There is another possible solution. A decade ago in a widely noted speech, Ben Bernanke, then a Federal Reserve governor, encouraged Japan to finance tax cuts with money printed by the central bank and credited directly to the budgetary arm of the government without issuing any more interest-bearing debt. This idea was first proposed by Milton Friedman in 1948, who likened it to a "helicopter drop" of money for combating deflation. Today "helicopter money" is more politely called "overt monetary finance."
The Fed has already printed about $2.5 trillion of new money. Overt monetary finance might offer a more direct way to channel that money into the economy than trying to push debt through banks to the private sector. Such an approach would bypass the credit channel and send cash straight to the Treasury, where it would be deployed as directed by Congress.
The Fed would be making the equivalent of an equity investment in the Treasury, which is important because it is prohibited by law from directly buying Treasury debt. This mechanism might offer an optimum combination of fiscal and monetary stimulus without increasing private or public debt.
Overt monetary finance is only a crisis-fighting tool. Once the economy stabilizes, the nation's elected leaders must find a responsible way to correct the nation's long-run budgetary imbalances.
quote:This may be the reason it hasn't been done before. The Fed needs to have some control over where the funds end up. As they have far more control over the banks compared to Congress, putting The Big Money directly into the hands of Congress would not be Plan A. JMHO.
Such an approach would bypass the credit channel and send cash straight to the Treasury, where it would be deployed as directed by Congress.
quote:To which banks is he referring?
Overt monetary finance might offer a more direct way to channel that money into the economy than trying to push debt through banks to the private sector.
and send cash straight to the Treasury, where it would be deployed as directed by Congress.
That really doesn't make any sense.
Congress controls the budget either way.
quote:+1. Something tells me Bernanke's criteria for a crisis is not quite the same as the criteria politicians would be wont to use in a given situation. I might be more in favor of it in a country with a balanced budget amendment in it's constitution and congressional term limits.
Politicians are short sighted enough.
Interest is controlled by supply/demand of our debt so the Fed can smooth out the economic and market thirst for our debt but principal is still controlled by the budget. The budget is controlled by politicians, and if you think Keynesiasm creates a blank check for the government this would be creating a money tree.
This would be a more honest way to pay for government expenditure
quote:But do you have any concern that funding the treasury this way could lead to even bigger stimulus packages in future economic downturns instead of across the board tax cuts? Which inevitably involves a lot of picking winners and losers. Or do you think this method wouldn't affect the ratio of tax cuts to stimulus much? I have little faith that future politicians will collectively vote to give themselves less power and pass on opportunities to play santa clause when they can convince voters it's in response to a "crisis".
rather than to pick winners and losers
quote:so the argument is that this should only be done the event of a financial crisis? To increase the money supply more quickly via tax cuts, instead of through the banks? At what point would you distinguish staving off a crisis from returning to the standard practice, near zero interest rates, etc, to combat a lagging economy following the crisis, and who would decide that? If it's at the fed's option, then I agree it would likely be a much better method for injecting money into the real economy, but if it's a standing option for congress, that distinction seems suspiciously arbitrary to me.
subsidize the financial industry while creating odd pockets of asset price bubbles
At what point would you distinguish staving off a crisis from returning to the standard practice, near zero interest rates, etc, to combat a lagging economy following the crisis, and who would decide that?
I still dont understand how funding only the tax cuts would have enough of an impact on the money supply to not have to augment it with OMO's though.
I just can't possibly fathom how it would be any worse than what we've seen the last 5 years, and I also can't understand why a blank check for government to cut taxes until inflation arrives is any worse than a blank check to completely override the pricing mechanism for money & interest rates.
Like I always say, ZIRP is more dangerous than people think. This would be a more honest way to pay for government expenditure, in my opinion. It makes far more sense to just cut taxes across the board and make up for it with a counteracting inflation tax, rather than to pick winners and losers and subsidize the financial industry while creating odd pockets of asset price bubbles as the remainder of the economy continues to erode.
The CPI index fell from March to April this year for the first time since 2003. Things are not looking good.