25 Aug 2013

I'm back - with a new idea. Direct ECB payments to Eurozone citizens.

I'm embarrassed to say that I have not added anything new to my blog since the 8th of May - nearly four months. It's nevertheless nice to see that people have kept on visiting the site - with more than 7000 visits since then, and 2540 in the last month. I presume that can't all be due to Google's search robots and the NSA.

It would be nice if I could say that I have spent all this time working on the new "Monnaie Honnête" website that we have been setting up. Unfortunately, that's not really true. I've been busy with plenty of other things (like trying to work out where Consciousness comes from) . However, the association "Monnaie Honnête" now legally exists - we have a president (Claire Boine), and my cousin Chris and I make up the rest of the "bureau". We really hope to get more than a welcome message online "real soon now". Sorry that it has been taking so long.

In the meantime, the members of the bureau have been having some interesting discussions about what we should be pressing for. Given that we are all fans of Positive Money - the UK based movement for monetary reform that has done such an excellent job of generating a highly coherent set of propositions - it is not surprising that their main propositions will be centre stage. Here's my latest version.
  1. All money creation should be debt free
  2. The current licence to create money and charge interest that has been given to commercial banks should be immediately removed. Lending money that you don't have and charging interest really is as outrageous as it sounds - and anyone who does it should be put in prison, just like you should be in prison if you print banknotes in your basement
  3. Any new money creation should be done in a democratically accountable manner by central banks or their equivalent.
But now there is the interesting question of how precisely newly created money should be injected into the system. According to Positive Money's proposals, money created by the Central Bank "Money Creation Committee" would be provided directly to governments, who would then be able to choose what to do with it. Eseentially, there are four main options.
  1. Reduce taxes
  2. Spend money directly into the economy by financing projects such as building schools, hospitals, housing, developping the transport infrastructure, renewable energy systems etc
  3. Provide money directly to citizens in the form of a citizen's salary
  4. Pay off government debt
Positive Money steers clear of saying what the priorities should be. Such decisions are highly political and are best left in the hands of the democratically elected government. This is a position that Monnaie Honnête also defends.

But, in talking with my colleagues, I've come to the conclusion that there is another possibility, one that is particularly interesting in the case of the Eurozone. Let's assume that the future governer of the European Central Bank decides that the Eurozone needs an injection of  (say) 1 trillion euros. This number is not ridiculous - after all, it's the amount that the ECB handed over to the European Banks in two rounds of Long Term Financing Operations (LTROs) at the end of 2011 and the beginning of 2012.

I've previously made the suggestion that instead of handing money to the banks and praying that they might decide to do something sensible, the ECB should hand the same amount of money to the 17 Eurozone governments, and that the decision about how much each country gets should depend simply on population size.  Roughly 25% would go to Germany (because roughly 25% of the Eurozone population lives in Germany) and so forth down to 0.1% for Malta (see the table).

While this seems absolutely fair, and quite sensible to me, there is a problem. The Lisbon treaty does actually prevent the ECB providing funds directly to governments (although there is a way of getting round this by lending to "Publicly Owned Credit Institutions", as I have argued repeatedly). Nevertheless, there is perhaps and even simpler solution.

How about the ECB simply adding a fixed sum to the bank account of every Eurozone citizen. If they wanted to add €1 trillion to the economy, this would mean adding roughly €3000 to the bank accounts of every man, woman and child in the region. Of course, €1 trillion is being particularly generous, but even €10 billion would make a lot of difference to quite a lot of people in Europe - particularly those in cash starved areas like Greece, Spain and Portugal.

What would people do if they were provided with such funds? Well, obviously in some cases it would just allow them to reduce their overdrafts, but that would in itself be a good thing for banks who would be able to reduce their risk levels. For others, they might use the money to do some useful work like insulating their houses, which would be good for the ecology. Others might use the extra cash to go on holiday, perhaps to places like Greece or Spain who could do with the trade. Yet others might go out and eat in restaurants, again stimulating the local economy, or buy a new car.  Virtually all these things would be good news for the Eurozone economy. Almost the only thing that would not be great news for Europe would be if people decided to use all the money to buy Flat Screen TVs from China - but well, you do have to give people some choice.

Compare that with the effect of throwing €1 trillion at the banking system and praying (which is what Central Bankers currently do). What evidence is there that much of that ended up getting into the real economy rather than being used to fuel house price inflation or other speculative bubbles?

But what I find particularly attractive about the idea that the ECB (and other Central Banks like the Bank of England) justs credits money on the bank accounts of ordinary citizens is that it completely bypasses the entire world of politics. There is no way that the money could be used for corruption, buying votes, or any of the other reasons why allowing politicians access to the money creation process is such a taboo. It would be the most neutral way imaginable to get money into the economy. It's Ben Bernanke's helicopter money, but without having people fighting to grab the banknotes being thrown out of the helicopter's window.

Of course, there could be checks. For example, the ECB could decide to only credit a citizen's bank account if that citizen is up to date for tax purposes, and can claim to be a true resident. Children could also count towards their parents allocation, if they were included in the country's educational system, and so forth.

How much could the ECB pump into the economy this way before the tell-tale signs of inflation would lead them to say that the sluice gates needed to be closed down? My guess is that the economy could handle a lot more money without overheating. Indeed, while unemployment is still so high, there is every reason to think that the extra cash could easily get transferred into getting people back to work. 

And you know what? If the cash injections directly into people's bank accounts does start lead to some signs of inflation, there is an easy solution. The ECB could directly apply a Financial Transaction Tax on all Euro denominated transactions to just take the money out of the economy.  Of course, the traders and speculators would object. But, given that the Eurozone handled  at least €1.6 quadrillion in 2011, each 0.05% of FTT would allow the ECB to redistribute another €800 billion among the Eurozone's 333 million inhabitants - around €2500 each - without any possibility of causing inflation because the net effect on the money supply would be nil. Who wouldn't vote for that?

Finally, I note that this suggestion differs from the idea of a citizen's salary - something that would be paid regularly. My suggestion is that the ECB should do all this money injection as a one off. Everytime there are signs that the economy needs more "fuel", the ECB would add a bit more - directly via citizen's bank accounts.

Can you see any problems? I can't.


  1. Simon, welcome back :) ... just couple of remarks. As I understand LTRO - it is not a program to pump money into the economy, although it might sound like that from the words of various commentators. And it is not a handout to the commercial banks either. When a central bank creates reserves and lends them to the banks it floods them with liquidity. In this case central bank reserves creates liquidity - not money. Banks cannot take this liquidity and lend it to someone else in the economy. Each time a bank "lends" money to a a non-bank customer it creates new deposits - hence there is no intermediation process going on. LTRO was clearly a successful program of the ECB to pump liquidity into the inter bank clearing system. Banks didn't trust each other in the inter bank market and were hoarding reserves. If banks are not lending to each other this means some banks would always be short of reserves. LTRO simply solves this problem - the dependency of the banks on the inter bank market. However, resolving liquidity issues doesn't automatically mean that banks will increase credit creation. If banks feel their positions are over-exposed and they fear even solid customers might go bust - they will not lend. ECB has bought government debt on secondary market - OMT program. This is debt monetization and I think this measure should have been introduced by the ECB much much earlier and without conditionality. Some fear that debt monetization will erode "the willingness of Eurozone member-states to implement reforms." I ask what reforms? The only reform that should be implemented is the monetary reform - to end this system of redistribution of wealth from the working people to the rich. Any interest in monetary terms is usury. How stupid that a banking system that is based on legalized fraud can get away with it for centuries. Money creation process in fiat money systems will always be a free lunch. And the lunch should be divided equally amongst people. We are giving the free lunch to financial parasites. So for a change why not give it to the people. However, I doubt that ECB can and will be ever willing to directly credit peoples accounts. But even in this system much can be done. I can only recommend professor Richard Werner and his ideas.

  2. Hi Marek,

    My understanding is that the €1 trillion of LTRO (consisting of 3 year loans at a low interest rate) was aimed at getting banks lending again. But there was absolutely no control over what the banks did with the money (see my exchange with the ECB). And yes, I do consider it is "money" - no more or no less that when the banks create money when they make loans.

    What is clear is that there are clearly more efficient ways of getting money into the economy - like my proposition for directly putting money into citizens bank accounts. But of course, doing that would break the system... Mario Draghi will not do that unless he is forced to.

  3. Hi Simon,

    thanks for your reply. Well it depends on how you define money. There is money that you and I can use and then there are reserves. Transactions between banks, between central bank and banks are conducted in reserves. If for example a central bank buys a government bond from a bank no new money is created. (this is because the bank created the money in the first place when it bought the bond from government or pension fond). Central bank creates reserves to buy the bonds. Reserves are considered base money or high powered money - a money base that can be multiplied by the banks - as the textbook examples say in describing the money multiplier model. We know that the model is misleading. Banks first create credit - money and then look for reserves later. However at least the model shows us some kind of distinction between reserves and money. If a central bank or a bank for that matter buys a government bond from secondary market, for example a pension fund, new money is created. It is a very simple rule of money creation: there has to be two sides a bank or a central bank on one side and a non bank on the other side. Money is created when a bank or central bank lends to the non bank customer, or a central bank or a bank buys an asset from the customer. It is also the case when banks are paying for services or paying wages and bonuses.

    I hope this helps to explain LTRO no matter what the ECB suggests. Although, I cannot argue against the notion that LTRO is easing the liquidity situation of the banks which in turn might contribute to credit creation. But there is no guarantee. On the other hand OMT is new money into the economy guaranteed.

    "But there was absolutely no control over what the banks did with the money" - there is not much that banks can do with excess reserves - leave it on reserve account in the central bank or lend it to other banks.

  4. Marek,

    For me, the critical question is whether there is anything to prevent the ECB (or any other European Central Bank) from directly injecting debt free money into the economy via citizens bank accounts. And if not, is there any limit to the amount of money that can be added in this way. If not, then let's go for it

  5. Well if you think about the banking operations, these function on the grounds of entering into contracts. As the whole system is a credit system- these contracts are debt contracts. ECB could either buy assets or lend money to the non-banking sector. So technically under this system the ECB cannot credit accounts like you propose. It is not a bad idea though and you are right that there is money missing in the system. Without a monetary reform a central bank would be not allowed to credit account without getting something in return. I studied your paper on transaction tax - great job. As states would create money they would use this tax only to counteract inflation - brilliant and simple.

  6. Do you think that it would be actually illegal for the ECB to just credit an account without getting something in return? If so, then this is clearly something that needs to be fixed - and quick.

  7. I think accounting standards would have to be changed and legal the framework of the ECB. Or maybe there is a way: - individuals would issue their debt certificates - bonds, that the ECB would buy. These would be zero-coupon bonds with maturity of lets say 100 years. After 100 years the ECB will have a loss but that is not a problem, because the ECB will simply roll over the loss - it cannot go bust :)

  8. Not bad! I've already suggested that the ECB and the Bank of England could make loans to governments with a period of 1000 years at 0% interest!