Ben Bernanke and Milton Friedman Were Right: Helicopter Money or Qualitative Easing?
Guest blog by Hazel Henderson, Ethical Markets Media
President Reagan’s famed economic adviser Milton Friedman often thought outside the economics box. In 1969, Friedman proposed that the best way to stimulate economies was to take bundles of cash up in helicopters and throw them out for everyone. His student, former Fed Chair Ben Bernanke, referring to Friedman’s idea, earned the nickname “Helicopter Ben.”
Fast forward to Wall Street’s financial crises in 2007 and the $700 billion TARP bailout of big US banks in 2008. President Obama in 2009 faced a 9% contraction of US GDP, catastrophic job losses and home foreclosures and got Congress to pass a $780 billion fiscal stimulus but the “new normal” followed: lower GDP growth. Stagnant wages, inequality, volatile stock markets, commodity prices, tax dodging, and continued offshoring of jobs and companies fueled the rise of the Tea Party, Occupy Wall Street and the resentment of the shrinking middle class. Congress (cognitively captured by laissez faire economics) refused more fiscal spending on crumbling infrastructure, instead focusing on deficits, debt and fears of inflation. These “austerity” policies and “sequestration” spending cuts produced gridlock and government shutdown threats if debt ceilings were raised to pay bills for prior spending. Poisonous partisanship continues ceding the economy’s problems to central banks.
Meanwhile in Europe, politicians, equally enthralled by orthodox economics, bailed out their banks’ liabilities into ballooning sovereign debt. They imposed austerity, cuts and costs on their citizens rather than haircuts on banks’ bondholders and shareholders. Austerity imposed in Europe led to similar angry resentful middle classes as in the USA.
The resulting polarized politics are shaking the foundations of the European Union (EU), while the USA is coping with Trump’s realigning Republicans and Sanders’ sweep of Democrats. Central bankers still are forced to act with quantitative easing (QE), lower and even negative interest rates. All hoping to spur the elixir of GDP-measured economic growth – itself discredited, even by The Economist, as unsustainably steering economies off course. Mario Draghi vowed to keep pumping money into EU economies, and Janet Yellen kept low interest rates and successive rounds of QE. Both US and EU economies are still stuck in the “new normal”, diagnosed by Lawrence Summers as “secular stagnation”, rather than a textbook cyclical phase.
Bernanke frequently warned that the US could follow Japan’s stalled economy, instituting lower interest rates in 2008, then several rounds of QE. Following economic orthodoxy, Bernanke provided these newly minted funds to the banks via the Fed discount window and purchasing $1.25 trillion of mortgage-backed bonds. Theoretically, money would trickle down through the banks’ lending — obviously mistaken since the money never reached Main Street. These mistakes were targeted by NGOs and critics of all stripes. Yet elites in business, finance, government and their economists’ theory-induced blindness persisted while academics and pundits failed to explain their policies’ failures. Monies stuck in banks went offshore in speculation on sovereign debt, offshoring jobs and companies’ stock buybacks.
Citizens in EU countries and the US had uncovered the arcane politics of money-creation and credit-allocation, seeing money-printing on TV shows. Across the political spectrum, protesters’ signs were similar: “Where’s MY bailout?” Common knowledge grew that money-creation was not a public function issued by governments, but had been ceded to private banks. Banks created the money supply whenever they made loans – just making an electronic entry into the borrower’s account. This new money was leveraged up to tenfold in the textbook “fractional reserve banking” – and the banks could also charge the borrower interest!
Governments wishing to finance voter-approved public works must borrow the money from bondholders and banks at interest. NGOs in the USA, the American Monetary Institute, and the Public Banking Institute, the UK’s Positive Money and the New Economics Foundation all said “Why not have government treasuries issue money directly without interest?” Citizens in both countries often agreed, shocked since the US Constitution gave the power to coin the currency to Congress – not to private bankers! US libertarians passed a bill in Congress to audit the Fed or shut it down as in Ron Paul’s End the Fed (2009).
Thus, central banks lost political independence because of the over-active role thrust upon their monetary tools to try to revive economies after the 2008 crises. Conventional economics disempowered politicians, saddled their taxpayers with bailouts, debts, austerity and fueled the rise of right wing calls for return to the gold standard, scapegoating immigrants. The new populists called for “QE for People” not bankers. Protests were grounded in understanding how money is created and credit distributed. Fairness was demanded as inequality of incomes and wealth grew. Bloated financial sectors, bankers, speculators and central banks were targeted, also in movies and TV shows. Britain’s former financial regulator Adair Turner, argued for returning money-issuance to governments. Others in Europe, the Planck Foundation and the World Future Council (WFC) called for “Green QE” to finance the global transition to low-carbon, renewable resource based economies. We agree and joined financial pioneer D. Wayne Silby’s call for ”Qualitative Easing!”
Today’s populism is driving huge political shifts. Formerly taboo debates reveal the bankruptcy of conventional economics. Milton Friedman’s proposal for a “negative income tax” or basic minimum incomes for all is debated in Switzerland. Academic and policy conferences debate fairness, inequality and privatized money-creation. Central banks are forced into more attempts to push money into their real economies to stimulate aggregate demand. While conventional QE efforts create asset bubbles and over-valued currency, Qualitative Easing could be directed to future needs: revitalizing infrastructure, education and growing greener, more efficient renewable energy deployment. Just as mortgages and rental income is securitized, so too can the $1.2 trillion of student loans. Deflation scares central bankers more than inflation. Low and negative interest rates make infrastructure investments attractive to pension funds.
Elections hang in the balance. Negative interest rates in Europe and Japan decimate savers’ nest eggs and bank profits. Central bankers and financiers now discuss “helicopter money”, their last hope for stimulating stagnating aggregate demand – by putting purchasing power into the pockets of the 99% who will spend it, unlike the 1% (who tend to save and invest). This is why financial media report daily on the helicopter money option. The other option re-surfacing is for basic incomes for all – thanks to Milton Friedman’s negative income tax. Time for helicopter money? Certainly for Qualitative Easing!
Hazel Henderson is President of Ethical Markets Media (USA and Brazil), publisher of the Green Transition Scoreboard®. She has authored many books, including Building a Win-Win World; is a Fellow of the World Academy of Art and Science and Britain’s Royal Society of Arts; and co-produced the Ethical Markets TV special, “The Money Fix”, on PBS stations.