monopoly issuers of their own currencies, make profits. Economists have a name for this: seigniorage. Today the potential for seigniorage profits is limited, owing to near-zero interest rates on bank deposits and government bonds issued in major currencies. But what happens the day that world interest rates rise? Will Facebook simply pocket the difference? Or will competition force it and its partners to begin paying interest on libra? Competition has not kept commercial banks from charging hefty fees on international transactions, and libra has the potential to be much larger than any commercial bank. An even bigger danger is that, at some point, the Libra Association could decide to switch from full to fractional backing of libra with safe liquid assets. The temptation to do this will be difficult to resist, because the reserves backing libra could earn a much higher return if invested in risky stocks, for example. But then, like commercial banking systems that lack a lender of last resort, the entire libra edifice would become vulnerable to a speculative run. Of course, by that point the libra system might have become too big to fail, forcing the U.S. Federal Reserve to act as a lender of last resort. Time inconsistency strikes again! What about the claim that libra would be a boon to financial inclusion in emerging and developing countries? Perhaps. But libra may instead become a source of major headaches for them. Emerging economies have long been combating so-called dollarization: the tendency of residents to seek insurance by holding U.S. dollar accounts in local banks and denominating contracts (including wage
contracts) in dollars. Because dollarization keeps central banks from serving as lenders of last resort to domestic banks, it foments financial instability. It also renders monetary policy less effective by, for example, limiting the positive effect of currency depreciation on exports and employment. Facebook imagines a world in which people everywhere eventually borrow and lend in libra, and use it for national and international trade. For emerging economies, this would mean being cured of dollarization only to catch an even worse case of libraization. If that happens, then libra will have complicated these countries’ monetary and exchange-rate policies and helped trigger a period of slow growth and financial instability. Facebook is betting that libra will trigger a Taurus market. But Libra’s benefits appear as slippery as a Pisces. The libra project is dangerous like a Leo, and it will require government regulation to keep it from Roberto Chang is a Distinguished Professor of Economics at Rutgers University. Andrés Velasco , a former presidential candidate and finance minister of Chile, is Dean of the School of Public Policy at the London School of Economics and Political Science. He is the author of numerous books and papers on international economics and development, and has served on the faculty at Harvard, Columbia, and New York Universities. becoming a Cancer. © Project Syndicate
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