Modern business operates at the speed of taps and swipes. But banking payments still stem from an old-fashioned, overnight, clearing system arising from the age of paper checks.
The Federal Reserve is seeking public comment on payment system modernization involving real-time gross settlement (RTGS), purportedly moving at the modern speed of business on the internet. The Internet actually moves at the speed of light.
Federal Reserve Governor Lael Brainard spoke at the Fed Payments Improvement Community Forum in Chicago on October 3, saying, “We are seeing a growing demand for payments to be as instantaneous as the apps on our smartphones.”
But the Fed payments infrastructure today is based on the old-fashioned “deferred settlements system,” stemming from a paper check framework where millions of daily payments are laboriously settled overnight by one to one comparisons. That system even today still imposes costs and delays harming banks, customers, even business and consumer borrowers.
Even by the 1970s, the sheer volume of checks stemming from that old-fashioned process, and the expensive process of clearing those checks, represented a “time bomb” that demanded attention and technology, in Brainard’s words. The Fed and the private sector working together back then to modernize payments resulted in the ACH system, which still exists today as a modestly updated overnight check clearance system.
Brainard said in Chicago that our payments system today is “again at a crossroads,” with a disconnect between the digital age, and the expectations that creates for speed and accessibility in payments, compared to the still underlying settlement dysfunction of a “deferred payment system.”
She said that the Fed has a responsibility to offer payment systems that serve the public operating in a real-time, 24/7 payments environment.
But the only real solution today would come if the Fed defers to emerging private sector enterprises and individuals that serve the public at large by empowering business and the public to manage their finances with the modern efficiency of a 24/7 payments system environment. A new website now reports daily on the emerging private sector payments system increasingly serving businesses small and large, and their customers. www.pymnts.com
The Fed need not try to create an unnecessary new system competing with the private sector. The Fed already has too much power and enabling them to compete with private sector payment systems is bad for the economy and empowers the Fed still more.
The Fed is already overwhelmed today focusing on the broader need to develop a path out of its decade-long experiment with zero-interest rates, and trillion-dollar quantitative easing, without cratering the long overdue booming economic recovery.
The architect of that recovery, President Trump, is complaining about the Fed’s recent interest rate increases. Trump created the booming recovery with his tax rate cuts, and deregulation, particularly regarding energy, finance, and health care and insurance.
Trump said, “I think the Fed has gone crazy” with those interest rate hikes. The stock market seems to think so as well.
The last thing America needs is more power for the Fed, which has not had a good record throughout the 20th Century, from the Great Depression starting less than 20 years after the Fed was first created in 1913, to the double-digit inflation of the 1970s, to the Great Recession of 2007-09.
Now that a booming recovery has started at long last from that recession, the Fed needs to focus on engineering a soft landing from a decade of zero interest rates, and $4 trillion in quantitative easing. They were lucky those loose monetary policies did not bring back roaring inflation.
Peter Ferrara teaches economics at King’s College and serves as senior policy advisor for the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan and as associate deputy attorney general of the United States under President George H.W. Bush.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.
