Bernanke’s four errors

I am a huge fan of Ben Bernanke. He can take a significant amount of personal credit for preventing a depression. Also, The Courage to Act is a superb book.

Disappointingly, Ben’s latest contribution to the helicopter money debate is uncharacteristically poor. He is wrong on four basic points.

1. The issue of ‘permanence’ is a pointless distraction. No one in receipt of a check from the central bank, asks: ‘Is this permanent?’ In fact, it is not even clear that the question is meaningful. It is a category error from the theory of taxation. The main challenge for theoretical economists is squaring these obvious intuitions with our models. The practical policy issues are in fact very clear.

2. Base money financed transfers from the central bank are not ‘tax cuts’.

3. Direct transfers from CBs to the private sector are in fact legal in most jurisdictions, whereas monetary financing of budget deficits is explicitly illegal. Ben seems oblivious to the major legal differences between the US, Eurozone and UK. It is clear that the policy he is discussing (unhelpfully calling it a ‘helicopter drop’), is simply deficit monetisation, and is expressly illegal in the Eurozone. He also refers to the proposal of Simon Wren-Lewis, Mark Blyth and myself in the Guardian, but describes it as illegal – in that article we are in fact requesting UK legislation, in part because the UK government is highly like to cooperate with a Bank of England request. Bernanke should be clear that it is probably illegal for the Fed to engage in cash transfers to households, and Congress is unlikely to cooperate with granting the Fed further powers – so it is really only in America where monetary policy, for institutional reasons, would now be virtually redundant in the face of a recession. But this is patently false elsewhere.

4. Ben assumes that helicopter drops are fiscal policy. He does so without clarifying the distinction between fiscal and monetary policy, and then quotes Friedman who is very clear on the issue – and very clear that cash transfers financed with base money is monetary policy.

About The Author

Eric Lonergan is a macro hedge fund manager, economist, and writer. His most recent book is Supercharge Me, co-authored with Corinne Sawers. He is also author of the international bestseller, Angrynomics, co-written with Mark Blyth, and published by Agenda. It was listed on the Financial Times must reads for Summer 2020. Prior to Angrynomics, he has written Money (2nd ed) published by Routledge. He has written for Foreign AffairsThe Financial Times, and The Economist. He also advises governments and policymakers. He first advocated expanding the tools of central banks to including cash transfers to households in the Financial Times in 2002. In December 2008, he advocated the policy as the most efficient way out of recession post-financial crisis, contributing to a growing debate over the need for ‘helicopter money’.

11 Responses

  1. Antti Jokinen

    Eric, let me quote myself, from a comment on Nick’s blog:

    “The permanence which matters here has nothing to do with the whole *stock* of base money, but with the fact that when engaging in “helicopter drops”, the authorities try to convince the public that there is now *some* base money that is not backed by any (genuine) liability. When we look at the left-hand side of the CB balance sheet, we can see what kind of backing base money has (the Fed calls these “Factors Affecting Reserve Balances”). There are private liabilities (eg, loans to commercial banks, and MBSs), liabilities incurred by the government (these are indirectly private liabilities; incurred on behalf of the people) and even gold. For helicopter money to be helicopter money, there should be an addition to the left-hand side of the CB balance sheet (matching the addition to base money on the right-hand side; credit=debit), but this addition should somehow not represent a genuine liability. In other words, we need to add a fake liability. This can take, for example, the form of a perpetual (perhaps even zero coupon, to really drive the point home) government bond or a coin with a large face value — say, $100B –, both of which are sold by the Treasury to the CB in return for a credit on the TGA (from which it will be further credited to private accounts, becoming part of “base money”). But this is not enough. In addition, the CB has to convince the public that it will never sell this “asset” (if it sold it to the Treasury later, then we could conclude, ex post, that it was genuine government debt like any other). Only in this way can it try to convince the public that there is now base money which is not backed by any genuine liability.” (My full comment can be read here: )

    Did Bernanke answer the question he posed to himself about “permanence”? I don’t think so. Or if he did, the answer was “Well, it might not be permanent… Next question, Ben!”. Right?

    The permanence is not about the money supply as an aggregate, but about some money (which is fungible, of course) existing permanently, without any liability backing it.

    Further, Bernanke is as confused as you when it comes to accounting 😉 He writes: “However, unlike standard fiscal programs, the increase in the deficit is not paid for by issuance of new government debt to the public. Instead, the Fed credits the Treasury with $100 billion in the Treasury’s “checking account” at the central bank, and those funds are used to pay for the new spending and the tax rebate. Alternatively and equivalently, the Treasury could issue $100 billion in debt, which the Fed agrees to purchase and hold indefinitely, rebating any interest received to the Treasury.”

    In his “equivalent alternative”, the Fed purchasing Treasury debt, it is clear which account the Fed will debit when it credits Treasury’s checking account (TGA): It will debit an *asset* account called “Treasury securities held outright” (or similar). The Fed *has to* debit some account if it credits another account — it has no option. But which account the Fed would debit in the alternative case, the case Bernanke lays out first? That he doesn’t say. Does this reveal that not even Ben Bernanke is fully familiar with how banking really works? I doubt it, but it is a possibility we cannot discount at this point. Perhaps this is a case of a some kind of “money illusion”.

  2. Gary Anderson

    Hi Eric, Bernanke prevented a Great Depression after killing the housing market for the middle class. He was just a little late. Mark to market still prevailed, and also the destruction of the commercial paper market. So, some good things, but to late to help the people who really needed it. The vultures then collected the houses. JMO.

    PS, your work is interesting!!

  3. Gary Anderson

    Oh, and one more point, Eric, Kocherlakota says treasury bonds are at the heart of helicopter money. But issuing base money from the Fed or central bank anywhere would not require treasury bonds as collateral at all, right?

  4. Gary Anderson

    Eric, I ran across Cochrane’s view that helicopter drop is so fiscally sound that it won’t cause enough inflation:

    “Thus, Milton Friedman’s helicopters have nothing really to do with money.They are instead a brilliant psychological device to dramatically communicate a fiscal commitment, that this cash does not correspond to higher future fiscal surpluses, that there is no ‘‘exit strategy’’, and the cash will be left out in public hands… The larger lesson is that, to be effective, a monetary expansion must be accompanied by a credibly communicated non-Ricardian fiscal expansion as well. People must understand that the new debtor money does not just correspond to higher future surpluses. This is very hard to do—and even harder to do just a little bit.”

    I am wondering what your response would be to this. I think you don’t take that view seriously but I would like more information. Thanks.

    • Eric Lonergan

      Thanks Gary. Interestingly, Cochrane and Krugman have very similar views here. I disagree for a very simple reason. A cash transfer from the central bank does not entail higher future taxes, even if the central bank sticks to its inflation target, which I would advocate. In fact, a cash transfer from the ECB to households would probably result in lower future taxes in the Eurozone, because the stagnation would end sooner, growth would be higher and fiscal positions would improve. It all depends on what you think causes cyclicality and growth. Cochrane doesn’t really believe that you can have insufficient demand in an economy and that there is profound path-dependence, and that effective counter-cyclical policies can have important medium-term benefits. Like Krugman, he seems to believe that the only policy variable is inflation expectations. I think they are both fundamentally misguided.

      • Gary Anderson

        So, helicopter money is more responsible than both Krugman and Cochrane and it makes sense that we should try responsible economic policy first. Thanks for your views.

        Helicopter money must be sold as the most responsible economic policy on earth. And by chance, if it were to put the central bank into weakness, surely in good times the central bank could be recapitalized.

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