Econintersect: This past week one of the leaders in global finance, Adair Turner, chairman of the FSA (Financial Services Authority), gave a speech of historic importance. In an address to the Cass Business School, 06 February 2013, Turner proposed that governments should use money for themselves and for ordinary citizens that is directly produced and not be restricted to that obtained via issuance of private bank credit as the global financial system has operated by and large for 100 years. He said that we are only slowly learning what factors got us into the financial crisis and how they "constrain recovery." And as we learn more he thinks the evidence indicates there are options that should be considered and have not been on the table.
Here is a quote from the introduction to the talk:
We must think fundamentally about what went wrong and be adequately radical in the redesign of financial regulation and of macro-prudential policy to ensure that it doesn’t happen again. But we must also think creatively about the combination of macroeconomic (monetary and fiscal) and macro-prudential policies needed to navigate against the deflationary headwinds created by post-crisis deleveraging.
Turner says that monetization of government debt should not be excluded. He referred to "helicopter money", obviously thinking of the U.S.'s "Helicopter Ben," Federal Reserve Chairman Ben Bernanke. He went on to say that the process of printing money to finance deficits has "the status of a moral sin - a work of the devil."
Turner rejects the moral sin status. He invokes Milton Friedman (an ultimate exorcist):
Friedman argued in an article in 1948 not only that government deficits should sometimes be financed with fiat money but that they should always be financed in that fashion with, he argued, no useful role for debt finance. Under his proposal, “government expenditures would be financed entirely by tax revenues or the creation of money, that is, the use of non-interest bearing securities” (EXHIBIT 1) (Friedman, 1948). And he believed that such a system of money financed deficits could provide a surer foundation for a low inflation regime than the complex procedures of debt finance and central bank open market operations which had by that time developed.
Later on in this article we will see that Ben Bernanke did not develop the concept of dropping money out of helicopters - it was actually Milton Friedman.
Turner also cited the work of Chicago School founder Henry Simons in support of direct government fiat money creation. And, of course, as readers of GEI contributor Derryl Hemanutz will be aware, Irving Fisher also supported the creation of debt-free money and was cited by Turner as well.
As for debt contracts between private sector agents and in particular bank loans that create matching quantities of bank credit and bank money, they are not mentioned in Goethe’s Faust. But as great economists of the 1930s such as Irving Fisher and Henry Simons correctly pointed out, uncontrolled creation of bank credit and money can be a major driver of financial instability and subsequent economic harm, even when the creation of irredeemable fiat money is tightly controlled, with fiscal deficits small or non-existent and inflation low.
Turner's two conclusions:
- First, that in the deflationary, deleveraging downswing of the economic cycle,we may need to be a little bit more relaxed about the creation, within disciplined limits, of additional irredeemable fiat base money.
- But second, that in the upswing of the cycle we should have been massively more worried than we were pre-crisis about the excessive creation of private debt and private money; and, that we should be wary of relying on a resurgence of private debt and leverage as our means of escape from the mess into which excessive debt creation landed us.
Turner suggests that the QE activity of the U.S. Federal Reserve may end up being the equivalent of providing additional fiat money to finance deficits if the Fed balance sheet is never completely unwound. The alternative discussed by Turner, OMF (overt money finance), which is just directly "printing" money to finance deficits, he finds has situations of merit. He does discuss the problem of containing inflation if OMF is done "irresponsibly."
Editor's notes: The word printing is placed inquotation marks because little currency is actually printed - it's all just electronic debits and credits. The discussion of control of OMF so as to avoid inflation is a problem that this editor has repeatedly referred to to as the "right sizing problem."
Anatole Kaletsky discussed the Turner paper Thursday 07 February 2013 in a Reuters column. He called the address an "emperor's new clothes" moment. He went on to call it a "truly historic speech." Kaletsky wrote:
The idea of distributing free money to end deep recessions has been promoted theoretically by serious economists since the 1930s, when it was one of the few practical policies that Keynesians and monetarists agreed on. John Maynard Keynes proposed burying money in disused coal mines to be dug up by unemployed workers, while Milton Friedman suggested dropping money out of helicopters for citizens to pick up. Friedman also argued in a 1948 paper that governments should rely solely on printed money to finance their regular cyclical deficits. More recently, as conventional policies to revive growth have faltered, with widespread disappointment about the impact of zero interest rates and quantitative easing, proposals for distributing money directly to citizens have been quietly gaining traction among critics of orthodox central banks. I discussed this trend, sometimes described as “quantitative easing for the people,” in several columns last year.
This editor has expressed thoughts about removing private banking from the public teat here.
Can the rational still possibly overcome the oligarchy?
- Debt, Money and Mephistopholes: How Do We Get Out of This Mess? (Adair Turner, Address to the Cass Business School, 06 February 2013)
- A breakthrough speech on monetary policy (Anatole Kalesky, Reuters, 07 February 2013)
- The Terrifying Danger of the Trillion Dollar Coin (John Lounsbury, GEI Opinion, 09 January 2013)
- Economist Ridicules Congressman's Platinum Coin Bill (GEI News, 08 January 2013)