The 75th anniversary of Bretton Woods … and Atlantic City

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The Bretton Woods conference, which established the International Monetary Fund and the World Bank, was held from July 1-22, 1944 and remains widely known today, 75 years later. Far less known is the smaller conference that immediately preceded it in Atlantic City, New Jersey, from June 15-30, 1944. Only 17 countries attended, as opposed to 44 at Bretton Woods, and the conference was closed to the press, whereas at Bretton Woods dozens of journalists were present. Not much has ever been written about the Atlantic City conference, in contrast to a number of books and hundreds of articles that have examined Bretton Woods and its legacy.

To commemorate the 70th anniversary of Bretton Woods, in 2014 the Center for Financial Stability held a conference in the same location, the Mount Washington Hotel in Bretton Woods, New Hampshire. The conference featured papers that can be found elsewhere on the CFS Web site and the presentation of The Bretton Woods Transcripts, a book of previously unpublished conference material that I edited with Andrew Rosenberg and that the CFS published.

For the 75th anniversary, the CFS later this year will issue a book edited by me and Gabrielle Canning, a young scholar who, conveniently, is my neighbor. The book, Just before Bretton Woods: The Atlantic City Financial Conference, June 1944, collects American and British archival documents that present a detailed picture of what happened at Atlantic City. The Atlantic City conference developed the draft agreements for the IMF and the World Bank from which the Bretton Woods conference proceeded. It is accurate to say that Atlantic City made the World Bank possible. Whereas there was already an internationally agreed statement on the principles to govern the IMF before Atlantic City, no similar statement existed for the World Bank. At Atlantic City, the two leading delegations, from the United States and Britain, found that their ideas about the Bank were close enough to assemble quickly a draft that was also broadly agreeable to the other countries present.

Hanke delivers John Ise Distinguished Lecture w/ Barnett interview…

CFS Special Counselor and Johns Hopkins professor Steve Hanke delivers the John Ise Distinguished Lecture at the University of Kansas – moderated by CFS Director of Advances in Monetary and Financial Measurement and KU Oswald Distinguished Professor of Macroeconomics.

Hanke and Barnett explored monetary systems throughout the world, tariffs and their effects on trade deficits, abolishing time zones and changing the calendar, plus “everything under the sun.”  View video

Facebook CEO Mark Zuckerberg Defends Libra

In testimony before the House Financial Services Committee, Facebook CEO Mark Zuckerberg defended his company’s proposed virtual currency, “Libra.” The Committee also considered several bills related to technology and the financial services industry.

Mr. Zuckerberg emphasized that Facebook would not launch the Libra payment system until it has the support of U.S. regulators. He warned that, while these issues are being “debate[d],” China and other countries are working to launch similar payment systems. He argued that since Libra would be backed by U.S. dollars, it would “extend” U.S. financial leadership. He also addressed several concerns, assuring the legislators that:

– a recent white paper co-authored by Facebook (see previous coverage) was intended to start a dialogue with financial experts and regulators, rather than serve as the “final word”;

– Facebook does not intend to “circumvent” regulators; and

– the intended purpose of Libra is to provide for the transfer of money through an online payment system, not to be a replacement for sovereign currency.

Mr. Zuckerberg also affirmed Facebook’s commitment to preventing discrimination among Facebook’s advertisers. To “combat[]” discrimination, he stated, Facebook has made specific changes to policies in order to prevent discriminatory advertisement targeting. For example, Facebook banned the use of age, gender or zip codes in housing and credit advertisements.

Committee members at the hearing discussed several bills concerning technology and finance related to issues raised by the testimony. These included:

H.R. Draft “Keep Big Tech Out of Finance Act” would prohibit large platform utilities (i.e., Facebook) from (i) being authorized as, or affiliating with, a U.S. financial institution or (ii) operating a digital asset that is intended to be “widely used” as a method for exchange, pursuant to the Federal Reserve.

H.R. Draft “Stablecoins Are Securities Act of 2019” would make clear that a managed stablecoin is subject to the same securities laws’ requirements as other securities that are meant to protect investors, such as disclosure, antifraud and conflicts of interest.

H.R. Draft “Bill to Prohibit the Listing of Certain Securities” would limit issuers of stablecoins access to capital markets prohibiting certain trading on U.S. national securities exchanges.

H.R. Draft “Designing Accounting Safeguards to Help Broaden Oversight and Regulations on Data” would create more “transparency” on how consumer data is collected by requiring commercial data operators to disclose (i) the type of user data collected, (ii) an examination of how valuable the user data is and (iii) third-party contracts involving the collection of the data.

H.R. Draft “Diverse Asset Managers Act” would require SEC registrants to (i) consider at least one “diverse” asset manager when seeking asset management services and (ii) report to the SEC the extent to which diverse asset managers are used.

LOFCHIE COMMENTARY

Facebook’s attempted entry into the digital currency market accelerated the inevitable: Congress and the financial regulators are more closely scrutinizing the entry of technology firms into the financial markets. What was not inevitable was Congressional overreaction. While it now seems universal practice to refer to Libra as a Stablecoin, it is not: it is an asset-backed coin (try “ABCoin”). Because the managers of Libra would have had the ability to shift the assets supporting Libra, Libra is not stable. Because of the management of the underlying assets backing the product, Libra almost certainly would have been a “security,” at least in the absence of an exemption, and therefore, it is not necessary to amend the securities laws to that end.

A true Stablecoin, whether backed by the dollar or another currency (or even a pool of currencies) may be issued as a custodial receipt that is not a security, and need not be regulated as a security. It would thus be a shame if such Stablecoins, which may very well provide an attractive alternative to other payment methods, were made impossible because of an overbroad reaction to Libra.

Mr. Zuckerberg is absolutely correct that the United States benefits if a global stablecoin backed by the dollar were to emerge. Facebook’s principal mistake, which arguably reflects a certain lack of sophisticated understanding of financial regulation, was to go forward with a managed ABCoin, rather than a true Stablecoin.

Penn: Quant Tools and Macro Workshop

The Penn Institute for Economic Research (PIER) will offer a workshop on Quantitative Tools for Macroeconomic Policy Analysis. Francis X. Diebold, Enrique G. Mendoza, and Frank Schorfheide will provide training on essential state-of-the-art methods.

Guest Speakers include:

– Guillermo Calvo
– Narayana Kocherlakota
– Donald Kohn (three-hour mini-workshop on the practice of Macroprudential Policy)

The workshop will be held May 4 to May 8 at the University of Pennsylvania. Details are available at http://economics.sas.upenn.edu/pier/tools-workshop.

Conclusion and Summary: Future of the Global Monetary and Financial System roundtable

The CFS co-organized a “Future of the Global Monetary and Financial System: 75 years after Bretton Woods” roundtable with the Euro 50 Group. The roundtable gathered high-level personalities coming from all over the world.

My final takeaways are:

  • First, the time is right for the Bretton Woods Institutions (BWIs) to exercise greater leadership. The IMF is uniquely situated to help govern effectively and navigate in an increasingly complex and challenging world. But, with greater complexities and areas of engagement comes the risk of mission creep.
  • Second, the international monetary and financial system would benefit from a move with great purpose over time to a more rules-based system.
  • Third, policy actions today would benefit from a system-wide and longer-term perspective.

A roundtable summary and conclusions are available at
www.CenterforFinancialStability.org/bw2019/Final_Remarks_BW_in_DC.pdf

The conference agenda and bios are available at
www.CenterforFinancialStability.org/bw2019.php

Aliber’s “Reflections on Bretton Woods”

Robert Z. Aliber offers his “Reflections on Bretton Woods.” Bob is professor emeritus of International Economics and Finance at the University of Chicago, co-author of Manias, Panics, and Crashes: A History of Financial Crises, and a good friend of CFS.

Bob covers much ground. Topics include:

  • The White Mountains, Cog Railroad, and Mount Washington Hotel.
  • Bretton Woods Conferences.
  • How the Founders of Bretton Woods might view the last 75 years.
  • Trade and Tariffs.
  • The IMF.

The full report is available at http://www.CenterforFinancialStability.org/research/Reflections_on_Bretton_Woods_101719.pdf.

IRS to Ask Taxpayers about Virtual Currency Transactions

The IRS proposed an amended draft of the 2019 Form 1040 that includes a question about taxpayer virtual currency transactions.

As previously covered, the IRS provided updated guidance in the form of a revenue ruling and an FAQ on the tax treatment of virtual currency transactions. The FAQ addressed (i) when a cryptocurrency on a distributed ledger undergoes a protocol change that permanently divides the legacy from the existing distributed ledger (i.e., a “hard fork”) and (ii) when units of a cryptocurrency are delivered to the distributed ledger addresses of multiple taxpayers (i.e., an “airdrop”), typically following a hard fork.

The IRS proposed adding the following question to the 2019 Form 1040: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

Comments on the revised draft must be submitted to the IRS within 30 days after October 11, 2019.

CFS Monetary Measures for September 2019

Today we release CFS monetary and financial measures for September 2019. CFS Divisia M4, which is the broadest and most important measure of money, grew by 5.9% in September 2019 on a year-over-year basis versus 5.4% in August.

For Monetary and Financial Data Release Report:
http://www.centerforfinancialstability.org/amfm/Divisia_Sep19.pdf

For more information about the CFS Divisia indices and the data in Excel:
http://www.centerforfinancialstability.org/amfm_data.php

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

1) {ALLX DIVM }
2) {ECST T DIVMM4IY}
3) {ECST} –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) {ECST S US MONEY SUPPLY} –> From source list on left, select ‘Center for Financial Stability’

FRB Vice Chair Randal Quarles Reviews FSB Activity

Federal Reserve Board Vice Chair Randal K. Quarles reviewed Financial Stability Board (“FSB”) activity and raised issues that continue to affect the global financial system. In a speech at the European Banking Federation’s European Banking Summit, Mr. Quarles highlighted the following:

OTC Derivatives. The FSB focused on the following issues as to OTC derivatives: (i) central clearing of standardized OTC derivatives, (ii) trading standardized OTC derivatives on an exchange or through an electronic trading platform, (iii) “reporting to trade repositories” and (iv) capital and margin requirements.

Prudential Bank Standards. Mr. Quarles addressed the work done by the Basel Committee to improve prudential standards for internationally active banking organizations (a/k/a “Basel III”). Mr. Quarles said that each of the 24 FSB jurisdictions have implemented the fundamentals of Basel III to incorporate risk-based capital and liquidity measures.

Key Attributes for Effective Resolution. As a solution to the “too-big-to-fail” dilemma, the FSB published “Key Attributes for Effective Resolution.” Mr. Quarles explained that the guidance offered procedures for national resolution regimes to follow if an important financial institution is failing.

Nonbank Financial Intermediation (“NBFI”). To better understand NBFI, the FSB conducted a “global monitoring exercise” and concluded that the overall size of NBFI to the global economy was $184 trillion. The FSB report also contained categories of NBFI activity and identified potential vulnerabilities.

Mr. Quarles also emphasized two issues the FSB is monitoring concerning the future of the global financial system.

– Financial Innovation. Mr. Quarles said that in response to an “explosion of financial innovation” in recent years, the FSB published a report on the potential implications and benefits of FinTech for the global financial system. Mr. Quarles highlighted multiple regulatory issues, such as (i) operational risks from third-party service providers, (ii) cyber risks and (iii) macrofinancial risks that may arise from FinTech activity.

– Market Fragmentation. While noting that market fragmentation will never “disappear,” Mr. Quarles explained that since the financial crisis, there have been growing concerns that globalization in the markets is slowing down. Mr. Quarles said that the FSB is working to assess the possible implications of market fragmentation, such as (i) the potential for regulatory “arbitrage” and (ii) an increased regulatory burden on firms.

CFS Monetary Measures for August 2019

Today we release CFS monetary and financial measures for August 2019. CFS Divisia M4, which is the broadest and most important measure of money, grew by 5.4% in August 2019 on a year-over-year basis versus 5.0% in July.

For Monetary and Financial Data Release Report:
http://www.centerforfinancialstability.org/amfm/Divisia_Aug19.pdf

For more information about the CFS Divisia indices and the data in Excel:
http://www.centerforfinancialstability.org/amfm_data.php

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

1) {ALLX DIVM }
2) {ECST T DIVMM4IY}
3) {ECST} –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) {ECST S US MONEY SUPPLY} –> From source list on left, select ‘Center for Financial Stability’

FCM Settles CFTC Charges Resulting from Cybersecurity Failure

A futures commission merchant (“FCM”) settled CFTC charges for failing to enact sufficient cybersecurity measures and to notify customers of a $1 million cyber breach.

According to the Order, the FCM, Phillip Capital Inc. (“PCI”) failed to implement sufficient cybersecurity and customer disbursement policies and procedures that ultimately allowed hackers to access their email systems and withdraw customer funds. After discovering $1 million in customer funds had been withdrawn, PCI (i) approved reimbursement of the mistakenly wired customer funds, (ii) notified the CFTC Division of Swap Dealer and Intermediary Oversight the day of the fraudulent wire and (iii) implemented measures to prevent further fraudulent transfers. The CFTC found that PCI failed to disclose in a timely manner the material facts of the cyber breach and fraudulent wire to current and prospective customers.

The CFTC credited PCI the $1 million restitution as a result of its prompt reimbursement of the customer funds upon discovery of the fraud. PCI also agreed to (i) cease and desist from further violating CFTC Rules, (ii) report remedial efforts to the CFTC and (iii) pay a civil monetary penalty of $500,000.

LOFCHIE COMMENTARY

This enforcement action is an illustration of both (i) what can go wrong in connection with a cybersecurity failure and (ii) how much the task of compliance has changed as a result of the need to deal with cybersecurity, as well as other technology, issues.

The firm’s initial problems resulted from the fact that its employees were deemed not be up to their cybersecurity tasks. Allegedly, the firm’s IT Manager “had limited training in cybersecurity, and cybersecurity was not broadly within the IT Engineer’s sphere of responsibility.” Apparently, neither the firm’s CCO, who was responsible for maintaining the firm’s Information Systems Security Program (“ISSP”), nor the CCO’s staff was qualified to manage cybersecurity defenses or problems. Even when firm employees discovered the breach, they failed to respond adequately and the hacker immediately rebreached the system. (The firm was arguably lucky that the hacker was so impatient. Had the hacker bided his time following the firm’s initial discovery, it is certainly possible that a second breach might have gone undiscovered for a longer period.)

The firm’s cybersecurity weakness was exacerbated by the fact that it had very weak “change of address” and disbursement policy controls. That was not of itself a cyber failure, but had those policies been up to speed, it is very likely that the major damage from the cyber failure itself could have been averted.

Finally, the firm failed to provide timely notice as to the breach. These days, firms must anticipate the possibility of a breach. While it seems unattractive to go public with information as to the breach, it is also risky not to do so.