I ended my first thread on Gorton and Zhang's new working paper (papers.ssrn.com/sol3/papers.cf…) by observing (with a nod to work by the late, lamented George Kaufman) that bank runs aren't necessarily a bad thing: papers.ssrn.com/sol3/papers.cf…
That makes for a neat segue to my next criticism, concerning GZ's table 1 (p. 5). Here they consider various "Options to Address Stablecoins," asking of each whether it (1) would eliminate runs on stablecoins and (2) would make it unnecessary for their users to scrutinize them.
Based on those assumed goals, they narrow down acceptable options to three: treatment like ordinary banks, 100% reserve (or Treasurys) backing, or replacement w/ CBDC, that is, outright prohibition.
But should we accept this procedure? If stablecoins are indeed "like" banks, as GZ argue (albeit not consistently), Kaufman's strictures should apply to them. And if they aren't like banks, it's even less clear that they need to be absolutely run-proof.
As Kaufman notes, and as I noted in my previous thread, runs can be an effective means for shutting-down bad banks quickly. They are to be regretted only when they pose systemic risks, because panic spreads like a contagion, or because institutions are "interconnected."
Work by Kaufman himself and by Calomiris and others shows that bank run contagion effects have been much less common and extensive than is often supposed. "Interconnectedness" has been a more common cause of spillovers, but it has rarely been such as posed a systemic thread.
Are stablecoin issuers different? Would a run on one necessarily pose systemic risks? GZ themselves supply an answer 2 pages later, in a footnote where they refer to the sudden, spectacular run on the Iron Titanium Token in June that caused it to become worthless in a single day.
Of course holders of those tokens took a beating, including some who, having first touted it, made their losses a reason to call for more regulation: news.bitcoin.com/mark-cuban-iro…
But economists (usually) look for spillovers before calling for regulation. Where other markets disrupted? Was the run contagious? Did were systemically important Iron Titanium counterparties threatened with failure? Nah.
Instead, some crypto enthusiasts who thought they'd found a way to make a fast buck while others "had fun being poor" got their cumuppance. These weren't people who had no choice but to deal with stablecoins because they had to go shopping: they were investors placing risky bets.
Why should public policy strive to rule-out any chance that such people will incur losses, any more than it strives to ban dealings in penny stocks, gambling, or (and almost certain 100% loss) lottery ticket sales. (Oh, sorry: it has dealt with the last, via GZ's solution # 3!)
If you ask me, the best solution to the "problem" of stablecoins like the Iron Titanium Token is instead GZ's solution 1: do nothing. And by all means don't do anything that suggests that the government is "watching over" them!
What about GZ's 2nd regulatory desideratum, viz., that regulation must help stablecoins achieve "no questions asked" status? Here, the problem is circular reasoning.
GZ maintain that the "no questions asked" (NQA) condition must be met by any decent "money." They then characterize stablecoins as "private money." And so they conclude that regulators must see to it that stablecoins satisfy NQA.
But who, besides GZ, says that stablecoins are or have to be "money"? The standard definition of money is any "generally accepted medium of exchange." No stablecoin today meets that definition. Instead, most are used only for very limited types of transacting.
Tether, for instance, is pretty much used only for cryptocurrency purchases and sales, and then only because most crypto exchanges aren't plugged into the formal, Fed based USD payments network.
Those of us who care only to have some decent "money" to transact with don't bother with stablecoins. Why should we when we already have plenty of NQA alternatives at our disposal? So, who cares if there are non-NQA conforming stablecoins out there?
Perhaps GZ imagine that there is some risk--purely hypothetical at this point--that one or more non-NQA stablecoins will succeed in displacing good-old NQA dollars in ordinary payments. Perhaps they worry that Facebook's Diem will do so.
But for them to suppose so begs the question: if NQA is "the most obvious" property any decent money must have, why would the public abandon established NQA-conforming media for non-NQA alternatives?
If GZ have a reason for thinking it would, they should explain it before they conclude that we need potentially Draconian stablecoin regulations to prevent it. In the meantime, so long as stablecoins aren't _really_ money, they simply don't "need" to be NQA.
That's all for now. Thanks for your attention.
Sheesh! So many typos. Sorry!
Sorry for wrong link. Correct one to Kaufman paper is here: fraser.stlouisfed.org/files/docs/his…
Note: This is not an argument for zero regulation. It is an argument against the assumption that the goal of regulation should be zero stablecoin runs.

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More from @GeorgeSelgin

20 Jul
Thread: The right way to go about deciding how to regulate stablecoins.

Having explained why loose (and misinformed) comparisons with 19th century banknotes are the wrong way to proceed, I thought I'd offer some positive suggestions.
(1) Acknowledge the fact that there are many types of stablecoins, with different underlying technologies and principle uses. It is highly unlikely that any broad-brush regulatory treatment will be appropriate to all.
(2) Stop calling them "money." They are niche exchange media, not generally accepted exchange media. And that is itself not a bad thing so long as national monies are also available.
Read 13 tweets
20 Jul
Anti- GZ, cont'd: the rise of national currency (pp. 27ff.) GZ conclude their discussion of antebellum currency by stating that, because that currency violated the NQA (No Questions Asked) principle, the antebellum "community had no money."
As I've already pointed out, regarded as a description of conditions on the eve of the Civil War, is very misleading, in part because there was by then no shortage of official coins, which were undoubtedly national NQA means of exchange.
As for state banknotes were, although discounting cont'd to disqualify them as truly "national" currencies, by the 1860s these discounts tended to be modest. Furthermore, almost all state bank notes were par monies for their "state" communities, if not in some surrounding states.
Read 25 tweets
19 Jul
My Gorton and Zhang critique series continues with a look at their discussion of antebellum U.S. currency (pp. 23ff.) Although their discussion of that history is better than many other recent ones (see alt-m.org/2021/07/06/the…), it is still misleading.
Although GZ recognize that most bank failures back then had nothing to do with "wildcat" banking, they still exaggerate the extent to which antebellum currency was (literally) "subpar."
Just as CZ "cherry pick" by focusing on US currency experience, ignoring what happened elsewhere, they also cherry pick from the diverse US record. I've already noted how they ignore the Suffolk System's successful achievement of a uniform New England currency--a "good" cherry.
Read 18 tweets
19 Jul
Gorton and Zhang's highly eccentric interpretation of pre-Fed banking crises isn't just inaccurate: it's topsy-turvy. And, like many of their paper's historical claims, it is contradicted by a wealth of evidence from other banking systems. 1/2
The _fons errorum_ of this and many of GZ's other mistaken arguments is their assumption that private monies must be 100% backed by reserves or Treasurys, or otherwise fully guaranteed by the state, to be stable and to trade at par.
While such arrangements can contribute to stability, they are neither necessary nor sufficient. Indeed, the Treasurys-backing requirement for national bank notes, for example, was a fundamental _cause_ of instability under the pre-Fed national currency system.
Read 8 tweets
19 Jul
In my last thread on Gorton and Zhang's new working paper, I criticized their criteria, in Table 1 of their paper (p. 5) for selecting among options for regulating stablecoins. Here I turn to the paragraph immediately following that table, which itself calls for a thread.
Here they claim that the option of requiring that stablecoins be 100% backed by reserves or Treasurys "ties two forms of money together at a fixed ratio," thereby making "a shortage of one pf the forms of money" likely.
To illustrate, they point to the currency shortages that plagues the pre-Fed national currency system (1866-1014). They say these were caused by nat'l banks reluctance "to move all the Treasuries to back national bank notes," that this caused deposits to expand instead, and
Read 15 tweets
18 Jul
I see now that, despite my fond hope of having a last, quiet day off from work (I have been o leave recovering from minor surgery), I have to continue my (probably futile) attempt to counter Gorton and Zhang's misleading article. But before I do, some preliminaries.
First, I am not doing this because I'm especially fond of stablecoins, or because I don't think they need to be regulated or even because I don't consider them especially risky. Personally, I wouldn't touch a stablecoin with a 10-foot pole.
Nor am I pitching any sort of "free banking." I only want people to understand how past free banking systems worked, and what self-regulating capacity they harbored, because I believe this understanding will help inform sounder bank regulatory policies.
Read 6 tweets

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