Can the Federal Reserve Bank of Atlanta play development bank in West End Atlanta?

Mohamed El-Erian in his book, The Only Game in Town, shared this observation about the average person’s awareness of the importance of their country’s central bank.
“Most people spend little of any time thinking about how central banks impact them — not only in their daily lives but also in influencing (and even defining) the opportunities that their kids will have. Indeed, despite the substantial reach of these powerful institutions and the critical role they have played, there is still little societal recognition as to how much citizens have riding on their judgment, wisdom, and success — from protecting and enhancing their financial savings to securing credit and finding well-paying jobs.”

Staff at The Economist published an article describing the history of the world’s central banks, institutions that were first started to help raise funds for wars waged by monarchs and then taking on the additional tasks of helping to grow economies by stabilizing the prices of goods and currencies.

“Governments have asked central banks to pursue several goals at once: stabilizing currencies; fighting inflation; safeguarding the financial system; coordinating policy with other countries; and reviving economies.” — The Economist

But development bank, specifically development bank for poor communities within cities, is not listed as one of those goals. The Federal Reserve Bank of Atlanta has taken on a role of “information clearing house” for initiatives that emphasize development of low income communities. The Federal Reserve is not a development bank like the World Bank or the Inter-Development Bank, where these organizations provide direct investment into national projects aimed at economic or social development. Given the Federal Reserve’s stodgy and wonky characteristics, the central bank’s interest in issues that border on the social as well as economic is interesting. The Federal Reserve Bank of Atlanta’s president, Raphael Bostic, has acknowledged that economists are considering the more behavioral aspects of consumers in assessing the health of the economy.

That approach could play well in understanding areas like the West End section of Atlanta, an area that given current gentrification still has a significant low-income population. The area’s household median income is half of that of Atlanta’s with home prices ranging between $45,000 and $580,000. Although the population experienced a 13% drop since 2000, people have been moving back into the neighborhood as evidenced by a 5% increase in population since 2010. But the Federal Reserve’s acknowledgment of an income and employment problem may be offset by its recent policy of rate hikes.

Rate increases approved by the Board of Governors of the Federal Reserve are good for bankers (Jamie Dimon, CEO of JP Morgan Chase believes interest rates should be at 5%.), but higher rates if not timed properly could dampen economic growth as borrowing becomes more expensive. Even if employment training initiatives championed by the Federal Reserve have any positive effects, could those effects be diluted by a higher cost of living?

Also, poorly timed rate increases could take a little air out of asset bubbles. Seeing a house priced at $580,000 literally two doors down from an apartment building where rents average $645 a month gives me the impression that little asset bubbles are forming given the gap in wealth on this street. Worse yet, as property taxes rise with home values, landlords may be forced to raise rents placing an additional burden on low-income residents of West End.

Instead of contributing to an initiative that empowers low-income residents, the Federal Reserve may be adding to the wealth gap by widening the physical gap between well-off and not so well-off. No need for electronics in order to build a virtual gated community.

Is America a socialist country? And if it is, so what?

Lawrence O’Donnell, host of MSNBC’s The Last Word appeared on C-SPAN’s Washington Journal this morning. One of the callers chastised him and Alexandria Ocasio-Cortez for supporting socialism. Ms. Ocasio-Cortez last week defeated Representative Joseph Crowley in the primaries for the 14th district. The 14th district is heavily Democratic, having favored Democratic presidential candidates all the way back to William J. Clinton. Sixty-one percent of the 14th district’s voter population is black or Latino. Ms. Ocasio-Cortez is favored to win and Establishment Democrats are not too excited about a Bernie Sanders supporter (Ms. Ocasio-Cortez worked on Senator Sanders’ campaign) infiltrating the halls of Congress.

Republicans may see this single win as a virus that is about to spread through the Democratic Party and may position themselves as the cure. While Nancy Pelosi may express outwardly a lack of concern about a democratic socialist win in a single district, democratic socialism has attracted more attention since the November 2016 election as an alternative to a Democratic Party that has been enjoying a quarter of a century of corporatization.

No doubt Establishment Republicans are enjoying the schism being caused by a socialist insurgency, but I sense run-of-the mill conservatives within and outside the Republican Party like the C-SPAN caller are concerned that a seemingly increasing number of young people are moving toward socialist philosophy. Mr. O’Donnell adroitly addressed the caller’s vitriol arguing that the United States has a political economy that mixes certain aspects of market and centrally planned economies. Conservatives tend to focus on the anti-freedom approaches of socialism such as limited speech, and a lack of universal suffrage at the voting booth. They focus on the brutality of a socialist State toward dissidents, currency manipulation, and closed access to economic markets. They assume that socialism is the only top-down, lock down system on the planet.

They are wrong.

Just one look at America’s monetary system alone should tell a critical thinker that the economy of the United States is top-down and centrally planned. Most people do not issue their own currency. That job is for America’s central bank, the Federal Reserve. See mortgage rates going up and you can reasonably tie some action by the Fed to your pain. And while Republican members of Congress scream about free markets and alleviating the tax burdens of entrepreneurs, they add to the entrepreneur’s burdens by increasing budget deficits creating spending gaps that have to be filled by more borrowing which increases demand for loanable funds which leads to higher interest rates which leads to businesses facing increased barriers to entry into the credit markets. This is top down, centrally planned, oppressive economics in American form.

And let’s not forget our tax system. Talk about centrally planned. Have you ever been asked to give direct insight and opinion on whether your marginal tax rate or effective tax rate should be increased? Of course not. America’s version of the National People’s Congress does that, with the only difference between China’s legislative body and America’s is the frequency of meetings and the amount of checks they place on their executive.

Conservatives would argue that the American electoral system is indicative of an open democracy. That fallacy has been exposed twice in the past eighteen years where the “people’s choice” lost because a small body of unknown electors decided five weeks after a presidential election who the winner was and had that decision certified three weeks later by members of Congress. Top-down. Centrally planned.

Lastly, if Obamacare didn’t convince you that your healthcare finance system is centrally planned, then the history of Medicare should inform you as to the impact and influence the federal government has on the insurance industry. Medicare opened up two markets for the private insurance industry: the administrative services market, where private insurers invested in and provided the administrative infrastructure for serving an influx of newer patients, and underserved market of people over the age of 65 and medical insurance supplemental market, where insurance services gaps in Medicare are filled by private insurers. It is hard for conservatives to argue that the free market met these needs when on the contrary government action created the markets and the opportunity for private insurers to increase revenues.

You can probably find more examples, but the point here is that too many Americans express their lack of economic literacy when wailing about the ills of central planning. While I don’t want to give liberals credit for much, they do make a point when clarifying that the United States’ economy is a mixed one and expose the irony that many critics are likely enjoying some of these socialist programs themselves.

When asked to choose an “ism”, my response is either one, whether socialism or capitalism, represents top down suppression of individual choice because government exercises an inordinate amount of influence under either paradigm. The individual has no say in the crafting of policy in either framework. It is a take it or leave it scenario either way. The questions conservatives should be asking themselves is, can I create a better benefit for myself on my own terms?

A person living in the internet shouldn’t have to pay taxes

Nyota Uhura is on a quest to digitize herself. She creates digital product on her laptop, transmits her finished product to her clients via the internet, and gets paid primarily in cryptocurrency. Every now and then she accepts fiat currency issued by a nation-state in part because as a mini-sovereign she likes to have a reserve currency for emergency use or in case a hole-in-the-wall restaurant on a south Florida beach doesn’t accept BitCoin.

She probably spends too much time socializing in cyberspace. Facebook and Instagram keep her in touch with her brothers and sisters in Congo or her cousins in Brooklyn. As a busy creative she sends out for food via Uber Eats and uses Uber or Lyft to get around.

She is not naive about the public safety protection that Atlanta markets to its residents. She has a home security service that she communicates with via broadband. She uses her laptop as a surveillance camera courtesy of her broadband access provider. She keeps a shotgun and feels confident in her self-defense skills. If she were a pilot, she would avoid Atlanta’s biggest amenity, Hartsfield-Jackson International Airport and opt for the smaller Charlie Brown airfield.

Why then, she asks, should she even pay taxes?

Her friends rebuttal is that she should contribute to the public services that she uses to get around; that she should pay for use of the streets and use of the police protection. On a national level, she should support Medicare and the national defense, and social security because these programs help provide security for her future.

And she should be ashamed of herself for not showing the ultimate allegiance to her government by avoiding the use of America’s fiat currency. Her failure to use it, they argue, only negatively impacts the nation’s economy by devaluing the dollar through shrunken demand.

Nyota expected the canned rebuttal from her friends and family. She responds, however, with a rebuttal they are not prepared for, one based on value. Being coerced by a false sense of duty and obligation to pay for sub-par protection services makes no sense to her. She hasn’t bought in on the police’s public relations campaign that they are there to protect the public and would like her taxes reduced by whatever the city assesses as her contribution. She has no enemies in Russia, North Korea, Syria, Afghanistan, Iraq, or Iran other than the enemies created by U.S. policy. Since she didn’t create these enemies, she would also like her taxes reduced by the amount of her contribution to these services.

Nyota pays a sales tax when she eats a cheat meal at McDonald’s. She also contributes to the transportation tax when she pays her Uber driver for a lift to the grocery store. She literally works in another jurisdiction, cyberspace, and because of this, Nyota believes she should not have to pay a federal income tax, especially to a government that provides low value protection services.

A strong legal and political argument will have to be crafted and promoted to bring about these changes, but at least Nyota is thinking about exit.

The Federal Reserve Bank of Atlanta’s outlook on #fintech in 2018

What will be the challenges for the fintech environment in 2018? Douglas King with he Federal Reserve Bank of Atlanta wrote a piece back on 4 December 2017 laying out potential questions that the Federal Reserve may address. They include:

  • Will it continue to be up to financial institutions  to do due diligence on fintech companies, much as they do for third-party service providers?
  • Will regulatory agencies offer financial institutions additional guidance or due diligence frameworks for fintechs over and above what they do for third-party service providers?
  • Will one of the regulatory agencies decide that the role of fintech companies in financial services companies is becoming so important that the companies should be subject to examinations like the financial companies get?

In addition, as we get closer to Jerome Powell taken the helm as the chairman of the Board of Governors of the Federal Reserve, what type of relationship should the fintech industry expect? Probably one of proactive collaboration, according to comments Mr Powell made back in September 2017. The Federal Reserve has as a policy goal a faster U.S. payments system that is also ubiquitous and safe, and a positive relationship with the private sector is key.

Bitcoin doesn’t threaten U.S. position as a tax and customs jurisdiction

Back on 16 November I posted a brief post opining on whether the federal government would go after Bitcoin, the cryptocurrency that has appreciated immensely in value this year. I wrote that if anything, the Federal Reserve would consider issuing there own digital currency. Federal Reserve Bank of New York president William Dudley alluded to the central bank issuing its own digital currency back on 28 November although nothing definitive has been set.

Readers should bear in mind that the primary role of the United States government is to conduct a resource extraction and protection scheme over its physical jurisdiction. To carry out these main functions it taxes citizens and businesses. Bitcoin is property and where an investor enjoys gains from the sale of that property, the United States Treasury will be there to collect. According to a 2013 report by the General Accounting Office, right now the biggest tax problem surrounding cryptocurrency is ensuring that taxpayers either investing in or using Bitcoin for transacting commerce are aware that they may be liable for taxes.

Fortunately for taxpayers investing in or using Bitcoin, the Internal Revenue Service does not have the resources to implement a tax compliance approach specific to virtual economies and virtual or cryptocurrency. The GAO recommended that at the least the IRS use a low cost information distribution approach, its website, to make taxpayers aware that they may be liable for income taxes as a result of investing in cryptocurrency.

Whether you agree with Warren Buffet’s assessment on Bitcoin, something that isn’t real and producing no dividends hence scheduled to implode, what’s real is that the Internal Revenue Service is ready to collect.

My instincts tell me the feds won’t go after Bitcoin … for now

The financial press has been focusing on Bitcoin’s rapid appreciation in value of late. The value of a single Bitcoin eclipsed the $7,000 mark a couple weeks ago. At the time of this writing, Bitcoin.com reported the cryptocurrency is selling for around $7,171 while its “fork”, Bitcoin Cash, is selling at $1,181.

Supply and demand primarily drive the price the currency. I guess it also helps that over 100,000 merchants accept the coin. A payment system driven by blockchain provides Bitcoin owners additional certainty about who actually owns a generated coin at a particular time. Also the near instantaneous payment is an attractive feature.

In my business, I focus on political threats and I see the Federal Reserve taking a parallel approach to Bitcoin as a payment system. One possible route is issuing its own digital currency supported by an enhanced payment system. A report filed last September by CNBC described a recommendation by the Bank of International Settlements that central banks consider issuing their own digital currencies.

Also, the Federal Reserve is in the process of revamping the payments process system. Bitcoin competes with at least two prongs of the Federal Reserve’s payments system: clearinghouse services and coin distribution services. Federal Reserve governor and Fed chair nominee, Jerome Powell, currently serves as co-chair of the Federal Reserve’s payments improvement oversight committee. I expect given Bitcoin’s growing popularity, the appeal of blockchain, and the concerns about using cryptocurrency for fraudulent purposes that should Mr Powell become Fed chair, improving the payments system and increasing the Fed’s ability to compete with innovative payment systems will remain a priority.