In a recent interview with the German magazine Deutsch Welle with the title "ECB could solve eurozone crisis, leading economist says", Lord Adair Turner, the former chief of the UK Financial Services Authority, and the new chairman of INET - the Insitute for New Economic Thinking, told the magazine that calibrated use of the ECB's balance sheet could end the eurozone crisis. The short article is full of gems. Adair Turner notes that
Banks create the circulating money supply when they grant credit to borrowers. Bank debt and bank credit - the latter is what we commonly call "money"– are two sides of the same coin, mirror images on banks' balance sheets. When bank debts are paid off, both the debt and the money used to pay it off disappear.
If more bank debt is repaid than is created in a given time period, the result is a reduction in the circulating money supply, and that means a reduction in purchasing power. The result is a recession, or even a depression."At last! An economist who really knows what he's talking about. Debt based money creation is guaranteed to be unstable. Money creation MUST be debt free! He goes on to say that
You have to allow the central bank to give carefully calibrated amounts of debt-free money to governments to spend into circulation."Hooray!! Another victory for Positive Money! The journalist points out that "eurozone rules prohibit central bank funding of governments." But Adair Turner has a neat reply:
The prohibition was put in place at the Bundesbank's insistence, because of a fear that if any monetary financing of deficits were allowed, governments would get carried away, print far too much money and create hyperinflation. Now, a medicine can be a cure in small doses, yet be a dangerous poison in high doses. But does it therefore make sense to forbid that medicine from being used at all? No. What you need is sensible rules about dosages and procedures for carefully monitoring how the patient responds to them - and a qualified doctor who administers and adjusts dosages based on the observed results. The ECB's balance sheet could be used to end the eurozone crisis.
The way forward is to set clear rules in advance, defining under what conditions, how and to what extent financing of eurozone government deficits with sovereign ECB money would be allowed. The rules should leave decisions about how much monetary stimulus the ECB provides entirely up to the ECB. The central bank would retain its policy independence. We'd merely be giving it a new tool to improve its ability to manage monetary aggregates and prevent depressions.The journalist then offers a comment that maybe there should be "an instrument to get rid of too much money ..." to which Adair Turner says:
You'd also give it tools for removing money from the system again when it deems it appropriate. For example, we could set up an adjustable financial transaction tax that flows money to the ECB. Whenever it thinks the economy is at risk of overheating, the ECB could stop passing the tax revenue along to governments for spending. It could put the money on ice or destroy it.Is it possible that Adair Turner has been reading my blog?? In any case, this is the first time, to my knowledge that anyone well placed has argued that we could fix the system by equiping Central Banks like the ECB with a push-pull mechanism for accurately controling the amount of money in circulation. Even better, the article has appeared in the German Press! Is the Bundesbank listening??
In case Adair Turner ever reads this, can I just point out that although paragraph 1 of article 123 of the Lisbon Treaty does indeed prevent Central Banks lending to Governments, paragraph 2 says that they can lend to "publicly owned credit institutions". Those publicly owned credit institutions could then lend to the governments. The problem would be solved without even having to change the rules.
Alternatively, the ECB could simply hand debt free money to Citizens via a Unconditional Basic Income - again eliminating any problems with the Lisbon Treaty.
All of a sudden there are reasons to be optimistic.
And, of course, all these ideas could fix the Greek Debt Crisis with a stroke of a pen....