Anatole Kaletsky

Suddenly, quantitative easing for the people seems possible

By Anatole Kaletsky
August 9, 2012

Last week I discussed in this column the idea that the vast amounts of money created by central banks and distributed for free to banks and bond funds – equivalent to $6,000 per man, woman and child in America and £6,500 in Britain – should instead be given directly to citizens, who could spend or save it as they pleased. I return to this theme so soon because radical ideas about monetary policy suddenly seem to be gaining traction. Some of the world’s most powerful central bankers – Mario Draghi of the European Central Bank last Thursday, Eric Rosengren of the Boston Fed on Monday and Mervyn King of the Bank of England this Wednesday – are starting to admit that the present approach to creating money, known as quantitative easing, is failing to generate economic growth. Previously taboo ideas can suddenly be mentioned.

Rosengren, for example, suggested that the Fed should expand the money supply without any limit as long it sees unnecessary unemployment. Draghi has similarly promised to spend whatever it takes to prevent a euro breakup, although politically his ability to do this remains in doubt. Most interesting was a speech by Adair Turner, chairman of Britain’s Financial Services Authority and leading contender to be the next governor of the Bank of England. This speech strongly challenged the pervasive complacency of central bankers and called for new ideas that might combine central-bank money creation with government decision making on how to bypass banks and inject this money into the non-financial economy of consumption, investment and jobs.

The radical alternative discussed here last week – QE for the People (or QEP, for short) – would bypass banks completely by distributing newly created money straight to the public. It is not yet on anyone’s agenda, but neither is it any longer dismissed as a joke.

Given the clear political attractions of giving money to citizens, rather than bankers, it may start to gain attention, at which point there will surely be powerful objections to this idea. Apart from the obvious observation that bankers and financiers are very powerful interest groups, there are four genuine arguments against QEP as a way to stimulate economic recovery.

The first is that it wouldn’t work. Since banks and bond investors simply hoarded most of the $2 trillion delivered to them via QE, maybe citizens would do the same. Instead of spending their QEP bonuses to buy consumer goods and houses and create jobs, citizens scarred by the financial crisis might simply save their bonuses or use them to pay down debts. This could indeed happen. But if it did, economic prospects would still be transformed, since the debt burdens crushing many households would be lightened. If the $2 trillion in QE had instead been used to repay consumer debts, U.S. household debt would be reduced from 83 percent to 70 percent of GDP, roughly where it was in the 1990s. The excess leverage created by the housing and credit bubble would be eliminated at a stroke.

The second objection to QEP is that it would work too well. The present slump would turn suddenly into a boom and create inflation. Excessive inflation is always a valid argument against excessive monetary stimulus, but the problem with inflation today is that it is too low. Central banks all over the world are explicitly trying to increase it by reducing interest rates to zero, and the Fed is particularly adamant about this. If central banks print too much money for too long, then inflation will follow. But the same applies to the present policies of zero interest rates and standard QE. Nobody worries about the inflationary risks of these standard policies any longer because they don’t seem to be working, but this may actually mean that an accidental monetary overdose is more likely if the central banks stick to standard QE.

Another, more powerful, version of the “works too well” critique relates to politics and moral standards. If distributing printed money proved successful, this discovery would corrupt society. Politicians would bribe voters before elections and citizens would stop working, preferring to collect handouts from the central bank. Of course, these things would happen if QEP continued forever. But the same is true of all popular policies, including tax cuts, welfare spending and low interest rates. What limits the moral hazard of these policies is not ignorance, but democracy. Governments that lose control of inflation get punished by voters – and the same would apply if central banks continued printing money for longer than required, whether this money went straight to voters or banks. Indeed, if QEP proved effective, central banks would have to print less money than under standard QE.

Which leaves the final and most persuasive objection: the idea that money could be given to citizens without raising taxes or increasing the government’s debt burden seems too good to be true. Economists often say that “there is no such thing as a free lunch,” but this is not true. In fact, economics since Adam Smith has demonstrated that the world is full of free lunches. Free economic exchange means that one person’s gain need not result in another’s loss. When properly managed, industrial specialization, international trade, market competition and full-employment macroeconomic policies can all produce gains without any substantial losses. In the deepest and most protracted economic slump since the 1930s, QE for the People may be another such idea whose time has come.

25 comments so far | RSS Comments RSS

Why not? We’re headed for an economic train wreck anyway. Why not have a little fun along the way. And while we’re at it, forget about those pesky treasury auctions. Who needs to go further into debt when you can just expand the Fed balance sheet ad infinitum. Even Nobel Prize winner and uber Keynesian Paul Krugman hasn’t come up with such a brilliant plan. Anatole for Fed chairman!

Posted by gordo53 | Report as abusive

Moral hazard may indeed be an argument against free money for ordinary people.

But there can be no doubt at this point that it is an overwhelming, incontrovertible argument against any more free money for banksters.

Posted by bluememe | Report as abusive

QEP does not pose a moral hazard risk because money is distributed to everyone rather than being used to bail out only the irresponsible.

Posted by chris9059 | Report as abusive

It will never go anywhere due to the Political Objection:

“The Fed is just throwing the election to Obama.”

Posted by NonaNym | Report as abusive

Lowering taxes to the “productive segment” of the populations and the small business (no more loopholes for big offshore tax free heavens though), will be better than QEP because it will encourage to work more, produce more, hire more etc. ultimately will stimulate healthy growth.

When direct fiscal pressure on money earned, simply working, reaches 50% (easy combining Fed & State), is like working 6 months out of a year for Uncle Sam and it is not an incentive to work or earn more.

Posted by robb1 | Report as abusive

I fail to see any more moral hazard in handing out cash directly to the public compared to handing it to banks. The banks simply sit on that cash and earn interest on it in the interbank market which contributes massively to profit since the money is free. Alternatively they use it to finance massive speculation like JPM recently proved, secure in the knowledge that if they make money it further inflates profit and if the lose money, they will be bailed out again. This massively inflated profit is then simply distributed as bonuses to the banks’ CEOs and their buddies. Therefore the free money eventually ends up in the hands of the public – only though in the hands of an elite little section of the public. I would argue that governments have a duty to ensure a fairer distribution of free money if they are going to use free money as an economic tool.

Posted by ThinkLateral | Report as abusive

So when does Atrios(the blogger) get credit for this idea? He’s the first one who I know that ever talked about it.

Posted by PhilPerspective | Report as abusive

By what mechanism is this money to people supposed to be ‘printed’ and distributed?

By statute the Fed can only issue money in return, payment in other words, for acceptable debt securities. Those being only Treasury Securities from the 30′s until 2009 when they started taking MBS mortgage backed securities too. At any rate the Feds hands are tied. What securities do people hold which they can sell to the Treasury? None of course. Besides if people had securities to sell in order to get money, they would, no Fed needed.

It is mindboggling that even economists don’t seem to know or forget what the mechanisms of money printing by Central Banks are. Well on second thought not so much. For the economics profession has studiously been forgetting to think about money, or credit in aggregate, for 30 years or more.

Posted by rapier | Report as abusive

Atrios has been way behind the MMT bloggers and economists on this. Atrios has the right idea, but has been blasting the Fed for not doing this, when it is clearly something that would require action by Congress and the Executive branch, in addition to the Fed.

MMT – Modern Monetary Theory – is part of a Post Keynesian macro economic tradition that recognizes that fiscal policy is needed, and that monetary policy is a very limited tool (basically limited to setting the interest rate for government bonds). QEP would be fiscal policy. The central bank only works with large financial institutions to manage interest rates, regulate, and bail out these financial institutions when necessary…

Posted by DetroitDan | Report as abusive

Yes, give everyone money, not just the banksters. That way we can all race to spend it first before inflation catches up. Therefore the imbalances switch from being between bankers and society to being between two parts of society. Then we can wake up and realise we’ve bought things we shouldn’t have had we realised nothing’s actually improved, and now the money we have saved is actually now worth less, making the adjustemtns even worse later on.

NB – I’m making the same assumption here as you: that people are foolish enough to spend enough of the money they receive to ‘stimulate’ the economy, and not save it or pay down debt to withstand the tough times ahead.

Posted by MBoulNZ | Report as abusive

The obvious thing to have done back in ’08 was for the Federal Reserve to have opened a retail TARP window. The banking business is basically obsolete. It was based on unavailable credit risk information and the high cost of data processing. We now have moderately reliable credit risk reporting – much better than S&P and the like – and cheap data processing. Why waste money propping up a relic of the past, our banking system?

Posted by Kaleberg | Report as abusive

I promise that if we do this, I will spend the money within 2 months. I have my eye on a lovely sofa.

Posted by masaccio | Report as abusive

this is actually the better “keynesian” idea I heard for a while

Posted by the_italian_guy | Report as abusive

in Australia they actually did it, back in ’08, just before Christmas. $1000 to every family.

Posted by the_italian_guy | Report as abusive

why do we have banks at all then? why not simply eliminate the ‘middle man’ and allow the government to hold our savings and lend to business as it sees fit? Bye bye capitalism.

Posted by Beta_adjusted | Report as abusive

of course QEP is morally dubious. It bails out people who have run out of money. In most cases, this has been due to the mismanagement of their personal finances and they should pay the price of making a promise to repay (borrowing) and then failing to keep their word. I would also like to finally be able to buy a house at a reasonable price; indeed, I would like to buy a house at a *bargain* price, a reward for the last 13 years of living at my parents, not buying a car, and saving for the future. Of course, it depends on your value system … I would argue that borrowing money to go to university, or even to buy a house, is immoral and dangerous. But today its more than acceptable: its expected. And there are arguments that credit results in a higher speed of economic growth, although I would argue that whether this is actually a higher ‘risk-adjusted’ rate of growth is debatable; I am not an expert and would be interested to read more on the subject. Imagine if the sum to be distributed was ÂŁ500k rather than ÂŁ6500. All the benefit (and hardship) borne by savers would be eliminated. Any QE or QEP is absolutely immoral, and strengthens the argument against democracy, namely that the wants/needs of the irresponsible masses will always win over sensible monetary policy.

Posted by Beta_adjusted | Report as abusive

It’s easy
use QE to write off and write down the underwater mortgages
= no more hording

Posted by lotuslandjoe | Report as abusive

The banks will end up getting the money in the end. You save it (unless it’s cash under a mattress), you buy a car, you pay off loans, etc. The problem is the banksters want everyone to be indebted to them.

Posted by mutt3003 | Report as abusive

This is a direct inflation play that would go directly to paying off debt. But since it’s new money, it would be equivalent to the government writing down the bank debt. No gain, bank interest rates up. Band-aid measures to fix the economy only work for so long, we need to address the structural issues in the economy that QE1,2,3,4? will never solve.

Posted by CtzCain | Report as abusive

QEP does not sound like a good idea any more than QE was for the banksters. I suggest a nice income tax cut (5%-7%) for everyone making less than a total combined income of $100k and for small business making less than $500k. Now that would work much better and would not start an inflation spiral.

Posted by JLWR | Report as abusive

Commenter “rapier” questions how the Fed could hand over cash without collateral. There would probably have to be an intermediary which would issue bonds for the Fed to buy with “printed” money. “lotusandjoe” suggest writing down underwater mortgages. Indeed, the intermediary could pay off the underwater portion of mortgages and then some, but this could not, should not, be a giveaway, but rather a low-interest (2%) loan such as Martin Feldstein proposed in 2009. This should all be part of a larger solution to clean up the mortgage system and the overhang of toxic CMOs.

Posted by richwell | Report as abusive

Why not allow the Fed to refinance folks (in good standing on their mortgages) at the 10-year treasury rate? The asset, the home, would continue to secure the loan while the reduction in interest rate would result in a halving, or more of the monthly payment. In turn, folks would begin spending again as they would soon feel ‘rich’ enough to stop being afraid. This is how you create jobs. A side benfit is Fannie/Freddie get paid off and we taxpayers are let off that hook as well. Sleight of hand? Of course, but at least this gets folks spending again.

Posted by jbeech | Report as abusive

China would love us!

Posted by Houserich | Report as abusive

Politicians in charge know all too well what to do OR NOT DO in this game of redistribution that debt and depression have evolved. They have plenty of technical support and knowledge themselves. Your solution or even debt canceling – which will prevent the hoarding effect swallowing the money injection – will not go down very well with any of these.We loose individual disposable income through wage reductions, deflation and higher taxes so that the banks get recapitalized at our expense.They keep the system running so that bank insolvency does not create rampant deflation erasing too much wealth but their relative position through gold and raw materials appreciation and devaluation of non-liquid assets becomes stronger every day.In Europe debt canceling through buying government bonds would work miracles.But who wants it?

Posted by Y-patia1 | Report as abusive

jbeech has the best idea I’ve seen. Another idea would be to use QEP to write down principal on mortgages to fair market value.

Posted by breezinthru | Report as abusive

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