A simple way to tackle recessions
Positive Money proposes a new tool for the European Central Bank so that it can respond effectively to current and future financial crises. By using ‘helicopter money’, the ECB would distribute money directly to all citizens in order to stimulate the economy.
When a financial crisis hits, governments and financial authorities have to respond very quickly to ensure the economy does not spiral down into a disastrous recession.
In response to the great financial crisis of 2008, central banks including the ECB promptly reduced interest rates to near-zero, in an attempt to make it cheaper for banks to lend money to the businesses and individuals. If this is not enough, central banks can also do “quantitative easing” (QE). Under this instrument, central banks create money and inject it into the financial sector by purchasing various government bonds and financial assets. The money injected through QE is supposed to trickle down to the real economy by pushing financial markets and banks to lend more. QE also makes it easier for governments to sustain their deficits.
The European Central Bank announced its quantitative easing programme in 2015 and has created more than 2.5 trillion euros this way. Unfortunately, the effects were limited.
Central banks don’t have the right tools
Despite a massive injection of new money through quantitative easing, the ECB has so far failed to achieve its primary mandate of maintaining inflation close to 2% for the past five consecutive years.
There are many reasons why quantitative easing and interest rates do not work well.
The main reason is that those policies rely on the assumption that the economy needs more debt, while in fact the economy is suffering because it has too much of it. Making money cheaper to borrow does not necessarily mean people want to borrow more, especially when they have already having a hard time repaying their existing debts. In fact, creating more debt would result in a more fragile economy, prone to a financial crisis.
Second, monetary policies like QE and interest rates are intermediated by a dysfunctional financial sector, which means money does not reach the real economy (where most people live and work). ECB policies take a lot of time to produce their desired effects on the economy.
Third, it is questionable whether the banking sector needs QE at all. Indeed, as acknowledged by prominent central banks including the Bundesbank, commercial banks do not need pre-existing funds in order to make loans – they create money by making loans. As Ben Bernanke once said, “the problem with QE is that it works in practice, but not in theory.”
Fourth, governments did not take full advantage of quantitative easing by expanding their investment spending. Because QE reduces the cost of government borrowing, it was an opportunity to scale up investment spending in order to ensure a sustainable recovery. However the Eurozone’s fiscal rules were too strictly imposed on member states, in effect forcing them to cut spending instead of investing more.
All in all, only a fraction of QE was transmitted to the real economy. The volume of money created under QE is equivalent to 20% of total Eurozone GDP. Yet, growth is increasing slowly, at around 2%. The ECB’s own estimate is that QE has increased inflation by a mere 0.5%, which is insignificant given the scale of QE! Not only did QE not work so well, but it tends to increase wealth inequality and creates asset bubbles in certain sectors.
Many economists are currently debating whether central banks have “run out of ammunition”. If that were the case, it would mean that central banks could not cope with another financial crisis.
Positive Money Europe’s view is that there are alternatives and central banks urgently need to look into them.
The ECB needs a new tool: helicopter money
Instead of pumping more money into financial markets like the ECB is doing with quantitative easing, Positive Money proposes “helicopter money”.
The intended purpose of helicopter money is to stimulate the real economy, by transferring money directly into citizens’ bank accounts. People could use the money to spend freely in the economy – no strings attached. Some people could spend it immediately, or pay off their personal debts, or even save or invest it. As a side effect, helicopter money would alleviate poverty and increase tax income for governments too.
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Why does helicopter money work better than quantitative easing?
It goes directly to the economy
Helicopter money is more direct. It stimulates the economy without relying on the financial sector’s transmission mechanism and its effects are therefore quicker to materialize than with QE or negative interest rates;
It can be legally implemented
Helicopter money does not violate the ECB’s monetary financing prohibition because it goes straight to citizens and not to governments. Helicopter money contributes directly to achieving the ECB’s mandate of price stability.
It is democratic and fair
Helicopter money treats all citizens equally instead of inflating asset prices for the benefit of the happy few.
It is sustainable
Using helicopter money does not entail piling up unsustainable levels of private or public debt. It would in fact help decreasing overall debt levels.
Helicopter money is not a new idea. It has been subject to a lot of academic discussions already, and supported by many economists. Even the ECB President Mario Draghi said he found the concept “very interesting”!
Through our work with the QE for People campaign, we managed to bring more attention to this idea in the Eurozone and in the European Parliament. The next step is to make the European Parliament and national governments back the idea so that the ECB can use when the next financial crisis hits.
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what they say about helicopter money
“Helicopter money is a very interesting concept”Mario Draghi
“Helicopter money simply has to be in the toolkit.”Martin Wolf
“All central banks can do it. You can issue currency and you distribute it to people.”Peter Praet
The main contribution of this policy briefing is to show why helicopter money can be justified on legal grounds as a monetary policy instrument for the ECB. This key point refutes recurring claims that such a scheme would amount to “fiscal policy”.
This short report by the Research Service of the European Parliament (EPRS) provides a fairly balanced summary of the state of the debate on ‘Helicopter Money’ in the Eurozone, mentioning arguments both for and against. The report was requested by Members of the European Parliament.
This paper written by Thomas Mayer from the Flossbach von Storch Research Institute argues why helicopter money would constitute a step towards a more effective monetary system. By distributing money directly to people, we could avoid the problems associated with money creation by private banks.
Czech Republic’s central bank deputy governor Mojmir Hampl examines the use of central bank capital as a policy tool whereby the central bank employs digital currency to transfer digital cash to each household, thus supporting consumption directly when needed. The paper addresses several objections to this policy, paying particular attention to the claim that weakening the financial strength of the central bank endangers long-term price stability.