Helicopters Grounded?

Having recently uncovered in its own research that quantitative easing is enriching the richest 5%, and the British economy still mired in the doldrums even in spite of hundreds of billions of easing,  the Bank of England announced last week that it was grounding its fleet of helicopters dropping cash onto the big banks and suspending the quantitative easing program.

Yet, this may not be the end for British monetary activism.

Anatole Kaletsky wrote last month:

This week an even more radical debate burst  into the open in Britain. Sir Mervyn King, governor of the Bank of England, found himself fighting a rearguard action against a groundswell of support for “dropping money from helicopters” – something proposed by Milton Friedman in 1969 as the ultimate cure for intractable economic depressions and recently described in this column as “Quantitative Easing for the People.”

King had to speak out because the sort of calculations presented here last summer started to catch on in Britain. The BoE has spent £50 billion over the past six months to support bond prices. That could instead have financed a cash handout of £830 for every man, woman and child in Britain, or £3,300 for a typical family of four. In the United States, the $40 billion the Fed has promised to transfer monthly, with no time limit, to banks and bond funds, could instead finance a monthly cash payment of $500 per family – to be continued indefinitely until full employment is restored.

Has the Bank of England stopped one program in anticipation of beginning another? Will be the Bank of England begin to inject cash directly to the public, bypassing the banks?

It is more than possible.

Could this mean some kind of debt jubilee? That is less likely — policymakers seem to remain fixated on demand and consumption, when the greatest obstacle to economic activity is the total level of debt.

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The Economist: “Be Afraid (Unless We Print a Lot More Money)”

While most readers of this blog will be convinced of (or at least open to) the idea that the global financial system is fundamentally broken, and either needs to fail or at the very least needs to undergo a radical transformationsome of us believe that the problem is basically a lack of demand, and that the entire solution lies in printing fuckloads of money, giving it to the people who brought us Solyndra, and hoping for the best.

From today’s issue of the Economist:

Lacking conviction and courage

In the aftermath of the Lehman crisis, policymakers broadly did the right thing. The result was not a rapid return to prosperity in the West, but after such a big balance-sheet recession that was never going to happen. Now, more often than not, policymakers seem to be getting it wrong. Their mistakes vary, but two sorts stand out. One is an overwhelming emphasis on short-term fiscal austerity over growth. Fixing that means different things in different places: Germany could loosen fiscal policy, while in Britain the reins should merely be tightened more slowly. But the collective obsession with short-term austerity across the rich world is hurting.

The second failure is one of honesty. Too many rich-world politicians have failed to tell voters the scale of the problem. In Germany, where the jobless rate is lower than in 2008, people tend to think the crisis is about lazy Greeks and Italians. Mrs Merkel needs to explain clearly that it also includes Germany’s own banks—and that Germany faces a choice between a costly solution and a ruinous one. In America the Republicans are guilty of outrageous obstructionism and misleading simplification, while Mr Obama has favoured class warfare over fiscal leadership. At a time of enormous problems, the politicians seem Lilliputian. That’s the real reason to be afraid.

The alternative view (as I have spelled out many times before) is that no amount of monetary policy without at the same time addressing the underlying real-world problems will solve the problems. Problems will just be kicked down the road, to re-emerge at a later date:

Those troubles are non-monetary — they are systemic and infrastructural: military overspending, political corruption, public indebtedness, withering infrastructure, oil dependence, deindustrialisation, the withered remains of multiple bubbles, bailout culture, the derivatives-industrial complex, and so forth. The real question is when will America tire of the slings and arrows of fortune? When will America take arms against her sea of troubles? And how long will she last on this mortal coil? To die? To sleep? For in that sleep of death what dreams may come…

Until we address the underlying problems, the market — in the long run — will keep crashing. And in the long run, we’re all dead. So that’s twice as bad. Junkiefication leads to junkification.

There was always the hope that kicking the can down the road might give us an opportunity to address those underlying problems. But it doesn’t seem like we have. Risk and leverage are greater than they were in 2008. Moral hazard is ready to rear its ugly head. The global trade structure is as fragile as ever. America is just as dependent on foreign energy and manufacturing. Deleveraging is proving costly and painful. Worst of all, many of the dangers inherent in the financial system have  now been transferred via bank bailouts to the sovereign level — like in Europe.

So no — the real reason to be afraid is not that policy-makers are not showing Bernanke’s famous Rooseveltian resolve. The real reason to be afraid is that what occurred after 2008 merely suppressed the symptoms of an underlying sickness.

They can’t. Only real reform — solving the underlying problems — can.