Cometh The Hour, Cometh An Insane Cash-Hating Fed Governor - Nobody's "Goodfriend"

Marvin Goodfriend is not a Fed governor yet, but it’s likely asking far too much to expect US lawmakers to block President Trump’s nomination.

Unfortunately for the American citizenry, Goodfriend (not) has all the establishment credentials which will likely see the nomination rubber-stamped: economic advisor to the White House (1984-5), director of research at the Federal Reserve Bank of Richmond (1993-2005) when he “regularly attended meetings of the Federal Open Market Committee", and currently Professor of Economics at Carnegie Mellon University. Watching the mainstream media’s response to Goodfriend’s nomination gave us a wry smile, as he is being portrayed as conservative. This was Reuters commenting on the news last week...

A former economic adviser in the administration of President Ronald Reagan and research director of the Richmond Federal Reserve Bank from 1993 to 2005, Goodfriend is arguably the most conservative of Trump’s Fed appointments yet. He has been critical of some recent Fed practices including the purchase of mortgage backed securities.


He has also argued that the central bank should invite more oversight from elected officials, including getting a congressional sign off on its 2 percent inflation target and more discussion of how its policy decisions line up with a “reference rule.” Those ideas are likely to find favor among conservatives on Capitol Hill who feel the Fed has accumulated too much influence.

Although some of Goodfriend’s views, which he’s no doubt enthusiastic about implementing, would be disastrous, Reuters argues (our emphasis).

Perhaps most significantly, he will bring recognized academic credentials to a Fed board that is losing Yellen, a recognized expert on labor markets, and in October lost Vice Chair Stanley Fischer, one of the intellectual forces behind modern central banking.

While we've seen the carnage that academic credentials can cause, we wouldn’t disagree that he looks (fairly) harmless.

One reason that Goodfriend is seen as conservative is that he is in favour of “rules-based” policy and would be less inclined than the likes of Janet Yellen to let inflation run “hotter” than the 2% target before putting the breaks on. Another reason is that Goodfriend has been critical of the Fed’s QE policy. However, that’s not because he is “conservative”, rather because he is in favour of far more radical measures.

We are less concerned about Goodfriend getting trigger happy for rate rises if inflation hits 2.2% or 2.5% than we are about his remedies to deal with the next financial crisis. Goodfriend is a big advocate of negative interest rates (which even the Bank of Japan is now backing away from) and, far worse, abolishing paper currency. As Bloomberg explains.

Economist Marvin Goodfriend doesn’t like the green paper rectangles in your wallet, which are formally known as “Federal Reserve notes”…Goodfriend may take the opportunity to pursue his academic interest in abolishing—or at least demoting—paper money.

Goodfriend is concerned that the existence of cash makes it harder for the Fed to lower interest rates below zero. In the next crisis, he says, the Fed might want to push interest rates into negative territory to prod people to stop sitting on their money and do something with it, such as consumption or investment, that would get growth going again.

But today, the Fed would not be able to push interest rates on checking or savings accounts very far below zero because as soon as it did, people would simply withdraw cash from the banks and store it in the mattress or a vault. The European Central Bank and Swiss National Bank have managed to push rates only slightly negative.

It’s clear from reading between the lines that although central bankers are not engaging in a public discussion, the architects of the boom-bust cycles are considering their policy options for the next crisis…the one where their latest credit/asset bubble bursts in horrendous fashion. It’s also clear that the preferred solution is negative interest rates and either abolishing paper currency or taxing it in line with a depreciating digital currency standard. For example, the IMF published a paper “Breaking Through the Zero Lower Bound” in October 2015, which explained how easy it would be to implement for any determined central banker.

There has been much discussion about eliminating the “zero lower bound” by eliminating paper currency. But such a radical and difficult approach as eliminating paper currency is not necessary. Much as during the Great Depression—when countries were able to revive their economies by going off the gold standard—all that is needed to empower monetary policy to cut interest rates as much as needed for economic stimulus now is to change from a paper standard to an electronic money standard, and to be willing to have paper currency go away from par. This paper develops the idea further and shows how such a mechanism can be implemented in a minimalist way by using a time-varying paper currency deposit fee between private banks and the central bank. This allows the central bank to create a crawling-peg exchange rate between paper currency and electronic money;

As we said, “cometh the hour…”

Bloomberg notes that Goodfriend was invited to present his ideas at last year’s Jackson Hole get together.

Trump’s nominee hasn’t tried to hush-hush his views on this controversial topic. Far from it. Goodfriend presented a paper on it in 2016 in Jackson Hole, Wyo., at a high-profile annual conclave of central bankers. His title: “The Case for Unencumbering Interest Rate Policy at the Zero Bound.”

To make it less convenient for people to hoard cash, he says in the paper, the government could phase out high-denomination bills or charge banks and the public whenever paper money is paid out or received. But even those steps might not be enough to suppress the use of cash, Goodfriend surmises. So he weighs three stronger measures.

Sadly, we disagree with Bloomberg that Goodfriend’s views on abolishing cash will be an “issue” in his confirmation hearings. However, we are pleased to see that highlighted several voices which are sounding the alarm (even though it will be futile).

Goodfriend’s dislike for cash could become an issue in his confirmation hearings, which are not yet scheduled. Senators could soon be getting an earful from constituents who fear that taking away paper money is a step toward socialism or totalitarianism.

Those voices are already being heard. “Is Marvin Goodfriend the Worst Fed Nominee of All Time?” asks a Dec. 1 post on the website of the Mises Institute, a think tank for the Austrian school of economics. An earlier Mises post in which Goodfriend’s name was first raised said, “Given his radical views on monetary policy, it’s not hyperbole to suggest that Goodfriend’s nomination would represent a genuine danger to the economic wellbeing of every American citizen—or at least those outside of the financial services industry.”

It’s not just the Mises people who want to hang onto paper money. “Cash Means Freedom, Which Is Why So Many Officials Hate It” was the headline on a post by the libertarian Reason Institute last year. Last year, in the Wall Street Journal, financial commentator James Grant attacked a book called The Curse of Cash by Harvard’s Kenneth Rogoff, writing, “The author wants the government to control your money. It’s as simple as that.”

In the meantime, other like-minded people to Goodfriend are lining up to support him, like author of “The Curse of Cash”, Kenneth Rogoff. Bloomberg asked Rogoff for his view on Goodfriend’s nomination. This was the predictable response. 

“Thank goodness there will be someone at the Fed with the foresight to realize that world needs to start thinking about how central banks can best deal with the inevitable next deep financial crisis. And negative interest rate policy is the best idea out there by a wide margin; hopefully we won’t need it anytime soon. Still, I believe that within a decade, all the world’s major central banks and treasuries are likely to have taken the simple steps necessary to create the foundations for effective negative interest rate policy in deep recessions or financial crises.”

Forgive us if we think it’s all a little too obvious where this is going, and has been, since we emerged from the last crisis. When the bubble burst in 2000, the Fed needed to cut the policy rate to 1% to reflate a new bubble. When that bubble burst in 2008, “conventional” monetary policy was insufficient to reflate the current bubble and unconventional ZIRP/QE policies had to be added to the mix. When the current bubble bursts “conventional unconventional” monetary policy will be insufficient to reflate the next bubble.

You can probably sense our skepticism that Goodfriend’s likely appointment as a Fed governor is happenstance.