Thread: Fed officials are now saying that they'll be able to launch FedNow in 2023 rather than later:…
It's understandable that they should do everything possible to accelerate FedNow's launch: RTP, FedNow's private-sector rival, has been operating since 2017, and its network now covers well over 70% of all U.S. bank deposits, with new depository institutions joining every week.
Universal or "ubiquitous" coverage was one of the key objectives of the Faster Payments Task Force est. by the Fed in 2015. The Clearing House's RTP system answered that Task Force's recommendations. By late 2018 it had 50% network coverage.
The Fed's decision in 2019 to launch a rival network, made partly in response to small banks' reluctance to take part in a network established by the big banks that own TCH, came as a big surprise to RTP, which would now have to struggle harder to achieve ubiquity.
If the two networks were "interoperable," or if banks could join both costlessly, ubiquity could still be achieved relatively easily. But that's not the case. W/ real-time payments, interoperability is not easily achieved; and connecting to either network is costly.
So by announcing FedNow, the Fed gave banks that might sooner have joined RTP reason to wait. However, the pressure on banks to offer real-time payments has in the meantime grown considerably. Many could not afford to wait until 2024-FedNow's original launch date-to do so.
Seeing RTPs network still gaining ground, the Fed had reason to worry that FedNow would be stillborn-a white elephant that couldn't possibly justify its substantial cost to taxpayers. (Indeed, even as matters stand the Fed does not plan to recoup those costs in a timely manner.)
Hence its resolve to get FedNow up and running ahead of its originally scheduled launch date. Whether it actually launches in 2023 remains to be seen. But the promise alone could in principle suffice to keep some mostly small banks from dealing with the rival service.
In principle. But in practice, maybe not: according to a recent survey by Levvel consultants, "66% of business respondents consider themselves likely to adopt RTP in the next one to two years."…
Those respondents aren't likely to put-off a move to real-time payments simply because their banks would rather wait for FedNow's launch. Instead, they will consider taking their business to a bank that already offers real-time payments.
Does this mean that FedNow may still be in trouble? Hardly. You see, the Fed isn't like a private-sector business. For it, "failure isn't an option," not because it always pulls through, but because it has all sorts of ways of-let's call a spade a spade-cheating.
Besides continued resort to implicit if not explicit cross subsidies (themselves made possible by its currency monopoly and consequent seigniorage earnings), the Fed can use its regulatory powers to sway things in FedNow's favor.
Furthermore-and here things get ironic-whereas RTP has committed itself to a flat-fee arrangement, explicitly aimed at assuring smaller DIs that their larger rivals will enjoy no quantity-discount cost advantage, the Fed has made no such commitment.
Indeed, even as it proceeded with plans for FedNow, the Fed claimed not to have developed a fee structure. So much for cost-benefit analysis! Still, 5 will get you 10 that when it launches, FedNow will offer attractive quantity discounts in an effort to win over bigger banks.
It's either that or lose money hand over fist, which of course will hurt us taxpayers rather than the Fed itself. Here's where the irony comes in: if the Fed does that, RTP will have to answer in kind, as it warned it might after FedNow was announced.
Critics of RTP, not understanding the context for RTP's warning, suggested that it's flat fee promise was a mere bait-and-switch tactic. This added to small-banks' fears and reluctance to join RTP.
But RTP was merely warning that if the Fed competed with it, it would have to compete w/ the Fed in return. (Sellers planning to bait-and-switch don't usually _announce_ the switch!) In fact, thanks to FedNow, small banks are _more_ likely to find themselves at a disadvantage.
For all these reasons, I continue to hold the minority view that FedNow is both unnecessary and undesirable, as I have since I first entered into the debate concerning it some time ago. I hope more people will consider my perspective…

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More from @GeorgeSelgin

6 Feb
Unfortunately, the errors of the past, however persistent, don't absolve fiscal and monetary authorities from responsibility for avoiding, or trying to ovoid, serious errors in the opposite direction. Life would be easier if they did. But they don't. 1/n
It's particularly unwise, IMHO, to suggest that ANY positive stimulus, now matter how large, is worth trying because of past inflation undershooting. According to this logic, why not $5 trillion; or $10, or...whatever?
Of course, many politicians will wring their hands at the prospect of piling-on to any such gravy train. They like "doing more" for their constituents. The macro consequences of excessive stimulus aren't their problem. But for that very reason, someone has to look out for those.
Read 5 tweets
27 Jan
It's dandy that 100 DIs have agreed to take part in FedNow's pilot program. That's about as many as are now directly connected to RTP (w/ many others using it through correspondents). And some of the top 15 banks are conspicuously absent from the list. 1/n…
Absent are Bank of America, U.S. Bancorp, Truist, PNC, the TD Bank Group, State Street Corp., and Fifth Third Bank. All save State Street are connected to RTP. So even if FedNow started now and all banks on its list connected, RTP would the bigger network by a long chalk. 2/n
And of course FedNow won't actually be ready to launch for 3 more years: in the world of payments innovations, that's an eon! 3/n
Read 5 tweets
27 Jan
As this claim has met with some resistance, allow me to expand upon it with examples, both fictional.
Suppose, for the first, that I go into my district Federal Reserve bank, find one of its cash tellers (yes, the Fed has tellers), present her with a $20 Fed note, and say, Here is one your liabilities, for $20. I'd like those now."
Of course in reality the teller would call security--itself evidence that the $20 is no ordinary IOU! But suppose instead she doesn't. Instead, she says, "No problem." Then an awkward pause ensues.
Read 7 tweets
27 Jan
An answer, in a thread, because others may gain something by it.
The first thing you must do, if you wish to understand the value of an irredeemable fiat money like today's USD, is to entirely expunge the word "backing" from your economics vocabulary. Trust me, it is good for nothing but mischief.
It's true that the dollars the Fed creates are, for accounting purposes, "liabilities." It's also true that, the market value of the liabilities of most financial firms, such as ordinary banks, depends on the value of the assets backing those liabilities.
Read 18 tweets
20 Jan
Thread: As many may be interested, I'm answering this with a new tweet.
The roots of the "Austrian" claim that fractional reserve banking (FRB) involves fraud or theft trace to the Austrian business cycle theory. According to some versions of that FRB inevitably leads to booms and busts.
In fact that believe is itself wrong, as I first tried to show in The Theory of Free Banking. See also here:…
Read 14 tweets
20 Jan
I have no idea who James Thomas Kesterton, Jr. is or was, but this is yet another bit of fractional-reserve banking mythology, for which there's not the slightest factual foundation. 1/n
From Collins and Walsh (…): "we can find little evidence of large and destabilizing asset bubbles in the Roman created by the fractional reserve banks...was not used generally for such speculative purposes." 2/n
As for financial crises, they occurred in 49-47BC and in 33AD. But had political triggers; sources say nothing about banks' involvement, though its probable that many suffered. The '33 crisis was deflationary rather than inflationary. 3/n
Read 4 tweets

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