Helicopter Money: Central Banks as Spenders of Last Resort?

Abstract

With the four big central banks – the Bank of Japan, the US Federal Reserve (the Fed), the Bank of England, and the European Central Bank (in chronological order) – either rescuing or having rescued the financial markets from crisis mode while stimulating the economy by means of quantitative easing (QE), Adair Turner has started a public debate stretching beyond the realm of academic discussion, which has gone practically unnoticed: economic stimulus programs financed by helicopter money to permanently banish the threat of deflation. With government budgets having reached their limits, central banks would become spenders of last resort. Turner’s most recent book Between Debt and the Devil – Money, Credit, and Fixing Global Finance deals with the question regarding whether central banks should receive a mandate to finance economic stimulus programs by printing money directly (helicopter money) to avoid the looming threat of deflation (Turner 2015). Government bond purchases by central banks in the context of QE have hitherto served to increase liquidity in the banking system, thereby opening the credit channel, which, in turn, was intended to act as the starting point for rising capital investment. Further, QE has, so far, only indirectly helped to finance national budgets by reducing the interest burden on public debt. In the case of this new monetary policy instrument, central banks would finance “fiscal” stimulus packages with the aid of the printing press directly (Naumer 2015). Turner attempts to explain the reasons for the financial market crises of recent decades by focusing on their origins. Moreover, he offers solutions and preventive methods to avoid such crises permanently, and, at the same time, to overcome anemic global growth. Many of his analyses are well known, but the explanations are in need of some elaboration. Certainly, Turner is right that the crises – starting with the bubble that burst at the beginning of the 1990s in Japan – were crises of excessive growth in credit, accompanied by bad investments and lax lending policies of banks, which were then amplified by new forms of finance, such as bundling of different-quality loans into subprime securities. This is just one side of the coin, however. What Turner’s observations almost ignore is monetary policy, which – starting with the Bank of Japan – flooded the markets with excessive liquidity to combat crises and was continued – or better, intensified – by the Fed and, later, by the European Central Bank with their policies of QE. Turner also Journal for Markets and Ethics/Zeitschrift für Marktwirtschaft und Ethik • 5(2) • 2017 DOI: 10.2478/jome-2018-0008