Talk of Central Banks' Helicopter Money Should Be Grounded

 | Feb 19, 2016 | 12:30 PM EST
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There's no such thing as central bank helicopter money. Remember helicopter money? That was a term introduced by Milton Friedman and made popular more recently by Ben Bernanke. In Friedman's original analogy, he said that if the situation ever became dire, the central bank could fly over the people in a helicopter and drop money, essentially, giving it to everyone.

This, apparently, has become part of Fed lore.

I'm here to tell you there's no such thing as helicopter money. Friedman was wrong. The Fed can't just give money to people. It has no power to do so. Read Section 13 article3 of the Federal Reserve Act.

"In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may authorize any Federal Reserve bank, during such periods as the said board may determine, at rates established in accordance with the provisions of section 14, subdivision (d), of this Act, to discount for any participant in any program or facility with broad-based eligibility, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are endorsed or otherwise secured to the satisfaction of the Federal Reserve bank: Provided, that before discounting any such note, draft, or bill of exchange, the Federal Reserve bank shall obtain evidence that such participant in any program or facility with broad-based eligibility is unable to secure adequate credit accommodations from other banking institutions. All such discounts for any participant in any program or facility with broad-based eligibility shall be subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe."

This means the Fed can make loans. Making loans is not the same as helicopter money. I have been through this. With a loan, yes, you get a deposit in your account, but you also have a liability that is the loan itself. You have to pay it back. The Fed has no power to give you money. It simply cannot.

What this means is that the Fed can lend. It's a bank. It can make loans against collateral.

While it's true the Fed can give you money against any collateral that it deems sufficient (that can ostensibly mean a pair of your dirty socks), that is never going to happen. It might be able to give you cheap credit, but that's money that has to be paid back. It cannot give you money free and clear.

Therefore, the Fed and other central banks really can't print money. They can create credit, which is different than base government money.

The currency issuer, the government, can give you money. If the government gives you a check or makes a deposit in your checking account, that's yours to keep. It doesn't come with any corresponding liability.

Back in 2001 when then President George W. Bush sent everyone a check for $300, people were $300 richer. The net supply of financial assets rose. Lending does not increase the net supply of financial assets.

There are really smart people going around seriously talking about central bank helicopter money right now. They've been wrong on QE and negative rates and now they're asking/saying the central banks need to give out helicopter money. What's amazing is that there's still no discussion of fiscal policy, which is the only real solution. It's off the table. In fact, you have presidential candidates going around saying we have to "balance the budget," which is crazy.

Luckily, we are getting some fiscal stimulus in the form of automatic policy, as I pointed out yesterday. The $66 billion in tax refunds and the $45 billion in interest payments this month equate to fiscal stimulus. A pretty nice one, too, I might add, over $110 billion and there's still 10 days left in the month. Thankfully, we have these things, otherwise there'd be some real problems with the economy, not that there aren't problems now.

Leaving policy up to the very "smurt" people and their nonsensical, misguided talk about central bank "next steps" is dangerous. These people haven't a clue. Discount their chatter, that's all I can tell you, and be happy for what's automatic in our fiscal policy right now. That will likely carry us through.

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