Before you start wondering, a disclaimer: yes, I am Greek. As everyone knows, all Greeks have the same fantasy, namely that German skies will start pouring money over us. Forgive me if you will, but hear me out.
The idea we will not try out
The man in the picture jumping from a skyscraper in Frankfurt is not a central banker in agony, who has run out of ideas to fight deflation. He is not even a man with an offshore account that has just made “breaking news.” Alas, his backpack is not filled with cash and he is not a staff member of the European Central Bank, trying out the latest economic instrument being considered, that is, “helicopter money.”
Unfortunately for some of us, Central Banks can give money to states, lenders and perhaps even to non-financial corporations, on condition they do not produce something of actual use; but, for crying out loud, central banks do not give money to citizens. To do so, would defeat the very rationale of having an independent central bank. Politicians would take over.
Seriously now, that was Friedman’s idea not a Greek wet dream
The ECB made clear on Thursday that the idea of “helicopter money,” which Mario Draghi found “interesting” in March, will not happen.
Helicopter money – as in throwing money off a helicopter – is a stimulus measure that entails handing out money directly to citizens to fend off deflation. The instrument was theorized by Milton Friedman in 1969, since it would provide an immediate stimulant to consumption.
Well, no to a fun idea, but is there a serious alternative?
Liquidity injections in the banking system through buying state and increasingly corporate bonds have decreased state borrowing yields; negative interests rates have also allowed for the cheap borrowing rates, which have boosted stock market valuations. But, the so-called “quantitative easing” measures have done little if anything to jolt inflation in Europe.
To the contrary, supply of cheap liquidity has spurred a massive wave of mergers and acquisitions, putting pressure on the job market. Meanwhile, fixed income pension and insurance funds have been struggling, to the detriment of governments that are faced with widening fiscal gaps. With both inflation and interest rates at subzero levels, the ECB has run out of orthodox tools and has very few if at all unorthodox ones. The ECB is not hoping to reach its 2% inflation target any time soon.
We are neither desperate nor do we have a sense of humour
Desperate times require desperate measures. But, apparently, the times are not desperate enough. On Thursday, the ECB’s 25 member governors’ council made clear that there is nothing wrong with quantitative easing.
The only reason these supply-side measures have not worked is tumbling oil and commodity prices. So rather than considering different measures, the ECB is considering more of the same. In March, the ECB announced it would buy more bonds, that is, €80bn rather than €60bn a month; and that will increasingly include corporate assets.
The idea of handing out money out to consumers has never been tried out.
During the interwar period, Keynes toyed with a similar idea of burying underground large amounts of money, providing an incentive for companies to employ people to unearth them.
Being serious (not)
But, the ECB does not and should not care about employment, therefore wage inflation and consumption. The mandate of the ECB is to affect monetary policy (supply); fiscal strategy (demand) is overreach many argue. Fusing fiscal and monetary policy would, in effect, undermine the rationale behind having independent central banks. That was the logic behind Italy’s Ignazio Visco remarks that helicopter money raised “legal concerns.”
The ECB’s Chief Economist Peter Praet made clear on Thursday that “helicopter money” was not even debated. The ECB’s Vice President Vítor Constâncio said “we are not considering anything of that sort.” And Bundesbank President Jens Weidmann warned that such measures would tear gaping holes in central-bank balance sheets.
I can totally imagine a room filled with people in suits I would never be able to afford. Someone puts on the table the idea of helicopter money. Mario laughs and contemplates. The other half of the room laughs but does not contemplate. The people who get it feel lonely in a room with people who are so self-absorbed they can hardly understand that their job is actually to serve the economy, not to play with inflation rates.
Ok, a fun idea was dismissed, but is there a serious one to replace it? I seriously doubt it.