Bernanke and 'Helicopter Money'

After a few hours of intense economic research this morning I came to the conclusion that it must be the government or crazy fools that pay these economist and academics to come up with the stupid and dumb ideas that fill the papers and internet. To layer more insanity on top of this, they actually get paid to attend and speck at lavish conferences to promote their ideas. In his 2012 Jackson Hole speech Michael Woodford suggested a version of flexible inflation targeting whereby the central bank commits future monetary policy to a permanently higher nominal target (such as the path of nominal GDP) and discussed various tools within that framework, including permanent increases in the monetary base via fiscal transfers. He said that in a situation of persistently weak economic conditions it makes sense to consider all options including tools that have stayed long in the closet.

Adair Turner also talked about a different option, and suggested the, "helicopter money" or permanent money creation solution. This is an idea that was originally discussed by Milton Friedman (Friedman 1948) and more recently by Bernanke back in 2003 in relation to the zero growth and "lost decade" problem in Japan. As Bernanke has suggested it can be implemented via transfers to households and businesses via a tax cut coupled with incremental purchases of government debt, so that the tax cut is in effect financed by money creation. Although this idea has been around a long time it is considered taboo. The non-standard monetary policies used in response to the recent crisis have all led to an increase in the size of central banks’ balance sheets but in the recent experience no central bank, has purposefully increased the monetary base and committed to keep this additional money in circulation permanently.

By the term "Helicopter money" I mean overt money finance of increased fiscal deficits, some economist think in some circumstances it may be the only certain way to stimulate nominal demand, and may carry with it less risk to future financial stability than the unconventional monetary policies currently being deployed. The crucial first question is: do we want more nominal demand? Most say yes if  we are confident that some of the increase will take the form of increased real output or and if some increase in the inflation rate is in itself desirable. These conditions seem likely to apply in many developed economies today, with nominal GDP growth rates very low and being pressured by private sector de-leveraging following  the financial crisis. It seems that we have reached the point where some economist are desperate or just wish to experiment and play with our money. The great thing, even if they are wrong they still get paid!

There are dangers in breaking this taboo, just because outright monetary financing is possible does not mean it should be pursued. We should recognize that the proposal undermines fiscal discipline in this specific environment, "helicopter money" should be regarded as an available option that carries more risk then benefit. Proponents say that if Japan had used this policy when Ben Bernanke proposed it in 2003, they would  now have a mix of higher real GDP, higher price levels, and lower public debt to GDP. But economist may be "too clever by half," those of us in business know that demand drives investment, and that real demand, based on true needs of people involved in meaningful and profitable jobs is the true source of  solid growth. Efforts to place temporary props under a poorly structured economy are destined to end in tears once the momentum ends.

Wow, what a tangled web politicians and bankers can weave, moral hazard be damned. Even the idea of how or who should just give out the money, and in what quantity, regardless the goal be it to gain favor politically, or to in effect shock the economy back to life, is unsettling. A promise that this would be or is a "one time event" would not be a guarantee, but would be enough to put us on a dangerous and slippery slope. Bottom-line, this idea and such talk at a high level economic summit is just another way to transfer wealth, put another band-aid on top of other band-aids, and proof that things are not working. Governments supporting failing banks, that are in turn supporting bankrupt  sovereign governments. Such talk also adds validity to my post about how we should fear the power of this new financial-political complex.

              http://brucewilds.blogspot.com/2012/10/the-financial-political-complex.html


Footnote; Lord Turner was considered one of two leading contenders to succeed Sir Mervyn King last fall when I wrote the post below. Of course, the views talked about indicate that Lord Turner would not be a cautious or placid Bank of England governor.

               http://brucewilds.blogspot.com/2012/10/a-helicopter-drop-for-england.html