(Bloomberg Markets) — The coronavirus pandemic that shut down economies around the globe showed how crucial—and difficult—it is to get money swiftly to people who need it most in a crisis. Former central bank officials Simon Potter, who led the Federal Reserve Bank of New York’s markets group, and Julia Coronado, who spent eight years as an economist for the Fed’s Board of Governors, are among the innovators brainstorming solutions. They propose creating a monetary tool that they call recession insurance bonds, which draw on some of the advances in digital payments. Coronado, president and founder of MacroPolicy Perspectives LLC, and Potter, nonresident senior fellow at the Peterson Institute for International Economics, spoke with Bloomberg Markets to explain their idea.
BLOOMBERG MARKETS: How would recession insurance bonds work?
JULIA CORONADO: Congress would grant the Federal Reserve an additional tool for providing support—say, a percent of GDP [in a lump sum that would be divided equally and distributed] to households in a recession. Recession insurance bonds would be zero-coupon securities, a contingent asset of households that would basically lie in wait. The trigger could be reaching the zero lower bound on interest rates or, as economist Claudia Sahm has proposed, a 0.5 percentage point increase in the unemployment rate. The Fed would then activate the securities and deposit the funds digitally in households’ apps.
And so instead of these gyrations we’ve been going through to get money to households, it would happen instantaneously.
SIMON POTTER: It took Congress too long to get money to people, and it’s too clunky. We need a separate infrastructure. The Fed could buy the bonds quickly without going to the private market. On March 15 they could have said interest rates are now at zero, we’re activating X amount of the bonds, and we’ll be tracking the unemployment rate—if it increases above this level, we’ll buy more.
The bonds will be on the asset side of the Fed’s balance sheet; the digital dollars in people’s accounts will be on the liability side.
BM: Aside from speed, what are the main advantages of this approach?
JC: It’s the most efficient from a macroeconomic standpoint in supporting spending and confidence. The fear of unemployment acts as an accelerant on a recession. There’s a shock—people are losing their jobs or worry about losing their jobs. They get very risk-averse. [By] getting money to consumers you can limit the depth and duration of a recession.
And you could actually generate real inflation. It could be beneficial for not only avoiding negative rates but creating a more healthy interest-rate market, a more healthy yield curve.
BM: What are the origins of the idea?
JC: The Bank of England has proposals for digital currency. And a number of people have talked about the need for monetary financing—the idea that the interest-rate tool is simply less effective in lower growth, slower credit growth economies. Helicopter money [making direct payments to the public] goes back to Milton Friedman, but Ben Bernanke revisited it.
Some people proposed doing that through financing fiscal stimulus. We think going directly to consumers is more efficient than wading through that sticky fiscal process.
BM: This policy could be complementary to Treasury stimulus?
JC: It’s not a replacement for fiscal policy. It makes sense from a fiscal perspective, for example, to authorize unemployment insurance benefits for people who lose their jobs and other assistance for medical-care providers in the current situation.
SP: The central bank is not elected. It cannot make allocation decisions about fiscal transfers. It’s now being pushed to make allocation decisions around credit with the Treasury, because we believe this situation is so unique that the private sector cannot make those decisions itself.
The simplest way to do this would be a lump sum. Not in the way Congress did it. We’d take the bluntness of monetary policy and say anyone who’s eligible should get the same amount of bonds.
Fiscal controls could use the same infrastructure. The imperative to invest in it is high. Nearly all Treasury payments at some point touch the Fed because it’s the Treasury’s bank. The digital payment providers—called interface providers in the Bank of England proposal—would manage these accounts and link them to the Fed and Treasury.
BM: What are the objections from the Fed, and other challenges?
SP: The reaction from some of my former colleagues a while ago to the notion of helicopter money was not the most embracing. Some of those concerns have disappeared.
The two objections were related to the switch of deposits in normal times from the traditional banking system into digital accounts and the extra stress in crisis times as people want to get safe. An account with the central bank is safe because the central bank can always print money to honor that claim. A private bank can’t do that because their asset side has all kinds of credit on it. What we’ve created is a narrow bank-type model [narrow banks only take deposits and invest them in the safest assets] that’s small and fit for purpose, with a cap of $10,000 [per person].
JC: One challenge is making it profitable for digital providers. We want strict limitations on the fees so we’re reaching people that are underbanked, but we also want a public-private partnership with a diversity of competitors jumping into this market.
Privacy is just as important, because one thing that might induce them is access to people’s data. As the Fed, are you blessing that, and what structure do you put around that?
SP: We’ll all have to deal with deep questions of privacy in the digital world. One of the issues Congress had in passing the Cares Act is identifying who’s got mainly tip income, who doesn’t have sick days. If society wanted, you could use large datasets to direct fiscal transfers to those people. But that’s a job for Congress.
BM: Have you seen similar trials elsewhere?
SP: Sweden is a leader in thinking about this in part because they had a large decline in cash use. China is testing versions of digital currency. Fintech firms in the U.S. are interested in this—there’s a stable coin version of our proposal.
There’s easily sufficient innovation within the U.S. to do this. How to do it in a way that’s well regulated and serving the public purpose is something the Fed should focus on over the next few years. It would be a key accomplishment of the Fed and Treasury to get this infrastructure in place.
Barrett covers rates and foreign exchange markets for Bloomberg News in New York.
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