On July 23, Sens. Elizabeth Warren (D-Mass.) and Chris Van Hollen (D-Md.), along with Reps. Ayanna Pressley (D-Mass.) and Jesús García (D-Ill.), introduced “The Payments Modernization Act.” The bill would solidify the Federal Reserve’s authority to create a real-time payments system. In plain English, that means the Fed will facilitate immediate bank to bank, peer to peer, and consumer to business money transfers in the United States.
The reason for the senators’ introduction of the legislation seems innocent enough. According to Warren, “Our bill would create a national, real-time payments system so that families have faster access to the money they earned and don’t have to pay overdraft fees or rely on a shady payday lender to make ends meet.” While the legislators’ motives are just, their bill will end up hurting the very people it is intended to help.
The United States’ banking system is certainly in need of speedier transfers. In many respects, U.S. transfer times are far behind the rest of the developed world. However, the Fed exists for two reasons and two reasons only: to promote maximum employment and stable prices. Involving itself in real-time payments will only weaken the Fed’s ability to achieve these two noble goals that Congress set for it. That would mean fewer chances at economic opportunity and mobility for the most vulnerable members of society. (KOLB: The Federal Reserve Supplies The Obama-Trump Cocaine Economy)
At the same time, central banks around the world are debating whether to change their target strategies. Most economists, even those being considered for Fed board seats, recognize that narrowing the focus of its dual mandate should be at the top of this list. That is because, to the detriment of the working class, the United States’ central bank has so far failed on both fronts.
Because of the Fed’s struggle at driving job growth, total U.S. employment did not reach its pre-2008 recession levels until 2014. According to the Census Bureau’s annual report on poverty and income, the middle-class only started to gain the income it lost after the recession last year – 10 years after it began. This data is nothing to cheer about and improving it must be a top priority.
The Fed has an even worse track record of achieving price stability. The central bank’s inflationary monetary policy of the past has caused countless downturns, not to mention income inequality and loss of purchasing power. Today, however, it faces the opposite dilemma, demonstrating an inability to hit the 2 percent inflation target it set for itself in 2012.
Which raises the question: how can policymakers expect the Fed to handle the long, arduous process of creating a real-time payments system when it still is working on achieving the two important goals Congress set for it 42 years ago?
The private sector is more than capable of providing the American people with faster bank transfers; in fact, it has already begun the process. The Clearing House has created a real-time payments network that already reaches 50-percent of the United States’ deposit base. Other companies, like Mastercard, have launched or are getting ready to release similar initiatives that will provide further help in satisfying consumers’ needs.
The Payments Modernization Act is well-intentioned, but it will stretch the Fed’s already expansive focus even further. History indicates that the central bank involving itself in real-time payments will create more adverse, unintended outcomes for the people that need its help the most.
Given the severity of the implications, no wonder some have questioned whether the Fed has the authority to create such a system. If the Fed had this authority without an absolute doubt, the bill would not be needed.
Congress should put its trust in the private sector instead of extending the central bank’s wings.
Dr. Michael Busler is a professor of finance at Stockton University, where he teaches undergraduate and graduate courses in finance and economics. He obtained his doctoral degree from Drexel University.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.
