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Central banks should issue debit cards

Sunday, December 07, 2008

In the past, I've joked about how the Treasury Department and/or Federal Reserve should just issue debit cards to each and every U.S. citizen and then apply a credit to these accounts now and then as necessary to stimulate the economy.

The cards would only be valid for purchases, not cash advances, and during times like these, the vast majority of this money would be spent very quickly, aiding the card holders while at the same time helping the economy to recover.

Like other suggestions made facetiously here (e.g., like mandating 2005-era minimum price levels for real estate sales in order to stop the housing market decline), it always surprises me to discover how many readers actually think these proposals are serious.

This opinion piece in the Financial Times helps explain why.

Central banks need a helicopter
By Eric Lonergan

The most direct and efficient solution to the economic and financial problems is for central banks to transfer cash directly to the household sector. Final demand and profits would recover, asset prices would rise and as a result banks would have strengthening balance sheets. Fiscal positions would similarly improve with rising revenue.

These are the effects that policymakers are trying to achieve in an indirect and inefficient manner: we are using governments to do the spending, and we are trying to fix the financial system piecemeal, when the problem is demand, profits and prospective default risk.

Allowing central banks to transfer cash directly to households would be the purest form of Milton Friedman’s “helicopter drop”.

What is lacking is a legal and institutional framework to do this. The helicopter model is right, but we don’t have any helicopters.
We need a legal and administrative framework to allow central banks print money and transfer it to households. This would be efficient, effective and would eliminate the deflation risk for good.
Apparently, it would be wise not to forget that most economists in the world continue to believe that you can fix the problems caused by easy money by applying liberal doses of even more easy money.

At some point, economic thought will surely veer away from this ridiculous idea, but, that may not be for some time to come.


This week's cartoon from The Economist:


Nostradamus, apparently said...

itulip scooped you on this one!

Tim said...

Thanks - I hadn't seen that - pretty funny in a sad sort of way

Tim said...

I liked the part about how the balance declines if you don't spend it.

Dan said...

Let's just make each citizen their own bank and have the CB increase our reserves as needed. As long as our reserve requirements were low, we could print our own money too! It'd be a new age of, "prosperity" for Americans. This would also ensure that no US citizen could ever fail as we'd all be 'backstopped" by the Fed! There'd be no more talk of 'greedy bankers' because we'd all be greedy bankers! It'd be a clusterfuck utopia! We could eliminate identity theft by simply calling it mergers and acquisitions! It would greatly simplify qualifying for loans! What a brave new world that would be.

fish said...

I don't really care what is done by the fed, foreign central banks, or the government.....I only hope that whatever stimulus money is shoveled in my direction comes in the form of the giant novelty checks that they pay casino jackpot winners or PGA tour members!

That would be super..

donny said...

So if individuals saved the "free" money, that would be evil. But if companies saved it (profits) that would be good. If you think of an individual as a small business, savings=profits. And is available, just like profits, for reinvestment. What's wrong with these people? How can you be an economist and not understand something so basic?

staghounds said...

I have come to the conclusion that our masters are delusional. Exactly the form of the delusion escapes me.

But a half, or is it a full, trillion dollars to "bail out" some companies? Imagine what we could buy if we spent that money rather than giving it to losers.

Real government things- teachers and schools, guards and prisons, border enforcement, you name it.

They are just crazy.

Nick said...

My suggestion along the same lines was to suspend collecting all taxes until the economy "gets back on track". At least that would be more equitable than the wealth redistribution inherent in the government handout programs. Plus it would make everyone happy (nobody likes taxes), and it's not like "printing" an extra 2 trillion a year or so is that much more than already projected...

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