Good morning Swampians. I’m Gillian Tett, chair of the editorial board and editor-at-large, US of the Financial Times, and I’ll be filling in on Swamp Notes for the final weeks of Rana Foroohar’s book leave. Now that my introduction is out of the way, let’s get to it . . .
Three long decades ago, Lou Gerstner, then chief executive of IBM, leapt into literary annals by penning a memoir with the punchy title Who Says Elephants Can’t Dance?
It captured the challenge that dogs so many big institutions: how can an incumbent behemoth (such as IBM) move in a sufficiently nimble way to fend off competition from more fleet-of-foot start-ups?
In IBM’s case, Gerstner did make the group “dance” for a few years. But today, a version of that “elephant” challenge might apply to a very different organisation: the mighty Federal Reserve.
No, that is not just because the US central bank faces a hellishly difficult task of policy dancing when America is on the verge of an economic boom — but the Fed seems determined to keep real interest rates negative. (Jay Powell, Fed chair, told Congress last week that this would not cause a boom and bust, because investors are adjusting to a brighter economic outlook in an “orderly” way; I have doubts.)
The other challenge for the Fed elephant comes from a completely different realm: China and financial technology. And while Congress has not yet grilled Powell (much) on this topic, it’s just a matter of time.
The issue at stake is that China has recently raced ahead of America in many areas of fintech: entities such as Tencent offer digital payment systems that are more slick than American rivals; Ant Group has pioneered cutting-edge technologies for credit scoring. Now, most crucially, Beijing is racing to develop a digital renminbi too.
This leaves figures such as Gary Cohn, the former White House chief economic adviser, telling me that he fears that American private sector companies could lose the financial innovation race to China unless there is a concerted effort by Washington to embrace fintech.
It also sparks geopolitical fears: as Michael Greenwald, a former US treasury diplomat, notes in a very smart new analysis, China is likely to try to use a digital renminbi to undermine the dollar’s position as the world’s reserve currency.
So how should Powell respond? The Fed itself seems ill-equipped for a fintech “dance” itself since it lacks tech skills. In any case, its stodgy bureaucratic culture is diametrically opposed to the freewheeling style of the start-ups that are driving so much innovation today — and Fed officials are terrified of quick-fire experiments that might undermine the (supposedly) timeless credibility of the central bank.
But Fed officials also know that they cannot ignore the drumbeats of change. As I explained in my column last week, a Bank for International Settlements survey suggests that almost two-thirds of the world’s central banks are now actively discussing creating a so-called central bank digital currency. This would offer some of the attractive features of innovations such as bitcoin or stable coins (which offer instantaneous remote transactions) but stay under central bank control.
So what Powell has done is take a tack common to CEOs grappling with innovation: outsource the issue. In a novel move, Fed officials are working with geeks at the mighty Massachusetts Institute of Technology to explore the logistics of creating a dollar CBDC.
Powell says he would not proceed with this momentous step unless there was clear authorisation from Congress. Rightly so. And he sees “no need to hurry”, given the pre-eminent role of the dollar today. Fair enough too: there is probably not much first-mover advantage in the CBDC world, since whoever goes first will inevitably make errors that others can learn from.
But make no mistake — if, or when, China launches its own CBDC, Congress will almost certainly wake up to the issue (which it has not done yet) and clamour for answers from Powell or any of his future successors. Or to put it another way, in the Trump era the China-US trade rivalries were usually presented in terms of soyabeans or smartphones; soon it could be about the nature of money. Dancing through that will be very hard, particularly in the aftermath of a vast quantitative easing experiment.
Ed, I’m curious what you think of the Fed’s experiment — and what it could mean for the US-China relationship.
Martin Wolf penned another must-read on the return of the spectre of inflation, which helps to frame the challenges that Powell faces. He warns that while “significantly higher inflation seems a remote risk . . . the monetary and fiscal policies unleashed by the pandemic, as well as longer-term structural changes in the world economy, might ruin this comfortable perspective”.
On the theme of China, it is worth noting the smart column from Martin Sandbu about how “Europe and the west are more match fit than the worst pessimists would have it” in terms of co-ordinating their stance against Beijing.
For an entirely different topic, The New Yorker has delivered a wonderful analysis of the investigations that the seemingly mild-mannered Cyrus Vance Jr, the Manhattan attorney, is conducting into the Trump family. If “Cy” lands an effective punch this could undermine any debate about Trump returning to Republican politics.
Last but not least, as debate intensifies around the future of New York governor Andrew Cuomo, it is worth looking at an excellent piece of reporting by New York magazine on the alleged bullying and “chronic mismanagement” of his administration. This could run and run.
Edward Luce responds
Gillian, I confess that I have a hard time grappling with the concepts behind e-coins, distributed ledgers, mobile payments systems, virtual versus digital, and figuring out the difference between central bank digital currencies and the Fed-backed dollar with which I pay people via Venmo. Nor do I intuitively grasp why a Fed digital currency would help the growth of American fintech, as opposed to becoming its far safer competitor. Then there is the impact on traditional commercial banks. If I could park my money with the Fed in a digital account, why would I take the risk of continuing to hold my dollars at an old-fashioned deposit-insured bank? At the slightest hint of instability, wouldn’t we all flee the bricks and mortar world (or its e-based successors) for the Fed? My head starts to spin.
But the world also keeps spinning. I do know that Mark Carney, the former Bank of England governor, has advocated for central bank digital currencies, and that he is now on the board of Stripe Inc, the booming Irish-American payment processing start-up. Meanwhile, China wants its CBDC in place in time for next year’s winter Olympics. So the Fed will feel under pressure to act. As a matter of principle, I think it should err towards safety over innovation. But it cannot ignore what is happening. In an ideal world, we would all be able to move our money around seamlessly from our smartphones between systems that are interoperable with trustworthy central banks. It would be bad for criminals and it would also be bad for wannabe kings of the cryptocurrency universe, such as Facebook. Yet data privacy would be fully protected. I don’t trust China to manage this process fairly. So I guess the safest thing the Fed can do is get involved. To stay the same, it must adapt.
And now a word from our Swampians . . .
In response to ‘The media is really missing Trump’:
“We need to read summaries of the seemingly insatiable demand for bad news more often. It forces us to be aware of a major fact of life. Until we understand why we human beings have such depressing tendencies, there will never be much hope for a benign well-adjusted global order. Is there a solution? As Mr Luce says, the answer, alas, lies ultimately with the consumer. A very good recent book that confronts this question head-on is Robert Sapolsky’s Behave: The biology of humans at our best and worst. It doesn’t provide any immediate answers but it does provide a framework for understanding our most depressing tendencies (as well as the good ones). The more people are aware of why they behave the way they do, the more likely that they will behave well. Well that’s the hope, anyway.” — Donald Sharpe, Vienna, Austria