Open Letter to Prof. Bernanke: Quantitative Balancing as a 21st Century Monetary Policy

 

Open Letter: Quantitative Balancing as a Solution to the Challenges Discussed in "21st Century Monetary Policy"

Marco Saba
Italian Center for Monetary Studies

July 26, 2025

Professor Ben S. Bernanke
Distinguished Fellow in Residence
Brookings Institution

Dear Professor Bernanke,

I have read with great interest your insightful work "21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19" (2022), particularly your analysis of the evolving role of the Federal Reserve as a "buyer of last resort" and the complex fiscal-monetary interactions that have emerged in recent decades.

As the author of the Quantitative Balancing (QB) framework, I believe our proposal directly addresses several critical challenges you identified in your book, particularly regarding the blurred lines between monetary and fiscal policy, the growing complexity of the Fed's balance sheet, and the need for greater transparency in the government's financial operations.

Addressing the "Buyer of Last Resort" Challenge

In your work, you eloquently describe how the Fed's role has expanded beyond traditional monetary policy into territory that increasingly resembles fiscal policy. As noted in the recent Hall and Sargent paper "Fiscal Consequences of the US War on COVID," this evolution has created significant accounting challenges: "These misleading accounting practices could become more concerning in light of the Fed's post-2008-financial crisis establishing 'lender of last resort facilities' to more and more institutions and now adding what Bernanke (2022) calls 'buyer of last resort' facilities."

QB offers a structured framework to clarify these blurred boundaries by:

1. Reclassifying bank deposits as liabilities owed to the Treasury, creating a transparent channel for seigniorage flows
2. Introducing explicit seigniorage charges (approximately 0.30% of M2) that formalize the fiscal dimension of money creation
3. Providing a gradual implementation pathway that respects the institutional complexity you've documented

Enhancing Transparency of Fed-Treasury Interactions

Your book highlights the growing interdependence between monetary and fiscal policy, particularly during crisis periods. QB directly addresses this by creating a transparent accounting framework that:

• Makes visible the previously implicit fiscal dimension of bank money creation
• Provides a structured mechanism for the Treasury to receive seigniorage revenue without requiring direct monetary financing of deficits
• Reduces systemic risk by 12-18 basis points according to our Monte Carlo simulations calibrated on 2023 data (EU, USA, UK, and Japan)

As you noted in your book, the post-2008 period has seen unprecedented coordination between the Fed and Treasury. QB offers a way to institutionalize this coordination through transparent accounting rather than ad-hoc crisis measures.

A Gradual Implementation Pathway

Recognizing your emphasis on careful, evidence-based policy transitions, QB proposes a three-year implementation plan that aligns with your methodological approach:

• Year 0: Regulatory sandbox with five volunteer banks; parallel reporting under IFRS and QB
• Year 1: Impact study to the Basel Committee; grandfather rule for existing deposits (>12 months)
• Year 2: Statutory roll-out in home jurisdiction via amended national GAAP

This gradual approach ensures stability while addressing the very concerns you raised about the potential for "fiscal dominance" and the need for clear institutional boundaries.

Empirical Evidence Supporting QB

Our Monte Carlo simulations, calibrated on 2023 banking data, demonstrate that QB would:

1. Reduce systemic default probability by 12-18 basis points, even in adverse scenarios
2. Maintain bank profitability with only a marginal 0.30% reduction in interest margins
3. Provide depositors with explicit sovereign guarantees (haircut=0) while maintaining market discipline

These findings directly address the stability concerns you've consistently emphasized throughout your career, from your early work on the Great Depression to your leadership during the 2008 financial crisis.

A "Peaceful Revolution" in Monetary-Fiscal Relations

What distinguishes QB from previous proposals is that it represents what I call a "peaceful revolution" - a structural change to fiscal-monetary institutions that does not require a crisis to be implemented. As you observed in your Nobel lecture and subsequent work, historical institutional changes often occurred only after crises. QB offers a path to restructure these relationships proactively.

Unlike the revolutionary France of 1797 that resolved its fiscal crisis by repudiating 2/3 of its national debt, or the post-1789 U.S. that established new fiscal institutions after the Constitutional Convention, QB provides a mechanism for deliberate institutional change without the need for crisis-driven transformation.

Conclusion: Building on Your Legacy

Your career has been defined by deep analysis of the relationship between monetary policy, financial stability, and fiscal sustainability. The Quantitative Balancing framework builds directly on this legacy by providing a structured, transparent mechanism for managing the very fiscal-monetary interactions you've so carefully documented.

I would be honored to discuss how QB could complement your vision for 21st century monetary policy, particularly as the Federal Reserve navigates increasingly complex fiscal-monetary terrain. The framework offers a practical solution to the challenges you've identified while maintaining the institutional independence you've consistently championed.

Thank you for your consideration of this proposal. I look forward to the possibility of discussing these ideas with you.

Sincerely,

Marco Saba
Founder, Italian Center for Monetary Studies
Author of "Quantitative Balancing: A Nash Equilibrium Framework for Transparent Bank Accounting and Financial Stability"