11 Oct 2015

Adair Turner and Mario Draghi : Could it be time for Peoples' QE?

As you may be aware, I am convinced that Central Banks should stop creating money and injecting it into the financial markets. Instead, they should be injecting the money directly into the economy, preferably by putting the money directly into the pockets of citizens in the form of a debt free Unconditional Basic Income.

I think that it makes perfect sense. The European Central Bank is currently printing €60 billion a month, and intends to keep going for another year at least. But this money has been going to the financial markets in the hope that somehow the money will encourage the banks to start lending again. But even if they did start lending, this would only increase further the ludicrous amounts of debt that are currently clogging up the global economy - over $200 trillion, according to a recent report by the McKinsey group.

Imagine what could happen if, instead of giving the €60 billion to the financial markets and praying, the ECB simply gave the same amount of money to the Eurozone's 330 million citizens as direct, unconditional payments. Everyone could be given roughly 182 euros a month. That's 724 euros for a family of four - more than the minimum wage in 6 Eurozone countries, including Greece.

Apart from the obvious, and direct, boost to the Eurozone economy, it would also give Central Banks a far more efficient way to control the amount of money in circulation. I simply cannot understand how anyone like Mario Draghi (president of the ECB) or Mark Carney (governor of the Bank of England) can seriously argue that controlling the base interest rates at which commercial banks can borrow from the central bank is enough. We have had near zero interest rates for years, but the Eurozone is still in the doldrums. More is needed.

For a long time, I have assumed that the fact that both Draghi and Carney are ex-Goldman Sachs bankers ("the blood sucking vampire squid") meant that there was zero chance that they might call into question the commercial banks' monopoly on money creation.

But, to my joy, it turns out that serious people in banking are beginning to admit that we may really need something better.

Firstly, on the 7th of September, I attended a meeting called "Making Money Work: can innovations in monetary policy promote long-term prosperity?” that was organized by Positive Money in London in which Lord Adair Turner, the ex director of the now defunct Financial Services Authority was talking about the idea that governments, or rather central banks, should be allowed to create money themselves. He shared the platform with Steve Keen, one of my favourite economists (!) and a journalist from the Financial Times. At the end of the presentation, questions came from such notables as Richard Murphy, the founder of the excellent web site "Tax Research UK", and apparently quite close to the new Labour leader Jeremy Corbyn, and  Nathalie Bennet, leader of the UK Green Party (whose election manifesto included both the idea of introducing a Financial Transaction Tax and an Unconditional Income).

Adair Turner has a new book out called "Between Debt and the Devil - Money, Credit, and Fixing Global Finance" which I have just ordered. The Positive Money website has a discussion of what he says, and it is clear that while he is not yet convinced that we can abolish the ability of commercial banks to create money, he seems clear that direct money creation by central banks and governments is perfectly defendable. For example, he says:
“[C]ompared with a pure monetary stimulus [such as QE], [helicopter money] works through putting new spending power directly into the hands of a broad swath of households and businesses, rather than working through the indirect transmission mechanism of higher asset prices and induced private credit expansion. It does not rely on regenerating potentially harmful private credit growth nor does it commit us to maintaining ultralow interest rates for a sustained period of time.”
“Ideally, the major advanced economies should have implemented Bernanke-style helicopter money drops in the immediate aftermath of the 2007-2008 crisis. If we had done so, the recession would not have been so deep, and we would now be further advanced in escaping the debt overhang.”
Hear, hear!

But Adair Turner isn't the only important figure who has been talking seriously about allowing governments and central banks to create money. Even Mario Draghi has been talking about the possibility!

Again, I thank Positive Money for pointing this out.  In the European Parliament, Draghi was asked about Helicopter Money and QE for citizens, to which he replies:
“For hundreds of years central banks have injected money in the economy through either banks and/or markets. That is what we know, and so we will certainly consider these ideas that are being discussed; they are being discussed everywhere and the ECB is part of these discussions in academic fora and in other circumstances.
We should also not underestimate the legal aspects that would apply to the euro area and to the ECB, so one should ask the question whether this helicopter money is consistent with the Treaties and so on.
I saying this not as a way to prejudge decision-making one way or another, but the gravity of the challenges right now basically would demand that we use all available instruments within our common knowledge, and that is what we know now.”
Could it be that Draghi is reaching a point where he thinks that the main obstacles are legal? If so, can I respectfully remind him that while  Paragraph 1 of Article 123 of the Lisbon Treaty prohibits Central Banks lending directly to governments, Paragraph 2 of the same article says that this restriction does not apply to "publicly owned credit institutions"?

In other words, there is absolutely no legal reason why the following could not be done.
  1. Each Eurozone Government should set up a publicly owned credit institution. Let's call it the "National Citizens Bank"
  2. Each National Citizens Bank would open accounts for all the Citizens in each country, which could be linked to each citizen's normal bank - much as you can link a paypal account to a conventional bank account.
  3. The European Central Bank should divide the €60 billion a month that it currently injects into the financial markets, and instead provide the funds to each National Citizens Bank, with an amount that depends simply on the population of each Eurozone Country.
  4. The National Citizens Bank would then credit each account with roughly €182 every month which can then be spent directly into the economy, or used to pay off debt. 
As people pay of debt, this actually decreases the total amout of money in circulation, so in fact, it may well be that the net increase in money would be substantially less than the €60 billion provided by the ECB. If so, then the monthly payments could well be increased.

And, if ever there were signs of the economy overheating and inflation starting to kick in, I trust you all know that I have another solution for that. Simply get the ECB to impose a very modest tax on the €2 quadrillion or more in Euro-denominted transactions taking place within the Eurozone. That way, the amout of Citizens' QE could be increased well beyond €60 billion a month, with no risk.

Finally, with a little extra effort, it would be perfectly possible for Central Bankers to impose the tax on transactions within their own jurisdictions for the other currencies. Thus, Mark Carney could impose the ECB's FTT rate on the huge volume of euro-denominated transactions occuring in the UK (for example, the €238 trillion in euro-denominted trades performed by one company, LCH.Clearnet Ltd in 2014).

To summarize - if the only reason for not doing QE for People is legal, then sorry that excuse is now clearly no longer a problem. It's just political will that is lacking.

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