George Selgin On Strategic Bitcoin Reserves, Debanking, And The Fed's Framework Review

Summary There has been a spate of proposals out there by Bitcoiners, but also by some prominent politicians, including Donald Trump, for having the US government accumulate Bitcoin. US government stocking up on Bitcoin is not the same thing as getting Bitcoin more widely used – you’d have to have transactions in it. The debanking of the crypto industry and the regulatory agencies trying to put the thumbs on the scales to keep it from competing on a level playing field has been a problem. The Trump administration is probably going to go the other direction and try to offset that. George Selgin, senior fellow and director emeritus of the Center for Monetary and Financial Alternatives at the Cato Institute, discusses crypto, strategic Bitcoin reserves, and the Fed’s framework review. George Selgin is a senior fellow and director emeritus of the Center for Monetary and Financial Alternatives at the Cato Institute. George is also a returning guest to the program, and he rejoins David on Macro Musings to talk about crypto, strategic Bitcoin reserves, and the Fed’s framework review. Specifically, David and George also discuss George’s outlook for a strategic Bitcoin reserve in the US, the significance of the debanking problem, the path to adopting a nominal GDP targeting framework, and much more. Transcript David Beckworth: George, welcome back to the program. George Selgin: Thanks, David. It's always good to be on it. Beckworth: Well, you continue to add to your leading number of podcasts that you've been on. You continue to be the number one guest on the show, so it says something. Selgin: Well, I really love it, and I do worry that people might catch up to me, so you give me an excuse to write controversial things just so I can get on the program. Beckworth: Well, we have some great news stories to discuss today. We're going to be doing what we've done in the past. We each bring in several items to discuss. Time permitting, we'll go through three each. We may only make it through a couple, because I know today's show is loaded with some hot takes from George and myself. George, let's start with you. I know you just recently wrote a paper on the strategic Bitcoin reserve and digital gold. Evaluating the Strategic Bitcoin Reserve and Digital Gold Selgin: Right, yes. Well, in case anybody hasn't noticed, there has been a spate of proposals out there by Bitcoiners, but also by some prominent politicians, including Donald Trump, for having the US government accumulate Bitcoin. The proposals vary. In my paper, I distinguish them by referring to the mama bear proposal, the papa bear proposal, and the baby bear proposal. The baby bear is Trump's suggestion that the government will keep all of the Bitcoin it has acquired, usually through confiscation in criminal cases, and make that the core of some kind of a Bitcoin reserve. The other proposals would add to that. Robert Kennedy Jr. proposed building a Bitcoin reserve consisting of 4 million Bitcoin, which, of course, is more than about a fifth of the outstanding stock. That's the papa bear. Then, finally, there's the proposal from Senator Lummis, which is the mama bear, which would have the government accumulate a Bitcoin reserve of at least 1 million Bitcoin. So, that's in between. Anyway, they're all out there. There have also been proposals from others in the Bitcoin community, particularly one by the Bitcoin Policy Institute, which has a long paper called *Digital Gold.* So, these proposals are justified, rationalized, using three kinds of analogies, and they tend to muddle the three. One would have the government treat Bitcoin as if it were a strategic commodity, like petroleum or silicon chips or something, and pile up Bitcoin just in case, so that it doesn't run out. I'll leave it to your listeners to decide what merit that analogy has. Second, it would treat Bitcoin as a component of a sovereign wealth fund that the US government would establish. Of course, some nations have sovereign wealth funds, so the idea is we should do that, the United States should do that, and they should include plenty of Bitcoin in it. Tyler Cowen, since we're at Mercatus, wrote a very good piece for Bloomberg on this, on what's wrong with that suggestion. Anyway, the third suggestion compares Bitcoin to international reserve assets that central banks hold as means for managing exchange rates and otherwise supporting their monetary arrangements. That's the comparison or analogy that I go after in my paper, because I think it's just as bad as the others. The difference is that in order to see why it makes no sense for the US government to accumulate Bitcoin to back the dollar or support the dollar, you have to know something about why other countries have international reserves, why they hold gold, why the US holds gold, and so on. And so, the article goes into that in order to explain why holding Bitcoin wouldn't serve any purpose as far as the strength or management of the dollar is concerned. Beckworth: So, what are some of the arguments that you shoot down that they make in terms of more Bitcoin supporting the dollar? Selgin: Right. Let me step back a bit, David, and point out that there's an irony in these arguments that shouldn't go unstated, which is that when the whole Bitcoin thing got started, the idea was that this would be an alternative to fiat monies and particularly to the US dollar. It was a government-independent currency that people could use where they weren't in any way having their exchanges monitored by the state, and they could protect themselves from having their exchange media in any way manipulated, confiscated, what have you. It was a free-market anarchist alternative to fiat money. Now, with this new set of proposals, what we're seeing is Bitcoin being vaunted as a way to shore up the US dollar, and that is quite a change. Beckworth: So, we've gone from libertarian motivation, free market, no government, hands-off, to let's get the government's hands all over this- Selgin: That's right. Beckworth: -support it, and make it a global reserve asset. Selgin: A global reserve asset, and particularly a US reserve asset. And so, the dollar's going to be saved by Bitcoin, because one of the things people who make this argument are saying is, "Look, the dollar's share of the reserve currency market has been on the decline," which is true, “and this is going to help shore up the dollar and increase its attractiveness so that it won't lose its international status.” So, that's the background. What these arguments are relying on is, again, the analogy with gold and foreign exchange, but particularly with gold. And it is true that all central banks hold some foreign exchange. Most, not all, have gold, and the US, of course, has more gold than any other. It has over 8,000 tons of gold at Fort Knox and some of it at some of the various branches of the US Mint. So, the argument is, well, look, first of all, the assertion is made that gold is playing an important role. It's part of what makes the dollar so strong, and therefore we need to have all that gold. Having Bitcoin is just a way of having another asset that's diversifying the portfolio, backing the dollar, and by diversifying that portfolio, will make the dollar even stronger, and of course, the proponents of this scheme can point to the appreciation of Bitcoin as a factor that can contribute to its desirability as a component of our international reserves. So, that's the general flavor of the argument. Mind you, it's a bad argument for reasons that I'll get into, and for that reason, they don't really elaborate very much on exactly how all this is supposed to make the dollar stronger, but it's simply assumed that the strength of the dollar is related to the reserves behind it, and particularly to the gold that's held and that Bitcoin is as good a reserve or better, in some senses, than gold, so let's have some of that backing the dollar. That's the argument. Beckworth: Well, let me throw out an argument I've heard. In fact, a previous guest, Matthew Pines, made this argument, and I've seen it recently repeated online, social media, and that is that Bitcoin— I guess crypto more generally, but Bitcoin being maybe the specific application— it's growing organically, it's a network. So, why not take advantage of it? We're competing against China on many dimensions, across many networks. We want a communication network, financial networks, information networks. Here's a network that's organically taking shape. Why don't we take advantage and run with it? The way that it would support the dollar is that if there's more demand for Bitcoin, [then] in turn, there'll be more demand for stablecoins. More demand for stablecoins, more demand for Treasury bills. And so, then, we're indirectly channeling demand for Bitcoin back to Treasury bills. You increase the presence of stablecoins, Treasury bills. It's a win-win. What do you think about that? Selgin: I think there's a lot of "ifs" there. There's a lot of links, and honestly, I don't know how they're supposed to work. I do see a role for— first of all, let me say, I think it's perfectly reasonable for many individuals to be holding Bitcoin and having it in their portfolios. It's done very well, might continue to do well in the future. That's all well and good. I also think that stablecoins can play a very beneficial role in the US payment system, given a chance, particularly if they're allowed to take part in the existing settlement systems and all that with appropriate regulations and all that. All of those things are true, and having more efficient alternative US dollar payment media will contribute to the attractiveness of the dollar, and that could help strengthen it. But I don't see how Bitcoin has much to do with that. The real point, though, that it's important to stress, is there's a huge difference between the holding of foreign exchange and gold by other countries and the use of those things here in the United States. It often goes unrecognized. But paradoxically, for example, gold— we have no need for any gold. It serves absolutely no purpose, which is ironic because other countries do have a rationale for holding some gold, even though they don't hold as much. So, the facts are inconsistent or seem to be at odds with the actual reality of what the reasons are for holding these assets. Foreign countries— many of them hold foreign exchange because they need to intervene in their exchange markets because they wish to maintain fixed exchange rates with the dollar typically. Their reasons for doing that have to do with having a lot of trade with the US or because they want to manage the floating rates that they have and limit how much they float, again, because they want to limit exposure to exchange rate risk of their people doing business, their merchants. Also, they often borrow in dollars. So, they have reason to want to have a dollar foreign exchange to intervene and limit exchange rate movements for that. So, foreign countries have motives for holding foreign exchange reserves and particularly holding dollar reserves. But if you hold foreign exchange reserves, you expose yourself to exchange rate and country risk. That's where the gold comes in. Gold is useful as a hedge against those risks. So, it's part of the international reserve portfolios of countries that have to hold a lot of foreign exchange. We don't have to hold any foreign exchange. We have some. The Fed and the Treasury between them have very modest amounts of yen and euros left over from some past foreign exchange interventions. But for the most part, our policy is one of perfectly flexible exchange rates. We don't intervene. We have not had any foreign exchange intervention since 2011, and we had only three episodes of foreign exchange intervention since 1998. None of them were really about stabilizing the dollar's exchange rate. They more often had to do with helping other countries that were in trouble. They were really foreign aid operations. So, we don't need any foreign exchange. Beckworth: We're the reserve currency of the world. We're unique. Selgin: That's right. Beckworth: We don't have the same motivations or- Selgin: That's right. Beckworth: -needs that a country that is not a reserve currency [has]. Selgin: Exactly. Beckworth: They need dollar reserves. We can create them out of thin air, literally. Selgin: We can create the most desirable currency out of thin air. And if we don't need foreign exchange reserves, of course, we don't need to have gold as a hedge against exchange rate risk, and we don't have to worry about country risk. So, why do we have all the gold? Because that's the natural question, because we've got more than most of the rest of the world combined, almost. The answer is, because we accumulated a ton of gold while the dollar was still attached to gold, and that remained the case until the early '70s. Although we've got rid of some— of course, we lost some in the run-up to getting off the gold standard under Bretton Woods. We lost a bunch of gold, and then we closed the gold window. Nixon closed the gold window in '71. Since then, they've sold some, but not very much. And we're just stuck with all this gold as a vestige of the old days. It serves no purpose, and we could sell it. We could sell every dollar of it. For some reason, for various reasons, the government hasn't wanted to do that. It's understandable that they don't want to do it all at once, but they could. I mentioned in the article, Canada— they had a lot of gold at one point, not as much as us. They sold it all, gradually, over the course of four decades. Now, they have like 77 ounces, some ridiculously small amount left. And of course, the Canadian dollar is still okay. It hasn't become worthless. So, we could do the same thing. We just haven't. So, although we have a ton of gold, the fact is that it doesn't serve any purpose in holding up the dollar, and Bitcoin wouldn't serve any purpose either. Beckworth: So, it's a relic of the past- Selgin: Absolutely. Beckworth: -the arrangements we had in the past, and I've heard many people talk about, "Well, why don't we sell it and make some money off of it?” Which is true, it's undervalued. I guess it's that cost on the books. Selgin: It's still valued at $42.22 an ounce, which is considerably less than the market value today. Beckworth: Okay, so there's no need for Bitcoin or some other crypto asset as a way to strengthen the dollar's role. But let me just circle back to the argument I made earlier. What is the purpose of stablecoins? Is it not to facilitate trade with crypto assets? Selgin: Yes, they are used for that. In principle, stablecoins can serve for other kinds of trade. What they are is a peer-to-peer payments medium that can circulate, analogous to old-fashioned banknotes. Old-fashioned banknotes were the liabilities of the individual issuers, redeemable in the underlying base money. But people who could hold them— they didn't have to have bank accounts and pass them on. So, stablecoins are very reminiscent of those old-fashioned banknotes and could serve some of the purposes those serve. Basically, another way to put this is they could do anything that a central bank digital currency could do, and I mean a tokenized central bank digital currency, where you wouldn't have to have any account, but you could use it. So, I could travel with it. I wouldn't have to have a bank account. I could have it on my phone. Beckworth: It's like a bearer bond, a piece of money. Selgin: It's a piece of circulating- Beckworth: Digital money. Selgin: -money, yes. So, stablecoins can do a lot of things. There's no reason why they should be particularly used to deal in other cryptocurrencies. So, that happens to be what they've been used for a lot. Beckworth: That’s one thing, and maybe the original motivation for stablecoins was the crypto connection? Selgin: I believe so. Beckworth: Yes, so the argument again is that— and then I want to draw some boundaries here— but the argument is that as crypto usage grows, people will still want to transact in dollars, go back and forth. So, it will be a bigger role for stablecoins and, therefore, for the dollar. And so, people who I've heard make more of a nuanced argument is, to the extent there are some places where the dollar's share is coming back— And again, I think it's very minor, very small. You look at SWIFT or any other cross-border transactions, it's still the dominant currency, foreign exchange. But to the extent it is, could we offset that? So, we're talking maybe small magnitudes by increasing the viability, the extent, the reach of Bitcoin, therefore stablecoin use, [and] therefore the role and the reach of the dollar. The danger I see, though, is if you use Bitcoin too much, in the limit, it could displace the dollar. Selgin: Well, I don't think that the US government stocking up on Bitcoin is the same thing as getting Bitcoin more widely used. Beckworth: I see. You'd have to have transactions in it. It'd have to actually be used as money. Selgin: Well, I don't fully understand the argument you're making, but to the extent that I understand it, it requires that this stuff actually is being used to transact with. So, let me clarify that all of these Bitcoin strategic reserve proposals would have the government accumulate and not spend. They have time limits, but the idea is that this stuff is just going to sit there for a long time. In other words, it's going to look like the gold that's sitting at Fort Knox. Beckworth: I see. I see. Selgin: And that's why I say it's going to be exactly as useful as the gold in Fort Knox. What people need to understand, though, is that the gold in Fort Knox isn't useful. It serves no purpose. Beckworth: Great point. Selgin: So, what we'd have is another reserve asset that serves no purpose, and people are trying to argue that having this extra reserve asset is going to somehow make the dollar stronger, prevent the continuing deterioration of the dollar's share of total international reserves, and so on. And there's no reason to think it would. By the way, the deterioration of the share needs to be clarified. The dollar is still, by far and away, number one as a reserve currency. Beckworth: Yes. Selgin: The second runner-up is the euro. It's 58% for the dollar, about 20% for the euro, and then much smaller amounts for all the others. The euro share isn't growing. The dollar share is shrinking to other so-called non-traditional currencies, which is to say, currencies that are not even in this horse race as far as ever becoming dominant. So, this isn't like the situation after World War I, and especially after World War II, where the sterling was number one, and then the dollar was second and it caught up, and it caught up, and finally, the sterling's falling behind. This is not a race between the dollar and some other horse that's catching up. Beckworth: -On its tail, yes. Selgin: There is nothing close, and that's for reserve currency. Now, reserve currency share is not the same as share in exchange. The dollar is not at all threatened as an actual medium of exchange. Its overwhelming role as an invoice currency, et cetera, is even more secure than its status as a reserve currency. So, there's no threat to the dollar. So, the dollar doesn't face a threat for Bitcoin to fix it, but Bitcoin couldn't fix it if it did. Beckworth: So, George, I'm going to make one last valiant effort to make the strongman case for this view. You're convinced to me that it's probably not going to withstand the mighty attack of George Selgin, but here it goes. So, they might say, okay, we see your point. What you're saying is— you're just adding to the stock of some assets sitting on the books of the US government. It's not a flow variable, it's not a transaction variable, so what's the point? So, they would say, well, maybe if the US government did this, it would send a signal. Maybe it would pre-cause value to go up but do something to trigger wider use of Bitcoin as a medium of exchange. Selgin: Well, I think the answer to that is, first of all, it will have one predictable consequence. It boosts the demand for Bitcoin. It's taking as much as, about, if not quite a fifth out of circulation, and that will boost the price of Bitcoin, which is, of course, the real reason, if I must say so, why the Bitcoiners are so enthusiastic about it. But what effect will that have? Well, the prospect alone will suffice to encourage other people to pile on Bitcoin, to have it in their portfolios in anticipation of its appreciation, but not to use it more in exchange. So, at most, this can encourage more HODLing of Bitcoin. It might encourage— if it actually takes place, it might encourage people to dump the Bitcoin once it takes place, on the belief that this is as good as it's going to get, as things are going to get. So, it can do all of those things, but as can't be said often enough, the appreciation of Bitcoin is not the same thing as its being more widely used as an exchange medium. We have seen all kinds of appreciation of Bitcoin. What we don't see is any corresponding increase in Bitcoin's adoption as an exchange medium. Finally, many people in the Bitcoin community who were sincerely interested in and keen on the original Bitcoin project of it becoming a rival exchange medium, a serious one, now acknowledge that, well, that hasn't happened. It has been a valuable niche medium that is for conducting certain kinds of exchanges, and its main value is there, but I don't think anybody can claim that it has become a serious rival to established fiat currencies in ordinary exchange activity. Even in El Salvador, it's not very popular, especially outside of the Bitcoin tourism areas. Beckworth: Larry White, in his recent book where he compares fiat money, gold standard, and a Bitcoin standard— one of the points he makes is because of the volatility of Bitcoin price, it's less likely to become a medium of exchange. And so, if anything, this would be maybe a strike against it being adopted. Selgin: Well, yes. Just suppose that Bitcoin was now widely used as a medium of exchange, with some nations using it, as well as their unit of account, et cetera, et cetera, and that the government then decided to buy a fifth of the stock. Macroeconomically speaking, this might not be a good thing. Beckworth: Yes, it'd be a big recession. Selgin: I think so. So, if you're going to have the government build a big Bitcoin strategic reserve, you sure as heck don't want it to be a popular money. Beckworth: Good point. This would be the equivalent of the US government taking out a bunch of money in circulation and just completely shrinking the money supply and sitting on it- Selgin: That's right. Beckworth: -and causing deflation, a collapse in aggregate demand. Selgin: Right. Suppose they decided to build up the Treasury General Account balance by some many trillions. That would be analogous to-- Beckworth: It'd be the equivalent of there being an economy that does use Bitcoin as a medium of exchange, and then the government adopted a strategic Bitcoin reserve. Selgin: It takes a fifth of it out of circulation. Beckworth: That's interesting. Okay, great points. I don't think one can argue with that. Where do you see this going? What's the outlook for it? Do you have a sense that the Trump administration is going to follow through and do something? George’s Outlook for the Strategic Bitcoin Reserve Selgin: Well, it would be very easy for them, at this point, to follow through on the Trump proposal itself, which was the modest proposal, the baby bear proposal to keep all the Bitcoin that the government has. Most of it already has recently been made the property of the government because its status was not clear before. It is now, most of it, US property, which means they could keep it. They probably will keep it, because that's an easy part of Trump's campaign promises to stick with. So, I don't think they'll sell it. As for whether the Trump administration will go any further than that, whether it will start to actually add to its Bitcoin stockpile by making open market purchases of Bitcoin, I'm not so sure. I'd like to think that people will come to understand that the government's doing that would certainly not do anything to shore up the value of the dollar. Whether that understanding would suffice to put the kibosh to this idea, I don't know. Then, of course, you have the sovereign wealth fund idea, which is absurd for other reasons. Basically, there's no reason for a country deep in debt to be trying to build a sovereign wealth fund. All of this is true, even though it bears insisting, [that] even if Bitcoin will definitely go up in value— I suppose [if] we're absolutely certain it's going to hit a million dollars in five years— that doesn't change the merit of any of these arguments. What it does is to add to the merit of individuals going out and stocking up on Bitcoin, which is a great idea if it's going to go up in value. But all of the benefits to be had from Bitcoin's appreciation are, as it were, private goods. That is, there are benefits you can have by doing it yourself. You don't need the government to do it for you. You don't need public money to be used. You can go and take advantage of it. And if you're really smarter than everybody else, then the suckers who don't buy it will be worse off and you'll gain from your superior insights. But having the government acquire Bitcoin for a fund makes no sense. It's just a way of allowing, as it were, losers to benefit when you should be able to get all the gains from your superior intelligence. Beckworth: I look forward to all the Bitcoin fans writing into the show, letting us know what they think about this. Okay, George, I want to transition into my article. I'm actually going to throw two in here, because I want to maybe take care of the crypto discussion first, and then we'll go to the framework discussion after that. But to keep it continuous, I'm going to mention an article here, and I have more time on the second piece. But there's a really fascinating article that recently came out— It was in November, in fact— by Rashad Ahmed, who I know on Twitter, who is at the OCC, and his colleague, Stephen Karolyi, and then Leili Pour Rostami from UMass Boston. They have a paper titled, *Does Sovereign Default Risk Explain Cryptocurrency Adoption? International Evidence from Mobile Apps.* What they do is they study what are the macroeconomic drivers of cryptocurrency adoption in a cross-country sample? They find that sovereign default risk is identified as a key cause of crypto adoption, [and] specifically, a 10% increase in sovereign CDS spreads is associated with about a 3% to 4% increase in crypto app download and usage. So, you can imagine, probably, places where [there is a] very unstable macroeconomy, people are going into— for the same reason they might go into gold, as you discussed earlier. A very interesting article. We'll provide a link to that in the show notes, and I just wanted people to be aware of that. But I want to go to my next article, and this will be more of a story than an article, and I want to get your sense on this, of what's happening. But recently, as you probably saw, George, Marc Andreessen was on The Joe Rogan Experience and he discussed Operation Chokepoint 2.0. So, there was an Operation Chokepoint 1.0 during the Obama administration when they went after people like payday lenders, gun businesses, and, basically, they debanked them. If you were some unfavored category of business in the Chokepoint 1.0, you lost your bank account. You couldn't participate, and that's a real hindrance to being successful in the economy. But what Marc Andreessen was claiming is that, at least what he knew, related to his activity, 30 founders in tech and crypto had been debanked over the last four years. He suggested that this operation was not just targeting crypto, but also tech founders and political opponents. As soon as he said this, it just broke open and lots of people came forward. "Yes, I am an example. I'm an example." Many examples came forward. And I want to go to someone who's an example of this. Now, she's well-known because of the legal case against the Fed and the master accounts, but Caitlin Long had a great thread. I'm going to want to draw from it, and then I'll turn it over to you and get your thoughts on this. But I'm going to just read a few things from what she had to say, and I guess the big interesting thing here is there is this awareness, a much greater awareness now that this has been a problem— the debanking of the crypto industry and people, maybe, affiliated, the regulatory agencies trying to put the thumbs on the scales to keep crypto, stablecoins, things like that from competing on a level playing field. And I think the Trump administration is probably going to go the other direction and try to offset that. In fact, Brian Knight, who [was] my colleague here at Mercatus— He told me that even the Trumps have claimed they've been debanked. So, I think there might be more than just a leveling of playing field. There might be a score to settle here. But let me read Caitlin Long's response. She says, "How do we fix the debanking problem?" So, given what's happened. "As Marc Andreessen alluded on the Joe Rogan experience, the levers of power used and abused by the federal bank regulators to effectuate debanking are subtle and insidious. Multiple attempts have already been made to fix the problem. Why did they all fail?" She says, "Because it's a multifaceted problem that runs deep." She goes on to say, "Truly fixing this problem will require overhauling the federal bank examination process for operating banks. Why? First, subjective levers and federal bank exams have proven to be too easily politicized. Second, the confidentiality of supervisory information. Three, no checks and balances." She gave just two examples of the many levers that a federal bank examiner can pull to pressure an operating federally supervised bank. She mentions reputation risk and adverse media screening of bank customers. And so, reputational risk is a part of what's called the CAMELS rating process, where when they look at banks, they want to see, what's your reputation risk? It's very subjective, apparently. Therefore, [it is] very open to being politicized. That's the problem. Whoever's in power can turn it in the direction they want to go. Also, the adverse media risk is something that also can be manipulated. She suggests that sometimes competitors may create adverse media situations that can knock them out of business. So, she was very clear that she thinks a lot needs to be done. It's basically that we need to address the federal regulatory agencies and revamp. Again, from her view, it's a structural problem. It's not just a little fix here, a little fix there. It's a wholesale problem. What is your sense of how significant and how important this development, this story has been? The Significance of the Debanking Problem and the Case of Libra Selgin: I think it's extremely important. What we're seeing here is a crack in, as it were, a sort of a crack in a window that allows us— in a doorway— that allows us to peer through what's supposed to be closed and see a part of a phenomenon, just part of a phenomenon, that's been going on for a long time. Because there's this bigger problem of shadow bank regulation, for want of another expression, which is regulation that is not dictated by any statutes but just has to do with what you might call a pressure from the examiners and regulatory authorities, subtle threats, et cetera, that creates, as it were, a parallel set of regulatory requirements that are independent of anything in the statute books and that change with different administrations and different overseers. So, we actually don't have just the bank regulations that we think we have, that you can see in the statute books. We have all kinds of regulations that emanate from the regulators themselves, independently of the statute books. This is an example of that. This is a very egregious example, because it involves denying people access altogether to banking services. So, it's going after the customers of banks. It's not just putting pressure on bankers to manage their banks differently. It's deciding who can have a bank account. And so, in that sense, it's particularly obnoxious. But they're all obnoxious, because what it all boils down to is that we have a culture, a regulatory culture, in which people who are not legislators are effectively creating banking, the equivalent of bank legislation and bank regulatory requirements. And so, I think Caitlin's right. This should be seen not just as an occasion for protesting on the particular abuses that have been revealed with the unbanking of fintech-related bank clients but should be seen as an opportunity for major overhaul of the regulatory system so that people who are supposed to be enforcing actual regulations only do that and don't impose their own layer of regulations on top of the ones that are in the statute books. Beckworth: Well, it was interesting as this revelation came out on Twitter. Marc Andreesen and the Joe Rogan Experience were on social media. As I mentioned, a lot of people came forward. If you go to Marc Andreesen's Twitter or X feed, he retweets a bunch of people who've come out, "Yes, I was affected. I was affected." What's interesting is not only the current fintech people come out, but people who worked with Libra came out. Selgin: Yes, I saw that. Beckworth: It was pretty amazing. This one individual, David Marcus, tells a story of how Libra was killed, and he goes on and he tells this super-fascinating account. We'll provide a link to this. He talked about how they were very careful. And to be clear, Libra was the stablecoin that Facebook was going to build on top of its already well-established network. So, it would have had this huge advantage. And as your colleague, Nicholas Anthony, pointed out in an earlier show, Libra is what really catalyzed or catapulted central banks into wanting to do CBDCs, because they felt threatened. Maybe they were falling behind. But David Marcus tells this story. It's like, "We were doing everything. We were crossing our T's, dotting our I's, going to all the regulators." He mentions how Powell was supportive at first. But then, Janet Yellen said, "If you support this, I don't have your back." And some other people said that there was also some political blowback on Facebook, because they thought Facebook is one reason Trump won in 2016. In any event, that's a different story. But what he tells is this, that they were ready to go. They were pretty close to launching. They had, again, gone through all the regulators. And this is what he said. "We had worked on a slow rollout of a limited pilot that some members of the Fed's Board of Governors were supportive of. At least Chair Jay Powell was ready to let us move forward in a limited way. The story, as I heard it, is Jay Powell was told by Treasury Secretary Janet Yellen at one of their biweekly meetings that allowing this project to move forward was, 'political suicide,' and she would not have his back if he let it happen. I wasn't in the room when this conversation happened, so take these words with a grain of salt. But effectively, this is the moment that Libra was killed." Then, he goes on to say that, “Shortly thereafter, the Fed organized calls with all the participating banks, and the Fed's general counsel wrote a prepared statement to each of them saying, ‘We can't stop you from moving forward and launching, but we are not comfortable with you doing so.’ Just like that, Libra was over.” Selgin: What's happened here is, by moving against non-bank targets in the fintech industry, I believe, I'd like to think, that these shadow regulators have taken one step too far. Because up until now, what's happened is they've done all kinds of shadow regulating, but the bankers did not dare complain. They had too much at stake. So, if you talk to almost any banker off the record, privately, they can tell you all kinds of stories about this kind of crap. Pardon my French. But they didn't dare go on the record. Now, because these people have nothing to lose— because they're not operating banks. They wanted to operate financial institutions of various kinds, or they wanted to get accounts, but since they've been completely shut out, they haven't got the motive for maintaining their silence that ordinary bankers have. And so, suddenly we get to hear about this stuff. But like I say, it's the tip of an iceberg. It's just the tip of an iceberg, but I hope it's enough to generate support for some major revision of the way bank regulation is done. Beckworth: At a minimum, some soul searching, and again, I imagine the Trump administration probably has other reasons to go after this. But it seems like it's going to start there. I know there's-- Selgin: Well, certainly, I'd like to see the Trump administration forget about buying Bitcoin and instead think about giving fintech firms a break and getting them treated fairly by regulators instead of being treated as pariahs to be kept out of the financial marketplace. Beckworth: So, if anyone from the Trump administration is listening, please follow the sequence of topics we've gone through. Don't do strategic Bitcoin, but do make it easier for fintechs to compete on a level playing field with all the appropriate regulations, not the shadow regulations in place, and make sure they fund with enough capital and all that other good stuff. So, let's switch, then, from the crypto space. This is going to be a hot topic to follow. We'll probably come back at some point, George, and see what's happened with the Trump administration in the crypto space. But let's move forward to another hot topic, at least one for you and me and some of our closest friends, and that is the Fed's framework review. We were just a part of a conference yesterday that was hosted by the American Institute for Economic Research, and the conference was titled, *Building a Better Fed Framework.* There were a number of interesting people there, including some senior Fed staffers in the audience. Governor Waller was our keynote speaker. Jim Bullard gave an opening talk. A number of people participated. You participated. I participated. It was a great time, and this conference had a lot of interesting and engaging discussions on how to think about FAIT, where it went wrong, what it can do better, and maybe what's even likely moving forward. You gave a talk there, George. Tell us, what did you have to share with the audience? Because you were in this session, “How Did We Get Here?” What were some of your takeaways? *Building a Better Fed Framework*: George’s Takeaways Selgin: I guess my big takeaway is that if we stand back from these framework reviews and try to ask, “Where are they headed?” Instead of just asking, “What have we learned since the last review?” We ask, “What does the whole bundle of reviews so far teach us?” I think what it teaches us is that the FOMC has been playing a kind of parlor game that consists of trying to formulate a strategy that works, that actually gives us macroeconomic stability, while constrained to pretend that they are targeting inflation. The reason they're constrained is because the dual mandate mentions stabilizing prices, which we can treat as another way of saying targeting inflation, and mentions full employment, but doesn't mention alternatives that might be better than focusing on either of those variables, like stabilizing total spending or nominal GDP. I'm holding up my NGDP mug as I say this. So, in other words, all this stuff, from just having a plain old 2% inflation target, to having a flexible average inflation target, to having God knows what they're going to come up with next, some acronym with inflation in it— All of this is just a way of getting to what really works, which would be targeting nominal GDP. But they can't say that. They don't even want to talk about it because it doesn't sound like the dual mandate. And this is really unfortunate, because NGDP targeting is a good way to come up with good behavior of both the inflation rate and employment. It's a way to avoid severe unemployment. It's a way to avoid overheating the labor market. It's a way to gain a long-run inflation rate of around 2%, but while also allowing prices to behave differently during supply shocks in a way that, again, best preserves stability in the labor market, which is the other thing you want. It accomplishes all of those things. The one thing NGDP has going against it is, it is not obviously the same thing as stable prices or high employment. It doesn't sound like the dual mandate. So, we have to figure out, I think, what the Fed has been doing has been stumbling its way towards strategy language that sounds like the dual mandate but is actually stable NGDP. They would save a lot of time doing this, and maybe, who knows how many more strategic reviews if they would just acknowledge what they've been up to and at least, secretly, talk about stabilizing spending. Beckworth: You're saying cut to the chase. What you're really after is stabilizing aggregate demand. Selgin: That's what they're really after. Beckworth: But they're framing it in terms of the modern approach, central banking, which is inflation targeting, output gaps. Selgin: Except that they don't really realize that that's what they've been trying to do, and it's preventing them from actually coming up with something that will work no matter what type of crisis we're confronted with. Beckworth: You gave the analogy, in your presentation, of some blind men feeling an elephant. Selgin: Right, the parable of the blind men and the elephant. The blind men, one's touching the tail, one's touching the trunk, one's touching the body, and they all think they're dealing with some different animal. None of them recognizes that it's an elephant. Some of them think that they're touching a rope or they're touching a snake or they're touching a wall. They don't even realize it's an animal. In this case, what we have is the Fed officials thinking about targeting inflation and thinking about targeting employment, in some sense, thinking about Phillips curves, and not realizing that what they really are involved here with, what they're really touching and trying to get a picture of, is stability of aggregate demand. That's what macroeconomic stability depends on. But they only are seeing the signals or these bits of the aggregate demand story that are manifestations of aggregate demand fluctuations, and those are changes in inflation and changes in unemployment. Beckworth: Yes, so, there was a lot of discussion of nominal GDP. It came up quite a bit, which is maybe not surprising given who participated. You participated, I participated. Even Jim Bullard, he's a champion of nominal GDP targeting. He made this point, which speaks to what you're articulating here, and that is, he saw flexible average inflation targeting as a step in the direction of nominal GDP targeting. He goes, "Look, the rest of the committee may not see it that way, but that's how I see it. I see us feeling our way toward that." That would be my hope, is that they continue this journey. Don't call it nominal GDP targeting. And I have a policy brief. In fact, we'll provide a link to it in the show notes. We just released it. It's part of a series. You're in [it] as well. In it, I take the modest approach. Look, I don't think we'll get to nominal GDP targeting this time, but can we at least use it as a benchmark, at least have a robust discussion of it? And maybe over time, we move closer to it. What do you think about the incremental approach versus the more radical, let's go all the way there? The Path to Nominal GDP Targeting: Incremental vs. Radical Selgin: Well, it takes longer. In the meantime, you get another round of crises, because you've done a little fine-tuning based on the last things that went wrong but you can't anticipate the other things that can go wrong. The problem with this incremental approach is that it's slow. At best, it's slow, and because of myopia, if it's too slow, you never get to where you're going to, because by the time you've tinkered with the targets to fix the last problem, you've forgotten about the penultimate problem. Then, that happens again, because you haven't made it work for that. Beckworth: This is a good illustration of what concerns me about where I think the framework review is going, and that is, Jay Powell sat down with Catherine Rampell from The Washington Post . They did a little interview. She asked him about the framework review, and he said, "I see as a base case," these are his words, "A reaction function where you don't overcompensate or you don't overshoot for past misses." So, effectively, he's saying, “I see as a base case, we don't have makeup policy.” To me, that sounds like a step back. We want to keep moving toward a path— again, I like to think nominal GDP level targeting, but some kind of makeup policy, because what if we do end up in a zero lower bound world again? What if we do end up in a crisis like 2008? Are we going to suddenly say, "Oops, we're going to go back to makeup policy?" It just ruins the credibility they spent so much time developing in the 2020 framework. Now, suddenly, to jump ship and try something different seems [like] a strike against their credibility. Selgin: That's right. We take some forward steps by addressing deficiencies in the current targeting strategy but forget the deficiencies that caused the last round of corrections and end up having to repeat the errors of the past. We don't repeat the errors of the last round. We repeat the ones from two rounds ago or three rounds ago. And so, you bounce around what is really a good strategic policy instead of actually getting to it. Again, I think one of the things that's preventing us from getting to it is that we have to stick to the language of inflation targeting. People are trying to find out a way to pretend that we're targeting inflation when we're really targeting something else, or we should be if we want to have macroeconomic stability. So, we might come up with an acronym with 10 letters that's actually got inflation targeting in it and symmetrical, flexible, blah, blah, blah, that really is exactly nominal GDP level targeting but it won't say so. But it can take us forever to get there. Beckworth: I'll make a confession. I have an article where I suggest the Fed adopts FAIT-N, which is basically a tweak to FAIT where they would drop the asymmetric part of the shortfalls from maximum employment, make it deviation. So, you make this symmetric but do it in a way that ultimately stabilizes aggregate demand. And I would note to listeners out there, what is the history of FAIT? FAIT is a version of a temporary price level target that Bernanke first proposed, I believe, in 2017. And if you read his documents, his motivation was that we need a way to escape the zero lower bound, have a price level target. So, we do catch up, but we don't want to get to a place where we have some negative supply shocks where the price level is high and generate a recession to come back down. So, let's just worry about inflation misses from below because it's most likely going to be a demand issue. What he's effectively saying is let's stabilize demand and then see through supply shocks. Selgin: Adverse shocks. Beckworth: Well, positive and negative supply shocks. In his case, he was thinking of adverse shocks. Selgin: And in practice, there is not much seeing through positive shocks, and that's a problem, because that's when you get overheating in the labor market and another problem, asset bubbles. Beckworth: That's why some kind of nominal spending target would be good, because it would discipline central bankers to do that. I wanted to share, though, that there have been a number of other events like the one we participated in yesterday where they come up with suggestions, refinements. Brookings has had several panels and conferences. Hoover has had several. The SOMC conference recently had one. And I came up with a list of seven items that kind of characterize a consensus, if I can call that, of the different folks who've participated. Characterizing a Fed Framework Consensus Beckworth: I went through this in my presentation, and I'll provide a link to my presentation in the show notes. But one, the first thing that these folks were looking for was a framework that would be robust to a variety of scenarios. So, yes, you want to respond to the zero lower bound, but you also want one that can respond vigorously to an overheated economy, number one. Number two, the framework should be symmetric, and I think this was speaking mostly to the shortfalls from maximum employment in the FAIT language. In fact, Michael Kiley— you discussed Michael Kiley's work. He argued if you say you will only respond to shortfalls from maximum employment, you're going to actually exacerbate the business cycle, because you're going to overcompensate when you go below and swing too high and you end up getting this wider volatility. Any more comments on Michael Kiley? Because I know you mentioned him in your talk as well. Selgin: Well, I think that he has two papers that I've seen that are germane to this, and they're all about trying to have a more symmetrical policy, and that is inflation targeting that's flexible, but flexible symmetrically in response to positive and negative shocks. I think that that's an improvement, but I think it's an example of working within the inflation targeting paradigm but really calling for something that, in practice, is very similar to nominal GDP level targeting but without using the language. I'm not saying that changing language itself changes anything. It's true that, in principle, we don't ever have to talk about stabilizing spending or nominal income, but it just makes it a lot harder to get what you really want when you're using euphemisms all the time. Beckworth: I thought his papers were excellent and very clearly in the spirit of something like a nominal GDP level target, if not in words. So, again, the first ideal characteristic, based on this consensus, was the framework should be robust to a variety of scenarios. It should be symmetric. Third thing was it should see through supply shocks. Now, Jay Powell gave a talk late last year. He goes, “I get this, if they're temporary, if they're idiosyncratic, we see through them,” but he became worried that if through too many of them, inflation expectations may become unanchored, which then leads to the next point. The framework should be a credible nominal anchor. If you have a credible nominal anchor, you're able to see through supply shocks, as you know you're going to keep expectations anchored. Selgin: Well, there's another response to that, David, which is that if we take the notion of supply shocks literally, its true analytical meaning, [then] over time, we'll have as many positive as negative ones. So, in principle if you see through both, ultimately, you are not going to have a price level that wanders away because of that seeing through. They should even out. Beckworth: So, then, I just can hear someone out there saying, well, what if it's a permanent shock? In that case, I would say that, eventually, you would update your target. If potential real GDP eventually became much higher, then I think you would slowly adapt your target, but if they're just shocks, so they're temporary and idiosyncratic, your point holds. Selgin: That's right. There are two different kinds of ways we could talk about these innovations to supply. First, there are genuine shocks, which is to say deviations around what we understand to be the long-term trend, and then there can be what you call permanent shocks or innovations, and all that means is that, oops, we got the trend wrong. If we get the trend wrong, of course, your target NGDP growth path isn't the path you really want to be on and you want to modify that. But that's true of any kind of inflation targeting. [With] any kind of inflation targeting we're trying to anticipate what the long-run growth rate of the economy is going to be, and we can get that wrong. That's not a special problem for NGDP level targeting. Beckworth: And moreover, potential real GDP tends to move slowly, so this is a gradual process. It's not like, suddenly, we're caught off guard in a major way. Alright, so, a credible nominal anchor was number four. Number five, a framework should include makeup policy. We've touched on that already. Six, frameworks should be easy to communicate. There were things about FAIT that clearly were not. The terms were undefined. What is a shortfall? Makeup from below was not very clear. And finally, a framework should enhance financial stability. Well, guess what? Those seven things are well-captured by a nominal GDP level target, and I had that in my policy brief. It was discussed at the conference. Selgin: Some people are going to say, "Oh, what about communication? Nobody knows what NGDP is." You hear this all the time. Well, nobody knew what inflation targeting was once upon a time, and I don't mean eons ago. I mean in the '70s. It took time and most people are, let's face it, still quite uneducated about inflation targeting. Most people couldn't tell you that there's a 2% inflation target that many central bankers prefer. So, yes, you need education. Nominal income isn't complicated. In some ways, it's less complicated than the price level. The aggregate nominal income is just the total of what everybody earns. What's so hard about that? So, I think that there's nothing inherently conceptually difficult about NGDP targeting, particularly if we just recognize— Forget the four letters. Forget the acronym. It's total spending on final goods. There's nothing complicated about that. There's nothing mysterious about that. So, let's stop talking as if this is something we can't possibly get people to wrap their heads around. That's just a cop-out. Beckworth: Well, George, we've covered a lot of ground today. We've gone from the strategic Bitcoin reserves to Choke Point 2.0 to the framework review. We covered a lot of great ground. Thank you once again for coming back on the program. Selgin: My pleasure, David. Original Post Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.