“Libra must be stopped”

There is an op-ed in the Weekend AFR by Katharina Pistor arguing against Facebook’s Libra project.

Silence in response to Facebook’s announcement this week is tantamount to endorsing its dangerous new venture. Governments must not allow private, profit-seeking parties to put the entire global financial system at risk. If banks are “too big to fail,” then states definitely are. If governments fail to protect us from Facebook’s latest act of hubris, we will all pay the price for it.

Okay.

The problem is that she makes (at least) one major factual and one major conceptual error that completely undermines her whole argument.

The factual error:

Libra, we are told, will be pegged to a basket of currencies (fiat money issued by governments), and convertible on demand and at any cost.

Told by whom?

Pistor has not even read the white paper of the product she is denouncing.

According to the white paper:

A basket of bank deposits and short-term government securities will be held in the Libra Reserve for every Libra that is created, building trust in its intrinsic value. 

Further we are told:

The actual assets will be a collection of low-volatility assets, including bank deposits and government securities in currencies from stable and reputable central banks.

So the peg is to a basket of financial assets – denominated in fiat currency and priced in fiat currency – but it is not “a basket of currencies”.

Then there is the conceptual error:

Should Libra ever face a run, central banks would be obliged to provide liquidity.

No. Libra is not a fractional reserve currency.

 By fully backing each coin with a set of stable and liquid assets (described later) and by working with a competitive group of exchanges and other liquidity providers, users can have confidence that they will be able to sell any Libra coin at or close to the value of the reserve at any time. 

If there were a run on Libra – users would simply redeem their Libras (Zucs or Zucbucks) for fiat.

So Pistor is worried about a non-problem. Facebook is not proposing to create a bank – that could experience a run. That might need to be bailed out. That could face moral hazard due to implicit guarantees. Etc. Etc. Etc.   They are proposing a payment system with a 100% backed currency.

So what are the potential problems?

(1) Facebook proposes to create a minimum-variance portfolio to provide the intrinsic value. A large systemic shock to the global financial system could severely reduce the value of that portfolio. Okay – that could happen. People might lose money under that scenario. But … under that scenario everybody is losing money.

(2) Facebook might cheat. They might not maintain 100% backing. Libra might become a fractional currency. That is a potential problem. This is where the institutional arrangements surrounding Libra become important.

(3) The peg might be unstable. This is effectively a fixed exchange rate system. Fixed fiat exchange rates always get attacked.  The story goes something along these lines – speculators start shorting the currency driving up short-term interest rates in the economy. After some to-ing and fro-ing the government can no longer bear the economic pain of high short-term interest rates and abandons the peg.  It isn’t clear to me where the equivalent short-term interest rate is that imposes high economic costs on the system. (If you know – email me there is heaps of money to be made).

On these points see the Q&A between Tyler Cowen and Christian Catalini – especially Q4b and Q7.

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7 Responses to “Libra must be stopped”

  1. Penguinite

    Libra? Surely that’s a female sanitary application.

  2. Before asking the question “What could go wrong”? shouldn’t we be asking the question “What’s the point”?
    What benefits do we get that we don’t get now?

    This Libra proposal is (AFAIK) for a large corp like Facebook to gather more data (for sale at a price) and to take a slice of the payment system profits being made by current players.

  3. Squirrel

    “Governments must not allow private, profit-seeking parties to put the entire global financial system at risk.”

    Because that’s the job of the banks.

    Look how close they came in 2007, and look at the current desperate efforts of the RBA to find every excuse (including pursuing an out of date inflation target and suddenly deciding on a lower unemployment target) it can to move towards a 0% cash rate in order to protect a banking system which has extended far too much credit to far too many people.

  4. Don

    https://lovelibra.com/au/
    Probably one company will do well from this.

  5. Buccaneer

    Quite happy to let Facebook rort the little personal data I leave on there, no chance I’m going to touch a Zuckerback.. don’t trust em

  6. None

    I’m starting to think that Sinclair really does believe in a one world government in a borderless, moneyless world. The majority of the world is not on Facebook. A great slab of the world doesn’t even had electricity. Hubris doesn’t even begin to describe Zuckerberg.

  7. Post Alley Crackpot

    What bothers me about Libra isn’t so much the Facebook association, although that’s vile in itself …

    It’s the fact that a “new crypto-currency” has been engineered out of something that smells a lot like a private market attempt to implement Special Drawing Rights outside of governments themselves.

    The most notable SDR is the one that the Eurozone implemented for all of the currencies that converted into it, of course.

    Adding some “government-backed securities” to the flavour packet doesn’t change that Libra proposes to be a central bank-backed SDR by way of the markets rather than through direct government intervention.

    And so if I’m going to be exposed to such things as “government initiatives” and QE 2+1 and so on, why shouldn’t I prefer to continue to trade on the forex markets directly instead of buying into this odd SDR-like thing that also seems to want to try to behave like an ETF as well?

    Does Emm Zed want Fascistbook to become a central banker but nobody really trusts any of the management to act in the interests of any particular government?

    Perhaps Emm Zed could gain Swiss citizenship and go work for the BIS …

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