From respectability to realism
“Helicopter drops” of money — central banks creating money they give away to the public or private sector to stimulate spending and hence price growth — have clearly moved from the realms of economic black magic to taking up a respectable role in the monetary toolbox. While no central bankers have, as yet, dared to call for the idea to be used, the gain in respectability means it is only a matter of time before this happens should economic prospects worsen significantly. Among the authoritative endorsements of helicopter money, we find Adair Turner, the FT’s own Martin Wolf and the hedge fund manager Ray Dalio.
Yet there is a lot of confusion about helicopter money still to be cleared up. That’s evident when you survey the range of views from observers in the financial industry, where some think it is technically impossible for central banks to implement helicopter drops, while others think it is already happening.
Commenting on Dalio’s proposals and Wolf’s op-ed, Cullen Roche says that the Fed doesn’t own a helicopter. By which he seems to mean two things, relating to the two versions of helicopter money: giving money to the government, and giving to the private sector. On the former, he points out that if the government refuses to spend more, the central bank cannot force it to do so even by giving it money for the purpose. So public helicopter drops necessarily require fiscal monetary co-operation, which means this is not a unilateral central bank option. On the latter, Roche argues in a separate post that the Fed is legally barred from giving out money in return for nothing: it always needs to buy an asset with the newly created money.
That is less convincing, and the reason is that monetary policy allows for so much trickery that ways can be found to channel money to private hands. (And of course what’s banned in the US may be permitted elsewhere; and even US law can be changed. It’s unclear why Roche insists on calling legal reforms of the Fed’s powers “fiscal policy”. Is changing the central bank’s mandate, for example, “fiscal policy”?)
Eric Lonergan’s blog is a virtual instruction manual in monetary helicopter engineering — to the point where Lonergan himself judges that helicopter drops are already going on in Japan, even if nobody has noticed. His point is that even as the Bank of Japan has lowered its policy interest rate below zero, the negative rate only applies to a small portion of banks’ reserves. Required reserves have a zero rate and, importantly, a large part of the reserve balances will receive a positive 0.1 per cent remuneration. The idea is to prevent the negative policy rate from eating into banks’ profitability — but as Lonergan rightly points out, that amounts to a transfer to banks, which he says is a helicopter drop.
While this does benefit banks, it’s an odd definition of helicopter money. It implies that the Fed is doing helicopter drops since it pays interest on reserves, and that the Bank of England has been doing them for a long time (again without anyone noticing) since its Bank Rate is just the rate on reserves.
But Lonergan is on to something. Consider this: a central bank makes a profit (seignorage) by paying less on its liabilities (cash and reserves) than on its assets (the rate it charges on loans to banks). That difference remains positive in Japan: the rate on its lending programmes is zero, while new reserves are remunerated at minus 0.1. But it could, in principle, flip these rates. Lonergan has suggested as much, arguing elsewhere that the European Central Bank could lower its lending rate below the rate paid on banks’ deposit reserves with it.
That would be an indisputable helicopter drop — insofar as the loans to banks were simply parked at the ECB’s deposit facility. In which case it would be an exceptionally poorly targeted helicopter drop. A better alternative is another proposal of Lonergan’s, under which the ECB would offer targeted loans to banks at zero rates and, importantly, perpetual maturities, on condition that the same terms be extended to private eurozone citizens. The central bank would print money and gain assets in return — albeit zero-coupon perpetual claims — which would have the great advantage of being legal under eurozone rules and should also overcome Roche’s reservations.
In other words, so weird and wonderful is the world of monetary economics that the only barriers to helicopter money are blocks on our imagination. That’s good to remember should helicopter drops be needed.
In the first of what will undoubtedly become a series, Free Lunch will be on the lookout for contributions to the debate on Britain’s EU membership referendum that make new or insufficiently noticed arguments.
Much attention has been paid to the utter uncertainty about what alternative the UK should pursue if it leaves, and the difficulty of achieving it (Simon Nixon rightly points out that it’s not just a question of trade, but of whether Europe’s conflicts should be managed on the basis of common rules at all). What is less appreciated is the amount of extrication that has to be done even before deciding on, let alone constructing, an alternative. Alex Barker provides an important analysis of the sheer technical knottiness of an EU exit. On the one hand, huge amounts of EU law would remain part of the UK statute book until legislators rolled up their sleeves to undo it — which presumably would have been the whole point of Brexit. On the other, 12,295 EU regulations that have direct legal effect on member states would cease to apply, leaving a huge regulatory vacuum to be filled.
And in The Economist, Bagehot’s interview with Ian Bremmer raises the point that a British exit from the EU could “dramatically” upset the negotiations for the Transatlantic Trade and Investment Partnership (TTIP), the putative EU-US trade deal. So much for the Brexiteers who envision a happily unmoored island nation, free-trading its way across all seven seas: their first achievement could instead be to pre-empt the farthest-reaching free trade deal the world has ever seen.
- US house prices have surpassed their 2005 peak, Tyler Cowen notes.