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 helicopterApparently, 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.
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.
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: