Over the past few months, President Donald Trump has had some choice words when it comes to the Federal Reserve.
Most recently, on Sept. 11, he decried the Fed as “bonehead” bureaucrats missing a “once-in-a-lifetime opportunity” to benefit the American economy. And the president hasn’t stopped there. A month prior, Trump excoriated Fed Chairman Jerome Powell for his “horrendous lack of vision,” and criticized the central bank for its exceptionally poorly-timed decision-making.
Needless to say, our commander in chief has a rather low opinion of the organization responsible for America’s monetary policy. But in this case, Trump’s assessment is dead on.
The Fed is an unmitigated disaster, and it must be put in check.
The Fed has consistently underperformed the private sector over the years in its ability to forecast economic conditions. For most level-headed Americans, this revelation shouldn’t come as too much of a surprise. The Federal Reserve is, after all, an enormous government bureaucracy. And like all other bureaucracies, the Fed is a hulking behemoth of waste, misappropriation, and inefficiency. The only difference is that the Federal Reserve acts alone, independent from the interests of Americans and removed from the consequences of its own actions.
Unsurprisingly, the results have been devastating.
America’s central bank is responsible for the economic travesties of the Great Depression and the Great Recession of 2008. Its myriad miscalculations are in large part the cause of our present-day stock market instability. Given that the Federal Reserve is principally responsible for ensuring the optimal performance from the American economy, this is a serious problem.
Despite the Fed’s blatant failures, it remains largely unchecked. It eagerly dives headlong into the next economic “problem” that needs to be solved, irrespective of the potential harm its “solutions” would cause. All too often, the Fed’s intervention can best be described as “too little, too late.” And that’s especially the case concerning their latest approach toward the market for real-time payments (RTP).
In August, the Federal Reserve announced its plan to develop its own real-time payments system. In doing so, the Fed intends to establish a financial infrastructure that would ensure instantaneous bank-to-bank transfers for accounts within the United States.
Under the current system, payments can take upwards of an entire business day to clear. That is, of course, not to mention the fact that one “business day” doesn’t include the weekends. As a consequence of this painfully slow payment system, everyday Americans suffer. These delays can devastate families living paycheck to paycheck, as the lethargic payment processing can lead to massive overdraft fees or late fees. Ultimately, this system results in even greater levels of credit card debt, and a substantially lower credit score for those that need it most. This is the problem that a real-time payment system looks to solve.
The Fed creating a real-time payment system would have been a better idea if it had acted on it five years ago. But as so often happens, our central bank’s reaction time was delayed, and it failed to get the jump on RTP. Now, without the right protections in place, the Fed’s proposed system of real-time payments could jeopardize consumers’ connectivity, America’s economic efficiency, and innovation en masse.
In the central bank’s stead, the private sector stepped up and is now thriving in the RTP industry. They started creating their own real-time payments systems several years ago, with one already serving about half of all U.S. checking accounts. The private RTP marketplace is growing and flourishing within the United States, but the Fed’s intervention could change that by potentially harming the private sector while destroying competition and innovation alike.
We must prevent the Fed’s intervention from repeated the same harmful results of the past. Since the Fed is the regulator of the marketplace, FedNow could effectively become a government-run monopoly, creating additional bureaucratic hurdles in the process. And given the central bank’s history of inefficiency, there are concerns that its monopolization would weaken the currently strong RTP marketplace. Instead of the free market working for the American people, FedNow could supplant private innovation with higher costs and lower quality of service. As a result, Americans will suffer.
It’s the job of Congress to ensure that a system of checks and balances are in place to prevent adverse outcomes. Luckily, Rep. Ted Budd, R-NC, a member of the House Financial Services Committee, recognizes this reality and is pushing to take a closer look into the Fed’s proposal. He sponsored legislation that would force the Fed to carry out a study of the potential impact of their RTP system. And now, Sen. Mike Crapo, R-Idaho, Senate Banking Committee is also getting involved, holding a hearing on the matter on September 25. This will provide Congress the opportunity to ask the central bank whether it will ensure its system is compatible with those of the private sector, ensuring that its existence doesn’t negatively affect millions of consumers who are already connected in real-time.
The Representatives’ actions are certainly the right move for their constituents and the American economy. For far too long, the Federal Reserve has operated as an unaccountable, economy-influencing government bureaucracy, and Trump was absolutely right to level it with criticism.
Given the obvious private sector consequences, the Fed’s entrance into the real-time payment system must be thoroughly examined. Our central bank has an unfortunate history of costly mistakes — mistakes we can’t afford to repeat here. We must ensure that the Fed works with the private sector without destroying it and de facto regulating them out of existence.
Only then could a federal RTP system properly function.
Michael Busler, Ph.D., is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years. @mbusler www.facebook.com/fundingdemocracy