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Central banks are printing rules almost as fast as they’re printing money. The consequences of these fast-multiplying directives — complicated, long-winded, and sometimes self-contradictory — is one topic at hand. Manipulated interest rates is a second. Distortion and mispricing of stocks, bonds, and currencies is a third. Skipping to the conclusion of this essay, Grant’s is worried.
“One would not think at first sight that government had much to do with the trade of banking,” Walter Bagehot, the famed Victorian writer on finance, mused a century and a half ago. As time rolls on and regulation gives way to regimentation, the question presents itself: Do bankers have much to do with the trade of banking anymore?
One sees a certain measure of justice in the humbling of the regulated financial titans who put themselves in this position of vulnerability; many of them were going broke. Then, again, there’s irony in the regulatees ceding power to the regulators. The latter seemed to know even less about the corrupted structure of money and credit than the former.
The US Fed keeps talking about raising interest rates, and maybe the time has come, or will come in this lifetime, for the Federal Open Market Committee (FOMC) to act. Even the talk, though, places the Fed many cyclical furlongs ahead of its foreign counterparts. The central banks of Japan and Europe haven’t begun to acknowledge the eventual need for tighter money. Besides quantitative easing (QE) of one kind or another, Haruhiko Kuroda and Mario Draghi are dropping broad hints about the desirability of cheapening their respective currencies. Concerning the Swissie, the Swiss National Bank is reiterating its determination to print them up by the boxcar-full to protect the domestic Swiss economy against an export-thwarting Swiss/euro exchange rate.
What the mandarins share — ours and theirs — is faith in radical nostrums. Few would have contemplated these measures, let alone espoused them, much less implemented them, before 2008. The conventional monetary belief system changed in the blink of an eye. In 2002, in a speech in Washington, DC, then Fed Governor Ben S. Bernanke invoked Milton Friedman’s idea for emergency monetary stimulus. When banks are impaired and the price level sags, the stewards of a fiat currency could hire pilots and deliver their stimulus by air instead of by land, Bernanke observed. Hence the phrase “helicopter money.” Wall Street, bemusedly reading the transcript of Bernanke’s speech, dubbed the future chairman of the Federal Reserve “Helicopter Ben.” It seemed funny.
The Council on Foreign Relations lent its imprimatur to the concept of helicopter money in the September/October number of Foreign Affairs (Grant’s, 5 September). Martin Wolf, columnist at the Financial Times (FT), does the same in his new book, The Shifts and the Shocks.
You think you know what Wolf is going to say — he rarely surprises in the FT — but here he throws a curve ball. Murray Rothbard, the great capitalist, long ago made the case against fractional reserve banking. No need to run for your money in a Rothbard-approved banking system; it would never have left the vault. Wolf echoes the call for 100% reserve requirements.
The argument has its appeal. The semi-socialized, thoroughly cartel-ized big banks keep stepping on the same rake. QE chiefly benefits the rich because it acts through banking channels to boost asset prices. And then QE boosts them some more. By and by, there’s another crisis.
Thinking you know Wolf, you wait for him to urge an even more draconian regulatory system than the one in place. He doesn’t. Big Regulation is a failure, he allows, though not for lack of regulatory effort. In the wake of the Great Depression came the Glass–Steagall Act; it ran to 37 pages. “This time,” as he relates, “the Dodd–Frank Act ran to 848 pages and requires almost 400 pieces of detailed rule making by regulatory agencies. The total response may amount to 30,000 pages of rule making. Europe’s rule making will almost certainly be bigger still.” If the goal — always and everywhere — is to keep it simple, complexity is poison.
The answer, so Wolf proposes, is to let the government end-run the banking system by printing the money with which to pay the government’s vendors or clients. In plain English, he advocates the methods of the Continental Congress in the 1770s and the French Directory in the 1790s. Wolf is inclined to overlook the legendary inflation that turned the US Founding Fathers against fiat currency. A fine one for the silken phrases of modern economics, the columnist puts his proposition thus: “The direct monetary funding of public spending, particularly higher investment, or tax cuts would be a debt-free and highly effective way to generate additional demand.”
Debt free? Here we come to the crux of the matter. Even the 21st century paper dollar pays some small homage to classical methods. On the Fed’s balance sheet, notes and bonds “secure” greenbacks and deposits. You can’t convert a wad of dollars into Treasuries or mortgage-backed securities (MBS), but the assets do — in a formal bookkeeping sense — anchor the liabilities. A note is a promise to pay; it is a debt instrument. The bills in your wallet, you US readers, are Federal Reserve “notes.” The nomenclature is a kind of echo, a tip of the hat to the distant days of gold convertibility. Under the Wolf plan, the newly printed dollars would be secured (or backed or mirrored) by no asset. The Wolfian dollar, pound, or euro would be the purest kind of scrip, a wolf in wolf’s clothing.
What’s new here aren’t the ideas; it’s their respectability. More than five years after the start of QE1, the consumer price index (CPI) is, if anything — according to the Federal Reserve — too well contained. Interest rates have shriveled. Why not put into place a still more radical doctrine? “If you had agreed with all the academics, billionaires and politicians who denounced Federal Reserve monetary policy since the financial crisis,” Bloomberg taunted the sound money tribe, “you missed $1 trillion of investment returns from buying and holding US Treasuries.” Most nutty ideas never reach the policy-implementation stage. We would not be so quick to write off “direct monetary funding.”
It’s the way of radical monetary gimmicks that one begets another. The more they’re tried, the less they succeed. The less they succeed, the more they’re tried. There is no “exit.”
Satu Insan - Malaysia 