Adair Turner’s FT piece urges the central bank/government to finance future debt with helicopter money. Leaving aside the merits of helicopter money, I found his argumentation unusual. It’s a piece worth taking seriously, because one presumes there must be a high chance still that he gets a post on the MPC in some capacity in the not too distant future.
One of his reasons is that helicopter money, unlike QE, would not affect asset prices. Three problems with this.
i) People should not take it as axiomatic that QE had a greatly material effect on asset prices. The research is much less clear-cut. For example, Vissing-Jorgensen and Krishnamurthy find that the Fed’s QE just pushed up spreads between government and private sector yields.
ii) Helicopter money-financed debt is fiscal policy but depriving the market of long dated securities, and giving instead reserves. ie, it’s like the first leg of QE. [Joining up the DMO debt issue and the declared temporary debt purchase by the BoE into one operation]. The BoE have said that QE will be reversed, so at some point the two policies will become different when the promise is kept. But right now, they aren’t. And maybe – HMT’s 2012 asset purchase facility profits grab is indicative – they won’t ever be. In which case how is QE supposed to bloat asset prices but HM not?
iii) Affecting asset prices is not all bad! That could be the price to pay for encouraging spending, increasing demand and employment.
Turner also says that helicopter money would lead to rates being higher than otherwise more quickly. I can see that one might argue that HM might stimulate more strongly, and so lead to the MPC later choosing, naturally, to raise rates back to normal. But he doesn’t seem to mean that. Other things equal [they aren’t, but never mind] dropping reserves out there means lower interest rates to clear the money market, initially.
As an aside, Turner says nothing about interest on reserves. Charlie Bean mentions this in a recent speech. As I see it, [and 2 others I chatted this through who have to remain anonymous] HM requires us to drop paying interest on reserves, to avoid creating an ever-increasing reserves ‘liability’ [the corollary of the bonds and their interest that are retired]. Not paying IOR is ok by me. But it means accepting lower interest rates for a while. That is also ok. But, to repeat, that means interest rates would not be higher [now at least] than under QE.
There are other reasons why Turner’s is a strange piece which I’ve mentioned before. He doesn’t say why we should do HM now, when we can simply do a conventional fiscal loosening without taking risks with the framework. And why we could not do more credit easing for that matter. Perhaps eventually there might come a time to contemplate HM. But not now.