills. You might think this is fraud or otherwise evil, but I found no promise by Mt. Gox that it would keep customers’ funds separate from the exchange’s funds when I was thinking about using Mt. Gox to buy bitcoins. To a programmer, as opposed to a financial economist, I can see why this would not seem like a big deal.

The implications of this are large though. Mt. Gox now is short bitcoins early on. Being short bitcoins is similar to being short stock. Going short is the same as selling now and buying them back later. If the price goes down, this is selling high and buying low. If the price goes up, this is selling low and buying high. An increase from $.05 to $600 is huge. A debt of $2.00 to cover the cost of a cup of coffee – 40 bitcoins – becomes a debt of $24,000. A couple of cups of coffee and suddenly it is serious money!

Losses due to fraudulent withdrawals may well have contributed to the large loss. Especially if the losses due to fraud by customers happened when the price was lower, for example $100 just a year ago, that loss of a $100 bitcoin becomes the loss of a $600 bitcoin today.

How does an initially small and later larger debt get translated into losing 850,000 bitcoins and having little cash? Redemptions on Mt. Gox in the last eight months or so were in bitcoins, not dollars. Starting in 2013 and especially in Summer 2013, Mt. Gox was having trouble transferring funds to U.S. customers. The price of bitcoins in dollars was higher on Mt. Gox than elsewhere, consistent with a difficulty of redeeming in dollars. A U.S. customer would redeem in bitcoins, not dollars. Instead of a constant inflow of bitcoins and dollars, there was a constant outflow of bitcoins because of Mt. Gox’s difficulties. Mt. Gox redeemed and bitcoins went away. At the same time, there were not that many dollars because the small initial short position became a very large loss.

Is this likely to be all the story? History suggests not. When people get into difficulties, they do things that seem mysterious, goofy or even stupid in hindsight. It would be surprising if nothing like that happened.

Still, Mt. Gox is likely to have been in the wrong place at the wrong time, experiencing the opposite of some others’ good fortune. One graduate student bought $27 worth of bitcoins and later cashed in a fifth of them to buy a nice apartment. Mt. Gox likely had the bad luck, borrowing a small amount, maybe losing a small amount other ways, and ending up short bitcoins early on. The small debt became a very large one and the drain of bitcoins made the magnitude of the loss evident.

Mt. Gox halted trading in Bitcoin on its exchange late yesterday (February 24), after suspending payments to customers on February 7. This morning (February 25 Eastern Time) their website is down except for the silly message

 Dear MtGox Customers,

In the event of recent news reports and the potential repercussions on Mt Gox’s operations and the market, a decision was taken to close all transactions for the time being in order to protect the site and our users. We will be closely monitoring the situation and will react accordingly.

Best regards,
MtGox Team

Why is this silly? Coindesk (a bitcoin news source) reports on a document suggesting that Mt. Gox has large losses, on the order of 750,000 bitcoins. This is about $370 million U.S. dollars at a price of $500. If the losses are anywhere near this big, Mt. Gox is gone. It would do well to be working out its insolvency and making the insolvency clear to customers with accounts. Instead, the document, which supposedly is a plan for resurrection, is wildly unrealistic about the options at an insolvent financial firm.

Bitstamp – the largest exchange by number of trades recently – recovered from the software issue in days and began trading again. The long suspension of payments indicates that the problem is serious.

Mt. Gox suspended payments almost three weeks ago and has been issuing nothing but rare, cryptic messages since. There is no evidence the losses aren’t very substantial and all efforts should be devoted to winding down the operation, not supposedly protecting “the site and our users.”

Fraud by Mt. Gox is not necessary to get to this sad end for the exchange. Instead, naiveté is sufficient to explain it. Some of it was on display in Wired in November when they used the prescient title “The Rise and Fall of the World’s Largest Bitcoin Exchange.”

The bankruptcy rules in Japan will have a big effect on the resolution for Mt. Gox’s customers. I know nothing about whether Japan even has “bankruptcy” laws as the U.S. does. Arrangements for insolvent firms and people are very different even in the United States and European countries. Japan may not be so different if General McArthur’s staff wrote the first version at the end of World War II but even that is not necessarily what is in force now.

The history of non-governmental currency indicates that the hit on bitcoin’s reputation is likely to be substantial. Some people have lost quite a bit of money. The Coindesk article says that one person had 550 bitcoins at Mt. Gox, which is a rather startling amount: $275,000 at $500 U.S. dollars per bitcoin. I would think twice before having that much deposited at my credit union, let alone at a startup operation in Japan. This person says that he has no one to blame but himself, which is admirable.

Unfortunately, many others are likely to want the government to protect them in the future and politicians will be happy to oblige. New York State already was floating the notion of BitLicenses.

Discretionary Monetary Policy and the Stability of a Money’s Value

George Selgin has a very nice blog about an FT op-ed on Bitcoin. He didn’t say all that might be said though.

The conclusion of the FT article is:

“Governments should be wary of allowing any virtual currency, unless they first find a way of putting central bankers back in charge.”

I couldn’t help but smile reading this.

So ends a profoundly uninformative piece on Bitcoin in the Financial Times no less.

The author of the article is Mark Williams “a former Federal Reserve risk examiner….” I guess this affiliation is supposed to suggest some sort of expertise concerning monetary policy. Unfortunately for the FT and we poor readers, the article is more a rant than a thoughtful piece.

The premise of the article is: “Keeping money stable and trustworthy has traditionally been a function of national governments.”

This premise assumes a great deal. It is fair to say that governments typically, although certainly not always, have been involved in defining the unit of account and money used by most people in the government’s area. Whether that money typically has been stable or trustworthy is quite another question. Probably the best answer is: “Sometimes yes, sometimes no.”

In the main part of the article, the loss of discretionary monetary policy determined by central banks is the big loss if private currency is allowed to exist. According to the author, central banks do a good job of executing the “enormous job” of adjusting monetary policy to the current state of the economy.

Williams assumes that Bitcoin and similar currencies will become sufficiently popular that they will make discretionary monetary policy less effective. A new currency faces a lot of hurdles to being adopted in place of an incumbent currency that is legal tender. If private currencies become widely held, it is hard to see how this can happen unless private currencies become a more reliable store of value than government currencies.

For private digital currencies to become a more reliable store of value and popular, there must be a trade-off of discretionary monetary policy and instability of money as a store of value. The desirable discretionary policy must make the money’s value less stable, or else digital currency is very unlikely to be widely adopted.

This whole line of argument seems more like an argument against discretionary monetary policy than an argument for it.

 

Mt. Gox’s suspension and software problems

On Monday, Mt. Gox announced that the suspension of payments would continue because of a software problem. This will not inspire confidence by Bitcoin newbies. The dollar price of a bitcoin at Mt. Gox fell below $600 on February 11. Long term though, such difficulties and responses are inevitable. Protocols in other contexts have these problems, including theft of information on millions of credit cards.