US Policy Changes Vol.41 (Deregulation/Reform Vol.6 – Finance, Federal Reserve)

Here are articles on financial deregulation, and reforms of the Federal Reserve System and the International Monetary System. Excerpts are on our own.

Adapting regulation for the FinTech world (12/4/2016) | @Aarondklein @RegBlog @BrookingsEcon
With the stroke of a pen, the Consumer Financial Protection Bureau (CFPB) quietly modernized regulations associated with a 38-year-old law to bring consumer safeguards to today’s mobile world.
…wide-ranging protections to pre-paid cardholders. …protections to cover electronic person-to-person payments, like those made via PayPal.
Congress solved this problem by enacting the Electronic Funds Transfer Act of 1978 (EFTA). The Act offered a straightforward solution: clear guidelines assigned liabilities to the parties regarding their rights and responsibilities concerning this new piece of property, the debit card. EFTA, and its associated regulations, assigned limited liability to consumers of between $50 and $500, assuming that the consumers reported their loss in a responsible and timely manner. Banks assumed substantial liability, which subsequently motivated them to create secure networks with robust fraud detection.
… In the Coasean world, the proper role of government is to assign property rights clearly, allow them to be traded, and then get out of the way. Relying upon several key assumptions of perfect information and no transaction costs, Coase theorized that the market would efficiently sort out the rest. While the real world often violates these assumptions, the Coase Theorem is practical enough to rank among the most cited economic theories. In the case of assigning liability and property rights for financial transactions, Coase’s ideas have worked remarkably well.
…the Dodd-Frank Wall Street Reform and Consumer Protection Act. First, the legislation explicitly brings remittances into the EFTA framework. I worked on this section of Dodd-Frank both prior to and during its enactment. By including remittances, EFTA expanded to cover transactions that occur outside of the banking system and traditional consumer accounts. Dodd-Frank also moved responsibility for EFTA from The Federal Reserve to the CFPB. …
… Use of these cards reportedly has grown from $1 billion in 2003, to $40 billion in 2010, and researchers expect pre-paid cards will generate $100 billion this year. …
Moving money is all about trust. Markets work more efficiently when consumers, businesses, payment processors, and financial institutions all trust each other. The CFPB’s actions in modernizing EFTA regulations marks an important step forward in creating a regulatory regime that enhances trust, provides the legal and regulatory framework to assign rights and responsibilities, and allows the market to work and innovate. …

Message to the candidates: Hands off the Federal Reserve (10/25/2016) | Alan Blinder @BrookingsEcon

The international monetary system: Is it fit for purpose? – To fix the international monetary system, first get domestic policies right (w PDF; 10/5/2016) | @EswarSPrasad @BrookingsEcon
1.1 WHAT’S THE ISSUE?
1.2 WHAT’S THE DEBATE?
1.3 WHAT TO WATCH OUT FOR?

The Challenge of Central Banking in a Democratic Society (12/5/1996) | Alan Greenspan – 1996 Francis Boyer Lecture @AEI Annual Dinner
… William Jennings Bryan… “…you shall not crucify mankind upon a cross of gold.” …
… The experiences with paper money during the Revolutionary War were decidedly inauspicious. “Not worth a Continental” was scarcely the epithet one would wish on a medium of exchange. This moved Alexander Hamilton, with some controversy, to press for legislation that established the soundness of the credit of the United States by assuming, and ultimately repaying, the war debts not only of the fledgling federal government, but of the states as well. Equally controversial was the chartering of the First Bank of the United States…
…endeavored to restrict state bank credit expansion when it appeared inordinate, by gathering bank notes and tendering them for specie. This reduced the reserve base and the ability of the fledgling American banking system to expand credit. The issue of states’ rights and concern about the power of the central government reflected the free wheeling individualism of that time. The Second Bank was a major issue of the election of 1832. …
After the Civil War, redemption of the paper greenbacks issued during the war brought an era of a gold-standard induced deflation…
…the rural-based pressures for a more elastic currency did not diminish and ultimately were reflected, in part, in the creation of the Federal Reserve.
Nonetheless, many of the proponents of banking reform in the 1890s, and in the aftermath of the Panic of 1907, were suspicious of creating a central bank. In very large measure, those concerns underlay the various threads of reform that were joined together in the design and creation of the Federal Reserve System in 1913. …
The world changed markedly with the advent of the Great Depression of the 1930s, and the evisceration of the gold standard. …
… The 1970s saw inflation and unemployment simultaneously at relatively elevated levels for some time. The notion that this could occur was nowhere to be found in the conventional wisdom…
… Monetarism, and new insights into the effects of anticipatory expectations on economic activity and price setting, competed strongly against the traditional Keynesianism. …
… That inflation could reduce employment was a highly controversial subject in the mid-1970s when introduced into communique language drafts. … Today in similar communiques such language is accepted boiler plate and rarely the focus of discussion. …
… It is generally recognized and appreciated that if the Federal Reserve’s monetary policy decisions were subject to Congressional or Presidential override, short-term political forces would soon dominate. …
Because monetary policy works with a lag, we need to be forward looking, taking actions to forestall imbalances that may not be visible for many months. …
Augmenting concerns about the Federal Reserve is the perception that we are a secretive organization, operating behind closed doors, not always in the interests of the nation as a whole. This is regrettable, and we continuously strive to alter this misperception.
… We have recently commenced to announce all policy actions immediately, federal funds rate changes as well as discount rate changes, and have expanded the minutes of the Federal Open Market Committee.
… Inflation concerns were not a dominant factor in economic forecasting in the 1950s and early 1960s, for example. Since the late 1970s, however, such concerns have become an important element in policy-making. …
…during the decades of the 1970s and 1980s, trends in money supply, first M1, then M2, were useful guides. …
Unfortunately, money supply trends veered off path several years ago as a useful summary of the overall economy. …
… As we seek price stability and maximum sustainable growth, the changing economic structures constantly present more analytic challenges.
…we will remain as the guardian of the purchasing power of the dollar. But one factor that will continue to complicate that task is the increasing difficulty of pinning down the notion of what constitutes a stable general price level.
… We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. … But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy.
The rapidly changing technologies of recent years… …where specific priced services have become effectively and competitively provided by private sector suppliers, the Federal Reserve needs to reassess whether the extent of our participation in those services fulfills a reasonable public purpose. …
Finally, the substantial changes under way in bank risk management are pressing us to continuously alter our modes of supervision and regulation to keep them as effective and efficient as possible.
… Recent mini-crises have identified the rapidly mushrooming payments system as the most vulnerable area of potential danger. …we have endeavored in recent years, as the demands on our system have escalated (we clear $1-1/2 trillion a day on Fedwire), to build in significant safety redundancies. …
A democratic society requires a stable and effectively functioning economy. …