We’ll Never Think About the Financial System the Same Way Again
(Source: coindesk.com)

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(Original link: coindesk.com)

Please consider using a different web browser for better experience. Please enable JavaScript in your browser for a better site experience. We Won’t Ever Think About the Financial System the Same Way Mar 26, 2020 at 12:20 UTC Updated Mar 26, 2020 at 12:37 UTC opinion Lex Sokolin We Won’t Ever Think About the Financial System the Same Way Lex Sokolin, a CoinDesk columnist, is Global Fintech co-head at ConsenSys, a Brooklyn, N.Y.-based blockchain software company. The following is adapted from his Future of Finance newsletter. For the first time in a long while, I find myself speechless. This writing was always about the creativity of entrepreneurs in the face of a monolith. That monolith was the financial incumbents. That innovation was human ingenuity across AI, blockchain, and digital experiences, working on beautiful progress in the face of rational skepticism. Today, we just need the monolith to stand. And we need the entrepreneurs to endure to come back another day. See also: Why the US’ $2 Trillion Stimulus, Unlimited QE Will Expose the Monetary System’s Flaws Right now, nobody is thinking clearly. There may be plans, and math, and bailouts. We have made a global choice – save lives, burn the bridges. Like the Russians retreating into the frozen country from Napoleon, destroying stocks and supplies along their way to starve the French, we are hunkering down in isolation to starve the coronovirus. As if a virus cares for this logic. To save our lives, we have had to sacrifice our economic heart – the one that brings food, community, employment, and other sustenance to billions. There was no choice. It is worth pausing on the strata of this impact. First, we have the individual. Individuals produce and consume. Most produce, that is, add to GDP, as employees of companies. They consume largely based on income and wealth levels. Let's do a quick back-of-the-envelope. Of the 330 million people in the US, 160 million people are in the labor force. There are 8 million households with children under the age of 3, another 10 million households with children under the age of 5, 15 million under the age of 11, and another 15 under the age of 17 (source). So that's about 45 million households who are now at home with kids, and I'll just assume that 1 parent in the household is no longer able to work.
To save our lives, we have had to sacrifice our economic heart. Let's simplify and say 40 million people out of 160 million people will exit the labor force for the time of contagion. In the case of a three month quarantine, we have just created 25 percent unemployment for 25 percent of the year, ignoring all the associated friction costs. Unemployment claims per week are already higher than in 2008. US GDP is about $20 trillion per year. Cut that by 25 percent, and you get $4 trillion. This is why the Congressional rescue package is in the $2 trillion range, and not the smaller billion-sized actions that were previously considered. Even if you redirect $2 trillion into supporting consumer spending and making sure people have some type of safety net, there are existential complications. See also: Lex Solkolin - Libra Wanted a Currency, All We Need Are DeFi’s Open Payment Rails For example, where would those $2 trillion have gone instead? Likely lower priority projects, like building the best ICBM, but jobs are on the line no matter what. If you just print the money, you devalue the purchasing power of existing money, and just re-distribute the losses politically. That may still be our best answer. The fiscal stimulus is not the only thing we need, and the follow-on effects on the markets can again create systemic peril. To that end, we should pay close attention to the actions of the Fed. As of Monday, it planned to create a repurchase program for $500 billion of Treasuries and $200 billion of mortgage backed securities. This already happened in 2008 as a backstop to souring financial instruments. More notable is the Primary Market Corporate Credit Facility and the Secondary Market Corporate Credit Facility to support the bond markets. This program could allow the Fed to be a direct underwriter in primary issuance, as well as a liquidity provider in a secondary market. Put simply – if you are Walmart, you can borrow from the Fed. Or if your Walmart $100 million bond comes due, you can refinance it. The key is that instead of enabling banks to do this activity, the Fed is taking on the account.
The Fed is lending to industry, side stepping banking infrastructure to make a faster, direct impact. This opens up an uncharted path for CBDCs. One argument against Central Bank Digital Currencies that we often hear is that governments do not want to be the entity providing financial accounts to businesses and consumers. This would wipe out parts of the banking industry. It would also turn finance into a version of the Post Office. Such logic implies instead that banks should sponsor accounts, and governments should back the ba...