The scale and length of the current recession has legitimised a return to the debate on introducing overt monetary financing as a policy option, according to economist Lord Adair Turner.
Lord Adair Turner missed out on being appointed as governor of the Bank of England but this was good for the world, according to business magnate George Soros, because it frees him up to speak his mind. And that is exactly what he is doing, pushing for an intellectual debate on ‘helicopter money’ and breaking the taboo on printing money as a policy option.
Mr Turner draws on the work of the Chicago School of Economics, bringing up the arguments of US economists such as Henry Simons and Milton Friedman, whose work was a response to the Great Depression.
“Their writing, either directly or indirectly, stimulates thoughts about what we should have done before the crisis and what we should do now,” he says. Although known for their laissez-faire, free-market thinking, Messrs Simons and Friedman saw banking as an exception and viewed debt as dangerous. In fact, they proposed that banks should be regulated so heavily that they should be reduced to mere payment institutions.
Beyond Basel
“We have to realise that the amount of debt within the economy is a crucial economic variable,” says Mr Turner. “Before the crisis we did not have that attitude." Rather than the textbook definition of banks as intermediaries, lending out pre-existing deposits to borrowers, he says that banks create money and private credit, a role that needs to be limited. “The authorities and regulators were the inheritors of a 50-year policy mistake of allowing far too high levels of leverage,” says Mr Turner.
While he does not agree with the radical position of the Chicago School of Economics, Mr Turner argues that in a perfect world banks should be subject to liquidity and capital requirements much greater than Basel III. And, while it is leverage that triggered the financial crisis, what is slowing the recovery is a great recession that has been caused by the deleveraging that took place after the crisis. In this environment, argues Mr Turner, conventional monetary policy is constrained and there should be a willingness to consider radical options.
Mr Turner is calling for a debate on overt monetary financing (OMF), or more simply, the printing of money to finance government deficits. Unlike quantitative easing (QE), where the central bank buys bonds with the intention of the action being reversed, OMF is permanent and there is no expectation that it will be paid back at a later date.
Breaking taboos
Messrs Simons and Friedman both argued for OMF. And the idea that it is a solution to extreme deflation is something that Mr Friedman and UK economist John Maynard Keynes, who was father of an opposing school of economic thought, agreed on. In 1936, Mr Keynes suggested that the unemployed dig in coal mines for bottles filled with bank notes, while in 1969 Mr Friedman suggested that “helicopter money” should be dropped to the ground.
Unlike QE, which is distributed through the financial system, helicopter money delivers the money straight to the general public. In 2003, before he assumed the post of chairman of the Federal Reserve, US economist Ben Bernanke argued that Japan should consider a tax cut that would be financed by money creation, earning himself the nickname ‘Helicopter Ben’.
Mr Turner says that OMF should be considered as an option because in extreme circumstances it can be appropriate. “Japan should have done this 10 years ago,” he says, adding that OMF then would have avoided the large-scale quantitative easing programme that the Bank of Japan has now embarked on.
Printing money is such a taboo because of its association with hyperinflation, but Mr Turner argues that OMF is no more inflationary than any other means of stimulus, the issue is more of quantity. The dangers, he explains, do not lie in the technicalities but rather political economy.
“Once the cat is out of the bag, politicians will want to do it, not in the appropriate quantities at the appropriate time, but they will want to do it all the time,” says Mr Turner. Once it is admitted it is possible, financing deficits with money comes with the dangers of irresponsibility. But one reason to break the taboo and open the debate is so that if OMF is ever used, it is not done in an undisciplined and dangerously inflationary way.
Lord Adair Turner was formerly the chairman of the UK’s Financial Services Authority. In April 2013, he joined the Institute of New Economic Thinking as a senior fellow in London.
