Separate House and Senate Bills provide for Federal Reserve digital dollars as part of a broader effort to reduce the shock of the economic shutdown related to the coronavirus https://t.co/vEkRV54TpR
— wsj (@WSJ) March 25, 2020
Forget Checks, How About Giving Everyone A Federal Reserve Account?
by Andrew Cockburn / March 21, 2020
“Amid the catastrophe of the Coronavirus crisis, the Trump Administration is moving toward the previously unthinkable resort of sending money directly to the people, reportedly mulling (clearly inadequate) payments of [$1000-$1500] per adult. The problem now arises: how to deliver the cash?
Under current plans, it will certainly take a while. The Treasury plans to stagger the payments, with the first tranche going out on April 6, and the second on May 18, small solace to millions out of work or shuttered businesses. Even then, the problems multiply, since the job of distributing the money has been assigned to the IRS.
Remember when @SpeakerPelosi teamed up with George Bush to stimulate the economy in 2008 with $600 per adult + $300 per kid? For those who don't remember, the stimulus checks were labeled as a tax rebate, and they worked. They also had bipartisan support.https://t.co/oU37KiroLZ
— Scott Santens🧢 (@scottsantens) March 15, 2020
Past experience is not encouraging: George W. Bush signed a law authorizing a similar cash distribution in February, 2008, but no one got any money ($600 per adult on a means-tested basis) until April. Under sustained attack from Republican lawmakers, the IRS has shrunk by 23 percent in the intervening years. Nor can the IRS simply mail checks to each and every citizen, because the government can no longer print checks on a mass basis.
If you don't already have direct-deposit information on file with the IRS from previous tax returns, you won't get the emergency funds for up to 4 months, Democratic aides said.
— Hamza Shaban (@hshaban) March 25, 2020
True, the Social Security Administration routinely already sends out millions of dollars to those eligible, directly depositing the money in their bank accounts, but what about people (surely those most in need during the crisis) who don’t have bank accounts? Furthermore, this will amount to yet another subsidy to the banks, already, as we shall see, deep in another crisis of their own making.
Pelosi's Deputy Chief of Staff is saying that a proposal for giving American's direct financial relief was shot down because it would be universal and not means tested pic.twitter.com/gSnRCgm75o
— jordan (@JordanUhl) March 18, 2020
Fortunately, there is a solution ready to hand, a fundamental and long overdue reform: give everyone an account with the Federal Reserve. Once implemented, the money could be available to account-holders with the click of a computer mouse. Unlike with banks, our money would be safe, because the Fed itself creates money with another click on a computer keyboard and can always make more of it when needed.
Most importantly, this could all be done instantly, rather than the weeks and months required under current plans. Lest all this sound alarmingly novel, even revolutionary, bear in mind that the Fed has plenty of experience in handing out money to account-holders, specifically banks. In fact, before the virus crisis buried all other news, just such a distribution had been under way for months as Wall Street careened toward a cliff-edge, again. Since the middle of September, the Federal Reserve had quietly pumped at least $5 trillion into Wall Street banks and other financial institutions.
Means testing the apocalypse is pretty much the most Democratic Party move in the book. pic.twitter.com/vRD7gzOPk1
— Nima Shirazi (@WideAsleepNima) March 17, 2020
We were not allowed to know which trading houses required this gigantic infusion, or why, presumably on grounds that the public might begin to worry about the stability of the financial behemoths that dominate the economy. A decade ago, as the global financial system tottered on the brink of disintegration, the Fed operated a similar money-spigot to Wall Street that ultimately disgorged a staggering $29 trillion to the lucky recipients, a secret bailout that was assiduously concealed from the rest of us.
COVID-19 teaches us why Medicare for All should be the floor of our demands, not the ceiling https://t.co/XBbEPHrVML
— jordan (@JordanUhl) March 22, 2020
Only thanks to the dogged persistence of the late, great, Bloomberg News reporter Mark Pittman and his colleagues, who sued for details under FOIA, did we belatedly learn who got the money, and how much. (Bloomberg, apparently embarrassed at having exposed the trillion-dollar panhandlers, has recently purged the story of Pittman’s coup from its website.) Such shenanigans should evoke concern as well as disgust among the citizenry given that these people hold our money in the form of deposits in our accounts.
If people could open accounts at the Fed, economic stimulus could be a lot more powerful https://t.co/APfrckEyqK
— Bloomberg Opinion (@bopinion) March 25, 2020
Now more than ever, therefore, we need an alternative to entrusting our security to institutions so prone to disaster, which is why Fed accounts for all is a proposal that is not only attractive and practical, but also urgent. Bankers can tell you that the Fed is an enviably indulgent loan-officer, charging minimal interest rates – currently 2.5 percent—on loans which, when passed on to customers in the form of credit card debt, carry hefty (17 percent!) profitable interest rates. So why shouldn’t the rest of us get in on the act?
Yes: give everyone the option to have a bank account at the Fed! This will make the stimulus work better. Crucial for our large unbanked population. Do it on a pass-through basis first (with member banks doing account set-up and customer service). It's in the Democrats' bill: pic.twitter.com/p5XTQsfQs4
— Morgan Ricks (@MorganRicks1) March 23, 2020
This is no fringe proposal, having been advanced by a number of responsible authorities and even in a paper published last year by the eminently orthodox Federal Reserve Bank of St. Louis. The authors, two Swiss economists, proposed “central bank electronic money for all” allowing “all households and firms to open accounts at central banks, which then would allow them to make electronic payments with central bank money instead of commercial bank deposits.”
This was basically Heinlein's dream Fiorello LaGuardia in For Us The Living's solution. All Americans get accounts at the Bank of the United States, a nationalized Fed, with commercial banks forced to do 100% reserves. https://t.co/5qqOqouQeH
— Kallistos (@Kallistos) March 21, 2020
Our modern banking system, after all, is descended from the days when money existed only in the form of actual cash (gold and silver) held in a securely protected space for security. The bulk of today’s money exists only in electronic form, data in banks’ computers, so we the account holders depend on them to make sure it doesn’t disappear. Banks in turn rely on the Fed to come up with the necessary funds if their own improvidence, such as led to disaster in 2008, puts these deposits at risk.
— Morgan Ricks (@MorganRicks1) March 25, 2020
But money in a FedAccount would be absolutely secure, as good as gold in fact. Meanwhile, banks themselves would still offer deposit accounts, but to attract business they would need to offer better interest rates than the Fed to offset the additional risk. Furthermore, if they put customers’ money at risk through irresponsible behavior, our deposits could be instantly transferred to the safety of a Fed account.
Another exponent of Fed accounts for all, Vanderbilt Law Professor and former Treasury advisor Morgan Ricks, has outlined further benefits, including no fees or minimum balances, the same interest rates that banks get, instant check clearance (as opposed to the two or more days that banks like to take.)
BRACE YOURSELF. I have been a labor economist for a very long time and have never seen anything like this. Here are last week’s initial unemployment insurance (UI) claims. (1/n) pic.twitter.com/fWhljQF9ww
— Heidi Shierholz (@hshierholz) March 26, 2020
Millions of people who are presently excluded from the banking system thanks to minimum balances and fees would have access and could thus avoid costly burdens such as check cashing and money transfer businesses. “The Fed has maintained bank accounts for banks and other financial institutions for a long time,” Ricks pointed out to me. “They love them. These accounts work great, offer high interest, real time payments, and no possibility of default. So they’re very attractive.”
The bill under discussion would send up to $1,200 in "recovery rebates" to those who qualify. But there are plenty of wrinkles to iron out.https://t.co/UFPAvGbgy4
— POLITICO (@politico) March 22, 2020
Currently, federally chartered banks are blessed with a guarantee from the Fed—recall those bailouts—justified by the need to protect customers’ deposits. In addition to the explicit government guarantee of deposit insurance, there is an even more valuable implicit guarantee.This amounts to a subsidy, allowing them to take greater risks, hold fewer capital reserves and, thanks to their privileged status, act as a cartel. Regulated by the perennially bank-friendly Office of Control of the Currency, they are allowed to claim federal pre-emption of state usury laws limiting interest rates and instead apply the local rate of the headquarters location of their State of incorporation on loans anywhere in the country.
There is actually a coalition to put together a real #coronavirus package if the conservatives and left populists can work together. Tom Cotton, Marco Rubio, Mitt Romney, Josh Hawley are pushing some good policies against Mitch McConnell. https://t.co/0QvU2JaQZB
— Matt Stoller (@matthewstoller) March 22, 2020
Delaware and South Dakota place no limits on interest rates, thus rendering them the favored choice of official domicile for banks even while gouging customers from Maine to Hawaii. But if customers were given the opportunity to hold deposits directly in Fed accounts, the need for that guarantee would disappear. After all, allowing consumers the risk-free alternative of holding their money in the Fed makes it difficult to justify printing trillions of dollars just to bailout the lifestyle of Wall Street executives on the grounds that consumers would suffer without such charity. In which case, the business of lending would be done on a truly competitive basis- anyone interested in the ancient enterprise of loaning capital for interest would be able to compete on an equal footing with banks, thus inspiring competition and lower rates.
The ongoing campaign by the finance industry to induce us to phase out cash for any and all transactions provides yet another powerful argument for Fed accounts for all. A “cashless society”, as author Brent Scott has nicely observed, “is a euphemism for an ‘ask-your-banks-for-permission-to-pay society,’” thanks to the enforced requirement to use a credit card or an iPhone app anytime someone wants to buy a cup of coffee, thereby paying a fee to a bank for the privilege of using one’s own money. Fed accounts would at least eliminate the profit-seeking incentive pushing the trend. (With Fed accounts for all ATMs, we might also be freed of the extortionate charges levied by banks for the privilege of accessing our own cash.)
— Joel D. Anderson (@byjoelanderson) March 14, 2017
It can of course be argued that Fed accounts for all would serve as an unwelcome extension of government surveillance, with any and all financial activity immediately visible to government scrutiny. But as anyone who has read the Patriot Act could tell you, the authorities can already help themselves to our financial records pretty much anytime they want. Similarly, the Fed already sets interest rates to manage the economy, via the rate it charges banks, but the ability to set the interest paid on individual accounts would obviously be a more effective means of achieving the same end.
— Longreads (@Longreads) February 26, 2017
A further objection to Fed accounts for all was pithily expressed to me by Pam Martens, co-editor of the indispensable newsletter Wall Street on Parade: “Pretty much nobody in America trusts the Fed,” she responded when I queried her on the idea, “so good luck with people wanting to place their savings with them in a bank account.” It is true that people don’t trust the Fed (though they do use Federal Reserve notes, AKA dollar bills.) On the other hand, people don’t trust banks either. In fact, the most commonly cited reason for not having a bank account, according to an FDIC survey, is “dislike or distrust of banks.”
How much should the federal government give in direct aid to Americans during the coronavirus crisis?
$2,500 a month.
— Lois Beckett (@loisbeckett) March 23, 2020
It is worth bearing in mind that under the current system the Fed exists to serve the banks. This is unsurprising, given that the regional branches, most importantly the New York Fed, are controlled by the banks. But the various subsidies and privileges enjoyed by the banks on the justification that they ultimately protect our deposits could be discarded once customers were offered the security of a Fed account. “There should be little reason for the federal government to subsidize these institutions, as there would be a government option that is inherently insured they could choose instead,” a former Treasury official commented to me. “So presumably JP Morgan et al would be able to devote themselves to gambling full-time.”
It's easy to get down during hard times, but we must look to the future for hope. If you need a dose of hope this Monday morning, read this @nytimes opinion piece by @SlaughterAM, which gives a UBI shoutout about half-way down. Great way to start the week https://t.co/ycz6y4aPwC
— Income Movement (@income_movement) March 23, 2020
Finally, this necessary reform would pave the way for an equally useful innovation: universal basic income. The notion of assuring everyone of a guaranteed income with no strings attached has been gaining increasing attention and support around the world in recent years, and in the presidential campaign of Andrew Yang. It has indeed been implemented in a number of locales with striking success. One notable example, the Alaska Permanent Fund, distributes up to $2,000 to every Alaskan citizen every year. When the fund was inaugurated (by a Republican governor) in 1976 the state ranked highest in poverty rates in the country. Twenty years later, Alaska had the lowest.
‘Iain Duncan Smith says universal basic income during coronavirus pandemic would be 'disincentive to work'
For most jobs that’s what we want. These people are fanatics and are going to kill people. https://t.co/QqrlKfyxWq
— Aaron Bastani (@AaronBastani) March 19, 2020
When the British Labour Party proposed a move toward UBI in its election manifesto prior to last year’s election, the proposal elicited a predictably choleric response from some, with the Financial Times sputtering that “rewarding people for staying at home, is what lies behind social decay”. Given that we are all now encouraged or forced to stay at home, the complaint seems ironic in the extreme.”
UBI is an affordable and feasible response https://t.co/6udGr7h0Ri
— FT UK Politics (@ftukpolitics) March 18, 2020
CENTRAL BANK DIGITAL CURRENCIES (CBDC)
Trillion-Dollar Stimulus Jumpstarts Central Bank Currency on Ethereum
by Michael del Castillo / Mar 25, 2020
“Digital dollars exploded into mainstream headlines earlier this week. As the U.S. House of Representatives scrambled to craft a draft bill that would authorize trillions of dollars in payments to “consumers, states, businesses, and vulnerable populations during the COVID-19 emergency” it introduced the digital dollar concept that could potentially let the Federal Reserve, responsible for printing U.S. dollars, send stimulus money directly to individuals.
A new stimulus Bill draft written by House Democrats would create a Digital Dollar which could be used for providing stimulus payments
The Digital Dollars would exist in a Digital Dollar wallet maintained by a Federal Reserve Bank on behalf of any personhttps://t.co/HcdnPJUbn7
— XRPcryptowolf (@XRPcryptowolf) March 23, 2020
Inspired by bitcoin and its underlying blockchain technology that lets individuals send value to each other without any middlemen, the concept had been percolating behind the scenes in blockchain skunk works for months when millions of people around the world saw first hand evidence of how the technology could impact them personally. Why give the money to banks and hope it trickles down, if the intended recipients are actual citizens?
— Forbes Crypto (@ForbesCrypto) March 25, 2020
A previously scheduled meeting at blockchain consortium Hyperledger, about a new project called eThaler using the ethereum blockchain to create a central bank digital currency (CBDC), took on new meaning, and urgency. Until the bill, sponsored by California Congresswoman and chair of the House Financial Services Committee, Maxine Waters, mentioned the use of digital dollars, their benefits were largely theoretical. Now, all of a sudden, there was a very clear use.
the proposal out of the house financial services committee is wild. pic.twitter.com/yHZfJ25ktl
— the warax. 🦛💨 (@iAmTheWarax) March 19, 2020
Such a prominent mention of digital dollars in a House bill, in relation to the Federal Reserve, means that the largest economy in the world has officially entered what is an increasingly heated race between a number of advanced projects at central banks around the world to be the first to issue this new kind of currency. “The concept of the CBDC seems to have gotten an imprimatur from the house finance committee,” said Vipin Bharathan, 59, chair of the Hyperledger identity working group, and a former senior developer at JP Morgan Chase, speaking at the meeting. “That’s a significant step, and I argue that such crisis situations always produce new ideas, and acceptance of new ideas, that will live on long after the coronavirus has burned through the world.”
If someone tells Trump that passing universal healthcare would piss off Nancy Pelosi, none of us would ever pay for healthcare again
It’s amazing watching the GOP outflank the Dems from the left just out of spite https://t.co/G0NSKPzXBE
— Karst (@leftward_karst) March 18, 2020
At the time of publication, an estimated 21,000 people had died from the COVID-19 globally, resulting in countless business closures, and wiping out billions of dollars in wealth. While it seems unlikely that any of the digital dollar projects currently in the works would be ready in time to transmit the trillions dollars being sought by the Congress, eThaler is a great example of the race to accommodate law-makers’ increasingly opened minds.
Hey @realDonaldTrump, let's provide relief from this crisis for people by giving pre-loaded debit cards to every person in America. No additional debt—we'll just mint two coins.#ABCAct #MintTheCoinhttps://t.co/v0gtfjBw7L
— Rashida Tlaib (@RashidaTlaib) March 21, 2020
Another bill, offered by California Democrat and Speaker of the House, Nancy Pelosi and other democrats, originally also included the “digital dollar” language, which was stripped shortly after it started circulating in media reports. Earlier today, the Senate approved a $2.2 trillion stimulus package, without mention of a digital dollar, now awaiting a vote by the House. First conceived earlier this year, eThaler gets its name from the thaler, a silver coin used throughout Europe for hundreds of years, from which the word “dollar” is derived. A group of professionals from consulting firms Accenture and InfoSys and the Itau Bank in Brazil, have been working on the open-source project in their free time for the past six months to explore the future of central bank currency issued on a blockchain.
dummies: "you can't just mint a 1 trillion dollar coin and make the fed buy it. that's insane"
gov: haha big coin machine goes *cha-ching* pic.twitter.com/i47dNxlPJ7
— randall (@cropneglector) March 21, 2020
The token-issuance system will comply with the Token Taxonomy Framework, a collection of standards for enterprises using ethereum, developed by JPMorgan Chase, ConsenSys, and other members of the Enterprise Ethereum Alliance, in April 2019. The group, informally called eThaler Labs, is building on Hyperledger Besu, an enterprise version of ethereum submitted by ConsenSys subsidiary PegaSys to Hyperledger and approved last August. A slide presented at today’s meeting by Bharathan, who worked for 16 years at BNP Paribas before founding blockchain startup DLT.NYC, laid out how eThaler would work.
First and foremost, eThaler is being designed to be fungible, meaning regardless of what central bank might end up minting its currency using the technology, every token will have the same value as the underlying asset, regardless of whether the token had been previously used for some nefarious purpose. Like traditional fiat currency, any initial supply of eThaler-based tokens would need to be increased through further minting by the central bank, or destroyed through a process called burning. But like bitcoin, it would also be able to be divided into as many decimals as the bank desired, a crucial component for so-called micropayments, tiny online transactions not currently feasible with fiat currencies. Lastly, and perhaps most controversially, the asset must be “pausable” in case a bug in the software is discovered, or an update is being implemented.
Great read to share with friends and family who may be skeptical of UBI. H/t to @TheAtlantic and @AdamHSays for a timely piece about making Americans whole again right now. And of course, @AndrewYanghttps://t.co/0s16rpYWng
— Income Movement (@income_movement) March 17, 2020
The important part about this, and other more advanced work, is that the role banks play, or don’t play, is little more than a design decision. Another slide reviewed by Bharathan showed that eThaler could be implemented as a wholesale solution, meaning it would only be issued to institutions with Fed accounts, and could be used to instantly move large values directly to one another without needing to go through the Fed itself. Another implementation, for retail however, would operate just like cash, except it could be disseminated from a central bank directly to the people.
Contact your representative to cosponsor H.Res.897. An emergency UBI can provide relief to millions of Americans as well as stimulate the economy by putting money into the hands of people who will spend it. #coronapocalypse #CoronaOutbreak #coronavirus https://t.co/mI8vaiN8iS
— California for Tulsi Gabbard (@CAforTulsi) March 14, 2020
In addition to complying with the Token Taxonomy Framework, eThaler-based tokens will comply with the ERC-1155 token standard. Unlike other ethereum token standards like ERC-20, 1155 is a single standard designed to support multiple kinds of tokens. So, for example, a central bank could use it to mint fungible digital dollars or bonds, according to the project’s lead developer, Mani Pillai, president of Swapshub capital markets infrastructure firm, who was also at the meeting. In the coming weeks, the entire structure is expected to be offered to open source developers, meaning anyone will be able to build on it. While developement of the codebase and launch of a test network will be governed by a capital markets special interest group, formal admittance to Hyperledger could take months.
Treasury Secretary Steven Mnuchin said the administration is pushing to send direct payments to Americans within two weeks https://t.co/gO5WNdam6u
— Bloomberg (@business) March 17, 2020
However, none of this is guaranteed. A diverse set of skeptics have long expressed doubt in the idea of a central bank digital currency. On one side, bitcoin purists argue that the central bank itself is a middleman that blockchain makes unnecessary. On the other are traditionalists who point out that the vast majority of global currency is already digital, no blockchain needed. According to Bharathan though, speaking in the meeting, a wallet issued by a central bank, and filled with cash, would remove the counterparty risk of the bank in the middle going under. “There is nothing standing between you and the central bank guarantee,” he said.
if they want stimulus they should give everyone $5K/month so they have spending money https://t.co/a2u2WkYRkB
— secret santa (@spectrevision) March 21, 2020
In an interview with Bharathan after the meeting he was quick to point out that his team’s work is among the youngest projects in the space. Perhaps the most prolific organization in the burgeoning digital dollar space is New York-based R3, which is funded by $100 million venture capital from big banks and others, and is already in advanced stages of work with four different currencies. Specifically R3 says it is now working with the Swiss National Bank to explore a central bank digital currency for settlement; the Bank of Thailand for interbank settlement; Sweden’s Riksbank on a digital version of the Swedish krona; and the European Central Bank to explore CBDCs in Europe.
"Who the fuck is supposed to even see you with your hair all done in the casket"
— Nicholas Thompson (@nxthompson) March 23, 2020
On the other hand, “China has been doing this for four years,” says Bharathan. In fact, the Chinese government’s secretive work on its own CBDC, is likely a contributing factor to Congress’s interest in digital dollars. In June 2019, Facebook revealed its own plans to help launch a “stablecoin” backed by a basket of global currencies, designed to make it easier for those without traditional banks to engage in global commerce. The news reportedly accelerated China’s own plans and prompted comparisons between China’s CBDC and Facebook’s stablecoin. So serious is the competition to be first, that this January, the former chairman of the CFTC, Christopher Giancarlo, co-launched the Digital Dollar Project with consulting firm Accenture specifically to advocate for the creation of a U.S. digital dollar.
As the world of fiat and cryptocurrency increasingly merges, it’s not the currency itself that most has Bharathan’s attention. Rather, he thinks the biggest opportunity is for smart wallets that store the currency that can be programmed to automatically execute any number of tasks, from moving funds to a savings account, investing, or being made aware of changes in tax codes, not just for individuals, but institutions. “It may not start off with a bang with a wallet holding a trillion dollars,” says Bharathan. “But over time, it may.”
Pandemic bonds offer little hope for dealing with coronavirus
by Sébastian Seibt / 26/02/2020 / adapted from the original in French
“The World Bank created an insurance mechanism in 2017 to help some of the world’s poorest countries deal with a possible pandemic. The coronavirus outbreak could lead to its use for the first time – but there are doubts about how effective this tool would be. The so-called “pandemic bonds” were created in response to the Ebola outbreak in Africa that killed more than 11,000 people between 2014 and 2016 – and the idea was to transfer some of the economic risks caused by disease outbreaks from under-developed countries to the financial sector. They work in a similar way to insurance: as long as there is no pandemic, the buyers of these securities make money from high annual interest and premiums, but if an outbreak occurs, they must return all or part of their investment to a specific World Bank fund intended to fight pandemics. In this way, there would be no need for fraught political negotiations when states raise funds to respond to the crisis. However, pandemic bonds have lost more than 50 percent of their value since the beginning of the coronavirus outbreak originating in the Chinese city of Wuhan.
The bond market has divided into winners and losers after a month of mayhem https://t.co/s7dHnwY1Vk
— Bloomberg Opinion (@bopinion) March 27, 2020
For NGOs and healthcare workers, the new coronavirus – which has infected nearly 80,000 people worldwide, including more than 2,600 fatally, represents a critical test for the viability of this very controversial insurance mechanism. In April 2019, Larry Summers, the influential former chief economist at the World Bank and former treasury secretary under then US president Bill Clinton, described pandemic bonds as “financial goofiness” and an “embarrassing mistake”. Olga Jones, a senior fellow at the Harvard Global Health Institute, a former economic advisor at the World Bank and among the most vocal critics of pandemic bonds, has argued that investors have been the only winners – describing them to the Financial Times as a “gamble with taxpayers’ money” at “terrible odds”.
Force global banks to suspend bonuses and payouts https://t.co/IFjg4ZD1iI
— Finance News (@ftfinancenews) March 22, 2020
The World Bank has issued two types of bonds. The first covers a wide range of potential pandemics – such as coronaviruses, Ebola, Crimean-Congo hemorrhagic fever and Rift Valley fever. It is considered riskier – and more lucrative – than the second pandemic bond because the conditions triggering reimbursement by investors are easier to meet. The second type covers only the influenza epidemic and potential hypotheses for what could happen with the coronavirus. When the bonds were first created, investors – mainly pension funds and specialists in “catastrophe insurance” – immediately rushed in to buy these financial instruments and the World Bank had no trouble achieving its goal of selling $330 million (€303 million) in bonds. This eagerness with which they were snapped up suggests that financiers saw them as a great deal.
Bond traders barely blinked at the prospect of piling on trillions of dollars of government debt https://t.co/mI4nn0yESV
— Bloomberg Opinion (@bopinion) March 25, 2020
‘The terms are too stringent’
The devil was in the detail – the 386 pages of documentation setting out how the bonds work and, above all, the conditions to be fulfilled for a pandemic to cause money to be transferred to the World Bank’s special fund. In order to be triggered, the first type of bond requires 12 weeks to have passed since the start of the outbreak (a point which will be reached on March 23 for the coronavirus), 250 people to have died in the country where it began, and 200 deaths in a second country. In this context, the second Ebola outbreak illustrated the limitations of pandemic bonds. Still ongoing after it started in 2018, this health crisis has already killed more than 2,200 people, almost entirely in DR Congo. But not a single penny has been transferred from the portfolio of pandemic bondholders to the World Bank fund, as 20 people have not yet died from the outbreak in another country. “The terms are too stringent; it shows how useless this instrument is,” Bodo Ellmers, director of the Global Policy Forum’s sustainable development finance programme, told the Financial Times.
Covid-19 isn't the first storm globalization has weathered, and it won't be the last https://t.co/C57D2otGas
— Bloomberg Opinion (@bopinion) March 26, 2020
In establishing such tight criteria, the World Bank was partly trying to ensure that the insurance was only triggered in response to a genuine emergency – but also, it seems, to attract investors. That would also explain why the pandemic bonds’ interest rates are so generous, at around 10 percent for the holders of both types. But in trying to please bondholders, the World Bank seems to be neglecting the interests of the poor countries the insurance mechanism was supposed to help. “The whole scheme is set up to minimise the probability of payout,” Jones told the Wall Street Journal. “The instrument has triggers that are well into an epidemic that’s about to be out of control or already out of control,” she continued.
"The #coronavirus outbreak is serving as a mind-expansion exercise, making hitherto unthinkable solutions thinkable. Debts that can’t be paid won’t be. A debt jubilee may be the best way out."
— Paul Sliker (@psliker) March 22, 2020
So by this point in the outbreak, critics of pandemic bonds argue that they will be an inadequate response to a situation that is already out of hand – while it will only benefit countries on the World Bank’s list, under-developed states excluding South Korea and Iran. Moreover, it takes 84 days after the first WHO “situation report” on an epidemic before the funds can be transferred. In the case of coronavirus, the first such report was issued on January 21, which means that – even if the criteria were reached – poor countries that need the money won’t get the money until April.”