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.

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, 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.