Macro Lit Review 4: Highlights from Mid-2023 with George Selgin

Episode Summary

Executive Summary: George Selgin discusses his forthcoming Great Depression recovery book and then critiques the Fed on three fronts: launching FedNow despite an existing private alternative, restricting master accounts for unconventional institutions, and maintaining an inefficient floor system that swells reserves, weakens market discipline, and strains Fed finances. He also argues recent disinflation reflects better nominal spending control and fiscal-monetary interaction, making a soft landing plausible.

Main Topics: FedNow and real-time payments competition (Priority: 5/5): Selgin argues the Fed should not have built a parallel real-time payments network when the private RTP system already existed and was advancing toward ubiquity. He says Fed entry slows network adoption, may create redundant cost, and could encourage subsidy-based competition the Fed can never lose. Master accounts and Fed discretion (Priority: 4/5): The discussion links FedNow to the broader issue of who gets access to Fed master accounts. Selgin endorses Julie Hill’s argument that the Fed uses excessive discretion, especially against unusual banks (cannabis, crypto, specialty banks), which may block payments innovation. The Fed’s floor system and reserve abundance (Priority: 5/5): Selgin welcomes Claudio Borio’s criticism of the post-2008 floor system, arguing it depends on vast excess reserves, damages the overnight interbank market, and makes monetary control, exit, and central-bank finances more problematic than under a scarce-reserves corridor system. Unrealized losses, remittances, and central bank independence (Priority: 4/5): The conversation distinguishes Treasury-security losses from mortgage-backed-security losses. Selgin agrees Treasury losses are partly consolidated-government bookkeeping, but says even those matter because persistent non-remittances can threaten the Fed’s political independence and budgetary autonomy. Inflation, NGDP, and the soft landing debate (Priority: 5/5): Selgin says the right policy metric is nominal GDP growth, not headline or core inflation alone. He argues the recent decline in inflation alongside stable unemployment shows a soft landing is possible and undermines simplistic Phillips-curve thinking. Fiscal policy as an inflation driver (Priority: 4/5): Selgin agrees expansionary fiscal policy materially contributed to inflation, but insists the Fed remains responsible for offsetting it through tighter monetary policy, often by crowding out private borrowing. He views the recent disinflation as evidence the Fed has made progress, though not yet enough.

Key Arguments: FedNow duplicates a private real-time payments system that already covered roughly 90% of bank deposits, so the Fed’s entry likely slows rather than speeds network ubiquity. Because the Fed can subsidize, regulate, and never go out of business, it has an unfair structural advantage over private payment providers and can distort competition. Refusing master accounts to unconventional banks reduces experimentation and may block beneficial payments innovation rather than just risk management. The floor system killed the unsecured interbank market, which historically provided discipline, information, and contagion control among banks. A massive reserve-supply regime requires far more reserves than a scarce-reserve system and makes policy exits harder and more costly. Recent inflation should be interpreted through NGDP growth and aggregate demand, not just CPI or core CPI, because supply shocks can distort inflation readings. The soft landing argument is plausible because disinflation can work through slower wage growth rather than rising unemployment, especially when labor market vacancies are high. Fiscal stimulus clearly added to inflationary pressure, but the Fed is still the institution charged with offsetting it through monetary tightening. Treasury-security losses are partly a wash in consolidated-government terms, but the Fed’s own income and remittance stream still matter for independence and political optics. Mortgage-backed security losses are a genuine economic transfer because household borrowers benefited from lower fixed rates while the Fed/taxpayer absorbed the downside.

Data Points: FedNow launch date: July 20 - The episode was recorded July 19, just before FedNow’s planned launch. FedNow trial participants: 57-odd - Selgin says the Fed had far fewer trial participants than the private RTP system. RTP coverage of bank deposits: about 90% - Selgin says the private RTP network already reaches roughly 90% of bank deposits. Great Depression book chapters: about 30 - Selgin describes his forthcoming manuscript as a long book with around 30 chapters. Book delivery target: September - He hopes to deliver the manuscript to the University of Chicago Press in September. Headline CPI peak: 9% - Beckworth notes headline CPI peaked in June 2022 at 9%. Headline CPI latest reading: 3% - Beckworth says headline CPI fell to 3% in the latest June reading. Core CPI peak: 5.9% - Beckworth cites core CPI peaking last year at 5.9%. Core CPI latest reading: 4.8% - Beckworth notes core CPI fell to 4.8%. Unrealized Fed losses: about $1 trillion - Beckworth summarizes the Fed’s 2022 mark-to-market loss estimate. Treasury-security portion of unrealized losses: about $800 billion - Beckworth says most unrealized losses were on Treasuries. Mortgage-backed security portion of unrealized losses: about $400 billion - Beckworth says the remaining unrealized losses were on MBS holdings.

Pivotal Quotes: "I think the whole thing stunk to high heaven, frankly." — George Selgin: Selgin’s blunt verdict on the Fed’s decision to create FedNow alongside the private RTP network. "If you don't use a muscle, it atrophies." — George Selgin: Quoting Claudio Borio’s point that the abundant-reserves regime has damaged the interbank market and institutional memory. "I think non-linear Phillips curves are the macroeconomic equivalent of... epicycles to the Ptolemaic system of astronomy." — George Selgin: Selgin’s critique of using ever-more-complicated Phillips-curve specifications to explain inflation and unemployment.

Implications: Listeners should expect continued debate over Fed competition with private payment systems, master-account access, and reserve policy. The episode suggests inflation may keep easing without major job losses, but the Fed’s long-run independence and market structure remain at stake.