Time for a radical solution?
If, after four years of printing money, the system isn’t working, what next?
This is where another two Kilkenomics guests, Richard Murphy (adviser to Jeremy Corbyn) and Stephanie Kelton (American economic guru for democratic candidate Bernie Sanders), offered some new insights. They both thought that it was only a matter of time before central banks, rather than give money to the banks, might actually deposit money in people’s bank accounts. This would make people spend and, hey presto, demand would recover and off we go.
Traditionalists at this stage will guffaw and declare this could never happen. Surely such profligacy would lead to inflation, or worse?
While there is little doubt that this policy sounds radical now, allow yourself to think the unthinkable for a moment. In economic terms, the ground has shifted. It may shift again.
And after all, it was Nassim Taleb who warned of Black Swans – improbable events that have enormous consequences. Don’t rule them out.
(Source: David Mcwilliams)
Indeed. I’ve thought this from the start – the original issue was that the average person was (and still often is) unable to pay their debts, specifically their mortgages (hello subprime). The mainstream solution was to throw money at the banks via bailouts or quantitative easing (asset purchases by the central banks, which injects money into the system), but the banks promptly hoarded this money to either bulk up their balance sheets so that they could weather the storm without going bankrupt, or falling foul of the suddenly-awake regulators. Either way, they failed to inject the money back into the economy via lending, which meant that the recession continued with at best anaemic growth.
Meanwhile, everybody cut back on spending to service their debts, which became worse as the depression deepened – as wages were cut and deflation loomed, everybody cut back further, exacerbating the deflationary spiral and resulting in the remaining debt (which wasn’t deflating) taking an increasing slice of everyone’s remaining income to service.
Why not just inject money directly into everyone’s bank account? I wondered at the time. What would most people do? Pay down their mortgages. What would that do? Improve the balance sheets of the banks, meaning they won’t need to retain so much capital to counterbalance their massive loan books.
I do understand that such a measure is hard to reverse, which is the main reason it’s frowned upon by the economics experts – quantitative easing is reversed by simply selling the asset the central bank bought and destroying the money. It’s basically impossible to do this once you’ve handed out relatively small amounts to all and sundry.
There is also the ‘moral hazard’ view, which suggests that handing people money just encourages poor financial behaviour – which I find rather humourous as handing big financial institutions free money isn’t seen as a moral hazard at all.
Maybe many people would take the cash and go on a foreign holiday, but I think that would be relatively few. And even at that, it would still inject money into the coal face of the economy (even if we move from the local economy to the global).
Surely it’s worth considering?