Ben Bernanke: "Helicopter Money May Be The Best Available Alternative"

Now that the prospect of helicopter money by the ECB has so infuriated Germany, the ECB had to reach out to Schauble to "mollify" the Germans who are dreading the second coming of monetary paradrops in one century, it was only a matter of time before Citadel's most prominent employer opined. In a blog post earlier today, Brookings' blogger and the central banker who together with Alan Greenspan has been most responsible for the world's unprecedented debt pile and sad economic state, Ben Bernanke, took the podium to share his views on "helicopter money" head on.

In "What tools does the Fed have left? Part 3: Helicopter money" the former Fed head who first infamously hinted at helicopter money in his November 2002 speech "Deflation: Making Sure "It" Doesn't Happen Here" when he quoted Milton Friedman, once again started off with a Friedman quote:

"Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated." (Milton Friedman, “The Optimum Quantity of Money,” 1969)

He then pulls a quote from his own book "The Courage to Act"

"The deflation speech saddled me with the nickname 'Helicopter Ben.' In a discussion of hypothetical possibilities for combating deflation I mentioned an extreme tactic—a broad-based tax cut combined with money creation by the central bank to finance the cut. Milton Friedman had dubbed the approach a 'helicopter drop' of money. Dave Skidmore, the media relations officer…had advised me to delete the helicopter-drop metaphor…'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.” (Ben Bernanke, The Courage to Act, 2015, p. 64)

He then proceeds to introduce the topic as follows: "in recent years, legislatures in advanced industrial economies have for the most part been reluctant to use fiscal tools, in many cases because of concerns that government debt is already too high. In this context, Milton Friedman’s idea of money-financed (as opposed to debt-financed) tax cuts—“helicopter money”—has received a flurry of attention, with influential advocates including Adair Turner, Willem Buiter, and Jordi Gali."

With that out of the way, he launches straight into his qualitative assessment of whether the Helicopter might fly, so to say. He seems quite optimistic: "in theory at least, helicopter money could prove a valuable tool." He goes on, with the caveat that he prefers the term Money-Financed Fiscal Program, or MFFP, instead of "Helicopter Money" - after all, very serious central bankers never call things by their real name:

In particular, it has the attractive feature that it should work even when more conventional monetary policies are ineffective and the initial level of government debt is high. However, second, as a practical matter, the use of helicopter money would involve some difficult issues of implementation. These include (1) the need to integrate the approach with standard monetary policy frameworks and (2) the challenge of achieving the necessary coordination between fiscal and monetary policymakers, without compromising central bank independence or long-run fiscal discipline. I propose some tentative solutions for these problems.

 

To be clear, the probability of so-called helicopter money being used in the United States in the foreseeable future seems extremely low. The U.S. economy has continued to strengthen and is not today suffering from the severe underutilization of resources and very low inflation (or even deflation) that would justify such an approach; and, as I’ve noted, the Fed has other tools still available. Nevertheless, it’s important that markets and the public appreciate that, should worst-case recession or deflation scenarios occur, governments do have tools to respond. Moreover, with central banks in Europe and Japan struggling to reach their inflation targets, money-financed fiscal actions may receive more attention outside this country.

Yes, the Fed may have other tools available, such as cutting rates by 25 bps back to zero, and then going NIRP as well, or perhaps doing even more QE. But what about central banks that are running out of collateral to monetize, or who are already in deep NIRP territory, such as the ECB?

Indeed, this is why Helicopter Money, pardon MFFP, is virtually a reality in Europe. Ben lays out the appealing aspects of sending money straight to consumers:

From a theoretical perspective, the appealing aspect of an MFFP is that it should influence the economy through a number of channels, making it extremely likely to be effective—even if existing government debt is already high and/or interest rates are zero or negative. In our example the channels would include:

  1. the direct effects of the public works spending on GDP, jobs, and income;
  2. the increase in household income from the rebate, which should induce greater consumer spending;
  3. a temporary increase in expected inflation, the result of the increase in the money supply. Assuming that nominal interest rates are pinned near zero, higher expected inflation implies lower real interest rates, which in turn should incentivize capital investments and other spending; and
  4. the fact that, unlike debt-financed fiscal programs, a money-financed program does not increase future tax burdens. [6]

Standard (debt-financed) fiscal programs also work through channels #1 and #2 above. However, when a spending increase or tax cut is paid for by debt issuance, as in the standard case, future debt service costs and thus future tax burdens rise. To the extent that households today anticipate that increase in taxes—or if they simply become more cautious when they hear that the national debt has increased—they will spend less today, offsetting some of the program’s expansionary effect.[7] In contrast, a fiscal expansion financed by money creation does not increase the government debt or households’ future tax payments and so should provide a greater impetus to household spending, all else equal (channel #4 above). Moreover, the increase in the money supply associated with the MFFP should lead to higher expected inflation (channel #3)—a desirable outcome, in this context—than would be the case with debt-financed fiscal policies.

To be sure, Helicopter, pardon MFFP Ben, does see a number of obstacles to such an implementation: one is the legality. So-called people’s QE, as has been advocated for by U.K. Labour Party leader Jeremy Corbyn, would be illegal in most or all jurisdictions, Bernanke points out. (That would involve the central bank printing money and giving it away.) Even simply financing extra tax cuts or spending would require coordination that would call into question central bank independence.

There’s also the practical worry that central banks don’t target money supply, but a short-term interest rate. Bernanke suggests that, to implement helicopter money, the central bank could temporarily raise its inflation objective. “Since the price level and the money supply tend to be proportional in the longer run, aiming for a higher price level could approximate the effects of committing to a higher money supply,” he writes.

Bernanke says another concern is governance, and the temptation to use helicopter money when the economy isn’t struggling.

This is somewhat like using QE for 7 straight years, long after the emergency conditions that required the Fed to print money and hand it out to banks had disspitated, so Bernanke would know all about this.

He says a way around that is to create the legal framework in advance, that the Treasury would have a special account at the Fed that would remain unfilled unless the Federal Open Market Committee said it would necessary to achieve employment and inflation goals. But, Bernanke says, it would then be up to Congress and the Administration to decide how, or even whether, to spend the money in the account.

At the end of the day, however, if Congress is faced with the choice of giving the Fed a carte blanche to do whatever it takes, or risk implementing unpopular fiscal policy which may result in many Congressmen losing their jobs, it is clear what the choice would be: "Get to work, Mr Chairman."

Which brings us to Bernanke's conclusion:

Money-financed fiscal programs (MFFPs), known colloquially as helicopter drops, are very unlikely to be needed in the United States in the foreseeable future. They also present a number of practical challenges of implementation, including integrating them into operational monetary frameworks and assuring appropriate governance and coordination between the legislature and the central bank. However, under certain extreme circumstances—sharply deficient aggregate demand, exhausted monetary policy, and unwillingness of the legislature to use debt-financed fiscal policies—such programs may be the best available alternative. It would be premature to rule them out

In short: Ben Bernanke has nodded his head in approval, and all that remains is for Congress to agree.

There is some good news: as Bernanke admits, "helicopter money is a presumably last-resort strategy for policymakers." Which means that once it is implemented, and fails resulting in either even more acute deflation or hyperinflation as these are the only two practical outcomes, that wil be the end of central banking as we know it. For that alone we welcome the inevitable monetary paradrop, and in fact wish it would arrive as soon as possible.