Why the US Should Nationalize LIBRA – William Michael Cunningham
Mark Zuckerberg’s October 23rd testimony before Congress on LIBRA, Facebook’s’ proposed digital currency, has garnered much attention. I attended the hearing (*I’m the Black guy in the blue tie) and thought both legislators and Zuckerberg missed the real solution to the problem.
To understand why, let’s start with what’s really going on. Facebook created Libra in response to competitive pressure. Imagine a social networking platform with the four functions of money (store of value, means of payment, unit of account and a means of social control) imbedded. A social media platform with this functionality has the potential to significantly reduce Facebook’s reach, if not immediately, then ten years down the road. Facebook moved to co-opt the technology that most threatens their long-term dominance.
Most observers have cited the contradictions inherent in Facebook’s claim that it is creating Libra to relieve poverty. This claim is, for the most part, demonstrably false, as are claims about what will help the poor access banks.
We have written extensively on this. Foreshadowing and predicting the rise of cryptocurrencies, on Oct. 5, 2006 we wrote to the US Securities and Exchange Commission stating that: “competitive advantage with respect to capital access is available to any country with significant economic potential and a modest telecommunications infrastructure.”
We were referring to cryptocurrency.
And, as we noted in “Blockchain, Cryptocurrency and the Future of Monetary Policy,” confidential, not-for-distribution research published in November, 2019, it is critical to understand that digital currency, specifically bitcoin, was created in direct response to the failure of global regulators to protect the public in the years leading up to the financial crisis of 2007/2008. Thus, the ethical and monetary functionality of cryptocurrency is superior to that of paper money. Eventually, cryptocurrency is going to dominate.
It is also critical to understand that banks did not stop serving low income and low-profit customers and communities due to, as some have erroneously suggested, “deregulation and waves of mergers and consolidations.” Banks stopped serving these customers because they were allowed to do so. They were allowed to do so because they captured the legislative and regulatory branches of the US government. These branches turned from protecting the public interest to protecting the interests of the financial services industry. This became obvious, to us at least, in October 1998 when we filed a petition in the United States Court of Appeals opposing the Travelers/Citicorp merger and the elimination of Glass-Steagall, a law separating commercial from investment banks. We cited evidence that growing financial market malfeasance greatly exacerbated risks in financial markets, reducing the safety and soundness of large financial institutions. The result, ten years later, was a financial crisis that imposed a $22 trillion dollar loss on the US economy and resulted in a 60% decline in Black wealth. None of this is apparent to legislators and regulators, those most directly at fault for failing to protect the public in the years before, during and after the financial crisis.
One proposed solution to the financial inclusion problem is to have the Federal Reserve open the payments system to all Americans. This is unnecessary and places the payments system at risk.
Rather, we suggest a two-prong approach. Step one is actually doing something to bring the underbanked into the banking system. At the Kansas City Fed in 1994, I suggested the Fed’s Federal Open Market Committee (FOMC) purchase mortgage-backed securities (MBS) originated by black banks as part of open market operations. The Fed, then under Alan Greenspan, declined, saying that only Treasury securities were appropriate collateral. Since the financial crisis, the Fed has purchased trillions in securities, helping white-owned banks, broker-dealers, insurance companies auto companies, and investment banks. (Not only did few black banks receive any assistance, but the ones that did were the wrong banks.) We still think having the FOMC create a black bank liquidity pool totaling at least $50 billion is part of the solution. By conducting repo and reverse repo transactions, purchasing Treasury, MBS securities (and/or SBA loans) from black banks with a record of actually making loans to the black community the facility will help provide liquidity to a sector that needs it.
The second part of the solution is to have the Federal Government take over Facebook’s LIBRA. There can be no doubt that digital currency has competitive advantages that are simply impossible to beat. Rather than fight Facebook, it is better if the US Government uses Facebook’s reach and platform to leapfrog every other government seeking to launch a competitive digital currency.
Nationalizing LIBRA is the way to do so quickly and efficiently.