Tags: fed | economy | money | recession

When the Recession Comes, We Can Always Drop Money Out of Helicopters

By    |   Thursday, 21 Apr 2016 07:20 AM

What could the government do if the U.S. economy dropped back into recession and interest rates had already been cut as low as they could go? Why, drop cash out of helicopters. 

Ben Bernanke surfaced that idea way back in 2002, when he was a new member of the Federal Reserve Board of Governors but not yet chairman of the nation's central bank. Wall Street traders started calling him Helicopter Ben, which was not a term of affection.

Proving that he has a thick skin, the former Federal Reserve chairman brought up the concept of helicopter money again in a post on his Brookings Institution blog last week. 

"Under extreme circumstances," Bernanke wrote, spraying the public with money "may be the best available alternative," and it would be "premature" to rule it out.

The basic idea is to get more spending money into people's hands, either by cutting taxes or by raising government spending. That part is conventional fiscal policy. The unconventional part is that the government would essentially conjure up the money from thin air. 

Congress would authorize, say, $100 billion in spending. Normally the Treasury Department would have to raise the money from investors by selling $100 billion in bonds. In Bernanke's scenario, the Treasury's checking account at the Fed would simply be credited with $100 billion, bringing the money into existence with a few keystrokes.

That would give the economy a nice jolt. Taxpayers might not be willing to spend all of the $100 billion that had descended from the heavens if they knew their taxes would be going up to pay back the bondholders. They might save the money instead, to cover their future tax bill. But helicopter money doesn't have to be paid back. It's cash dropped from the sky, manna.

Mishandled, this could cause hyperinflation. Sad to say, that's true of conventional monetary policy, too.

The purpose of Bernanke's blog post is to work through the various difficulties of helicopter money, which are technical but involve questions such as whether the necessary coordination between the Fed and the Treasury would compromise the Fed's independence. All the details are right here. Bernanke bends over backwards to say that helicopter money would be a last resort and that the chance it will be used in the U.S. in the foreseeable future "seems extremely low."

He might be underestimating its likelihood. With negative interest rates failing to stimulate growth in Europe and Japan, more and more economists from Willem Buiter to Adair Turner are talking about helicopter money as a live option.

Unfortunately for advocates, "helicopter money" sounds kind of lunatic. Bernanke wrote in his memoirs that a P.R. guy at the Fed named Dave Skidmore warned him about that: " 'It’s just not the sort of thing a central banker says,' he told me. I replied, 'Everybody knows Milton Friedman said it.' As it turned out, many Wall Street bond traders had apparently not delved deeply into Milton’s oeuvre."

On his blog, Bernanke makes a stab at a substitute. "To get away from the fanciful imagery," he writes, "for the rest of this post I will call such a policy a Money-Financed Fiscal Program, or MFFP."

Perhaps there's a compromise between lunatic and soporific? Taking your suggestions at pcoy3@bloomberg.net.


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What could the government do if the U.S. economy dropped back into recession and interest rates had already been cut as low as they could go? Why, drop cash out of helicopters. Ben Bernanke surfaced that idea way back in 2002, when he was a new member of the Federal Reserve...
fed, economy, money, recession
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2016-20-21
Thursday, 21 Apr 2016 07:20 AM
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