The US Fed is printing money to get the US out of a recession. The ECB is also printing money, with the same target in mind. In limited amounts, this is a good idea, but the central banks are going about it the wrong way: they are essentially printing money for banks and politicians. They should print money for populations and in order to do this, they have to set up individual accounts for the whole population.
So far, the central bankers have pumped money through the existing systems to friends in high places, bankers and politicians. They have so far been loathe to create new systems to print money for the people who actually have debilitating debts: individuals and their private companies.
Let’s unpack this and talk about how additional money is currently channeled towards ‘friends’ and what needs to happen to get money in the hands of those who would do useful things with it.
The US Fed first started printing money in 2008 by directly rewarding banks for having reserves, ie it just gave a quarter of one percent on all reserves. Then it dropped the cost of loans to banks: the ‘discount rate’ it charges to commercial banks is now a paltry 0.75%. So a bank can lend at 0.75%, also implying that bank-related major institutions can borrow indirectly at such low costs. What does a bank do with this cheap money, apart from giving its bosses a huge bonus of course? A particularly safe thing is to buy up government bonds, which the Fed counts as ‘safe’ and as a ‘reserve’. And what are the returns on the Federal bonds? Well, at the moment they are 1.88% for 10-year bonds, but they were roughly 4% in 2008 when the Fed started this game. So a direct and fairly safe profit is to be made by borrowing from the Fed at 0.75% and then lending it out again to the Fed (via the government) for 2-4%. Of course, investing abroad is even more lucrative. So, the roughly 2 trillion more money that the Fed has put into the US economy has partially ended up as 1.6 trillion in additional, idle, reserves in US banks (see here) who in turn have a fair whack of Treasury bonds directly or indirectly, and have of course also tried to park their money in lucrative foreign investments.
The Fed has also announced it will just directly buy up mortgage backed securities for more than its real worth, again sending money to banks, and more to banks that previously made worse investment decisions. Similarly, the Fed now and then buys entire vintages of new government bonds.
In short, the Fed has printed money for bankers and governments, subsidizing government consumption, bankers’ bonuses, and crowding out commercial investment since the smart money will have been invested abroad to flee the dropping US dollar and get the higher foreign returns.
The ECB has similarly been printing money for bankers and governments, albeit somewhat indirect. It for instance doesnt like to directly buy bonds so instead gives loans to commercial banks at very low rates (such as 0.5%), who in turn give them those bonds as collateral. By borrowing from those self-same banks the same money at higher interest rates (say 3%), the ECB gives these banks a guaranteed income-stream that ensures the viability of the incredible bonuses the bankers award themselves. Somewhat deviously, the ECB does not disclose the prices on these buddy-buddy deals so the full extent to which money is given to befriended bankers is not clear! How convenient for them. And when the ECB is not ‘lending’ from commercial banks, they can always buy up government bonds at much higher returns than banks pay to borrow off the ECB.
Also, the ECB now directly buys up bonds, some 200 billion euros worth at the moment according to one source. The large combined holding of bonds mean it has now become a cheap financier of government consumption. And of course banks are just as loathe to lend to private investors as before, prefering instead to get into safe government bonds. When push comes to shove, as happened with Greece a while back, the ECB allows countries to simply not pay back the loans, or, equivalently, extend the loans till the far far future whilst giving back any interest rate up to that moment (zero-interest loans hypothetically paid back in the far future).
So the situation in Europe too is that the ECB is subsidizing government consumption and bankers bonuses.
It is crucial to realise that this method of money printing is not the economic ideal nor really necessary: it is just convenient and helps the direct friends of the central bankers. I know this sounds somewhat conspiratorial, but dont forget that central bankers come from and often return to the world of bankers and governments, so favours they do to that in-crowd come with personal returns to central bankers! ‘Mates helping mates’, we would say in Australia.
What is the alternative? To do money printing properly, ie to have what is known as ‘helicopter drops’ wherein every member of the population is given the same amount of new money to spend as they see fit. In stead of printing money for bankers and governments, one would give new money to the population. It then wouldn’t end up in bonuses but in things households care about: the education of their kids, holidays, cars, medicines, their own private business, paying back their stifling mortgage debts and their commercial loans, etc. Now, which method of money printing sounds more likely to help the economy and get rid of the shackles of bad debts: the hoarding of idle reserves in banks and inflated government consumption, or private investment and private consumption? The latter, of course, particularly since the most crippling debts are private.
Why hasn’t this happened yet? I suspect the main reason is that central bankers are members of the financial elite with an unhealthy disdain for the population, thus allowing themselves to think that giving money to their friends and future employers is ‘better for the economy’ than giving it to the ‘plebs’.
But there is also a convenient excuse, which is that we don’t have the institutions to do it. There is no mechanism to send, say, 10,000 Euro to every member of the Eurozone. Why not? Because no-one has a list of all the individuals living in the Eurozone. Neither do all those individuals have bank accounts. They aren’t even all registered by their own governments.
How come? The deep historical reason is that Napoleon did not conquer the whole of Europe and that there are hence outposts (like the UK!) that do not have a population register to start from. Many people don’t have passports, nor are their deaths properly recorded. More immediately, even in those countries with population registers, not everyone has a bank account because they are too young, too disabled, too old, etc.
So the easy excuse of the central bankers is that they simply have no mechanism to print ‘money for the people’ and hence are forced by circumstance to give it to their mates. But of course this really is just a form of laziness that masks elitism, for there is really no reason why the central banks could not set up a universal bank for everyone. It should create that public institution, just as it is the role in general for government to set up beneficial public goods!
So one practical way to go is to announce that everyone over 16 with a passport of a Eurozone country can register themselves for a bank account with the ECB, at which point their fingerprints and perhaps a photo of the eye is taken too to ensure minimal cheating. Upon receiving their ECB account they get 10,000 Euros in that account. The ECB can of course just out-source this job if it wants to. Ditto for the US Fed. What then would happen is that everyone first goes through their national system to get a valid passport and only then applies to the local ECB-registering office.
It would clearly be a massive operation to register the entire population with several pit-falls (just imagine the incentives to pretend a family member hasn’t yet died!), but that registry itself has all kinds of further useful purposes as it can become the main conduit for European and American taxation and subsidies. It is the kind of system we should want to have anyway, if only to get more efficient internet banking! And yes, public goods of this type are still being built in the modern world, but lately more by private companies than public ones. Just think of Google StreetView.
The simple message: if central banks think printing money is the way out of the debt crisis, they should print money for their people rather than just their befriended bankers and politicians!
I’m surprised that you didn’t discuss the closest thing to this that has been attempted, although as fiscal policy rather than monetary policy: the Australian stimulus payments in 2009 carried out through the tax and transfer systems. This obviously had the advantage of using existing registers already dedicated to putting money in people’s hands (even the ATO does refunds after all) and allows symbolic, if somewhat meaningless, actions like mean testing .
I think the US may have done something similar, albeit smaller, with social security numbers.
Of course there are a large number of reasons why it would be inappropriate, especially in the Eurozone. It would miss some people (such as students and young never employed, of which the depression has produced many) and send some money to overseas pensioners (as happened here) and this would favour states with more expansive welfare systems with more , so would be disadvantage countries that “did the right thing” in a time of austerity.
Much worse, however, is that it would require the co-operation of all governments in the zone. Not gunna happen.This information simply isn’t going to get to the ECB. Still with your passport plan, with the flagellents-by-proxy in power, I would not be surprised if some governments freezed the issuance of new passports (to young people disproportionately) just to spite the plan, or refuse the bank office space.
The transfer system mechanism might be possible in the US. Might depend on the secrecy laws regarding social security. If the executive is permitted to pass that info on to the Fed, the Fed would be able to act without the blessing of Congress. But I still think this would be as unpalatable as the platinum coin option.
You are quite right: the stimulus done through the welfare system in Australia indeed is pretty close, although it did raise debt. I didn’t think of it when writing the post but should have mentioned it, thanks!
The mandate of the ECB is quite broad so though I am no lawyer, I would be surprised if the ECB could not do it: it’s main legal constraint has been not to aid the budget of countries and is has with quite general blessing disregarded that supposedly iron constraint, so this one would be minor as the ECB could just chalk it up to its role as financial stabiliser. And I doubt any country would prevent its own citizens from getting a handout. Doesn’t seem the popular thing to do! I worry more about dead and fake citizens coming to claim.
I have clearly forgotten my introductory economics, but I vaguely remember there being some “proof” from the dismal science that monetary policy is more effective than fiscal policy.
I’m sure that there are a lot of assumptions in that “proof” which may not be true today (i.e. frictional costs of banks, capitalization of banks, consumer & business outlook)
Hopefully someone more knowledgeable than I would be able to explain why most economies moved to monetary policy in the last 2 decades, and whether policy inertia is leading us down the wrong path?
The other argument is that governments are now overly in debt, although proving that outside the eurozone is challenging.
I agree that a more direct stimulus is needed, particularly where the problems stem from the financial system. The size of the margins the banks are able to get by loaning on the money indicates that something is not working in the financial system and so it would be prudent to find alternative channels to apply monetary policy to the economy.
The main concern I would have would be how would you enact a contractionary policy if the economy became over stimulated and inflation began to rise. Would it work to just ramp up interest rates and collect the money back as people pay off their debts?
That one is easy: increase taxes and use them to pay off the national debt! Of course, it ain’t politically expedient but it is clearly economically imperative to save up when times are so good that one can speak of ‘over-stimulation’!
Wouldn’t having one institution (independent central bank) in control of the expansionary mechanism while having another (elected government) in control of the contractionary mechanism be a recipe for disaster?
I dont really see why. Ultimately, both are beholden to the general public with Central bankers being appointed by politicians and both subject to the laws and customs of the day.
Of course, in Australian reality we already had the situation last time round when the Howard government should have increased taxes and saved up but elected to spend in a boom, pushing the RBA to increase interest rates to effectively undo the spending boom, leaving more debt as a net result. The political reluctance to hoard in good times for the bad times will probably remain an issue whatever is done with these accounts….
http://www.positivemoney.org/2011/11/steve-keen-bbc-government-print-money-pay-debts/