Ben Bernanke: helicopter money

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pages: 249 words: 66,383

House of Debt: How They (And You) Caused the Great Recession, and How We Can Prevent It From Happening Again by Atif Mian, Amir Sufi


Andrei Shleifer, asset-backed security, balance sheet recession, bank run, banking crisis, Ben Bernanke: helicopter money, break the buck, Carmen Reinhart, collapse of Lehman Brothers, creative destruction, debt deflation, Edward Glaeser,, financial innovation, full employment, high net worth, Home mortgage interest deduction, housing crisis, Joseph Schumpeter, Kenneth Rogoff, liquidity trap, Long Term Capital Management, market bubble, Martin Wolf, money market fund, moral hazard, mortgage debt, negative equity, paradox of thrift, quantitative easing, Robert Shiller, Robert Shiller, school choice, shareholder value, the payments system, the scientific method, tulip mania, young professional, zero-sum game

Richard Koo, “The World in Balance Sheet Recession: What Post-2008 West Can Learn from Japan 1990–2005” (presentation, “Paradigm Lost: Rethinking Economics and Politics” conference, Berlin, April 15, 2012), 8. The most cited reference to such helicopter drops of money is Milton Friedman, “The Optimum Quantity of Money,” in The Optimum Quantity of Money and Other Essays (Chicago: Aldine, 1969), 1–50. 9. Ben Bernanke, “Japanese Monetary Policy: A Case of Self-Induced Paralysis” (paper, Princeton University, 1999). 10. Martin Wolf, “The Case for Helicopter Money,” Financial Times, February 12, 2013. 11. Willem H. Buiter, “Helicopter Money: Irredeemable Fiat Money and the Liquidity Trap; Or, Is Money Net Wealth after All?” (working paper, January 31, 2004), 12. Alan Boyce, Glenn Hubbard, Christopher Mayer, and James Witkin, “Streamlined Refinancings for Up to 13 Million Borrowers” (draft policy proposal, Columbia Business School, Columbia University, June 13, 2012), 13.

The most extreme image that comes to mind is the chairman of the Federal Reserve authorizing helicopter drops of cash. The idea of directly injecting cash into the economy may at first seem crazy, but reputable economists and commentators have suggested exactly such a policy during severe economic downturns.8 Ben Bernanke, only a few years before he was chairman of the Fed, suggested helicopter drops for Japanese central bankers in the 1990s, earning the nickname “Helicopter Ben.”9 Financial Times columnist Martin Wolf wrote in February 2013 that “the view that it is never right to respond to a financial crisis with monetary financing of a consciously expanded fiscal deficit—helicopter money, in brief—is wrong. It simply has to be in the toolkit.”10 Willem Buiter used rigorous modeling to show that such helicopter drops would in fact help an economy trapped at the zero lower bound on nominal interest rates.11 It would be best if the helicopters targeted indebted areas of the country to drop cash.

The increase is equivalent to almost 5 million households owning a home in 2006 that they would not have owned had the ownership rate stayed at its historical average. The increase, however, was as fleeting as the mortgage-credit boom itself: by 2012 the home-ownership rate was back to 65 percent. Strong Economic Fundamentals? In October 2005, as the mortgage-credit boom was reaching its frenzied height, then Council of Economic Advisers chairman Ben Bernanke touted recent advancements in the U.S. economy. As he testified to Congress, “On each of the three indicators of the real economy—GDP growth, job creation, and productivity growth—the United States in recent years has the best record of any industrial economy, and by a fairly wide margin.” Further, the boom in housing and mortgage markets could be explained in large part by these advancements: “House prices have risen by nearly 25 percent in the past two years.

pages: 361 words: 97,787

The Curse of Cash by Kenneth S Rogoff


Andrei Shleifer, Asian financial crisis, bank run, Ben Bernanke: helicopter money, Berlin Wall, bitcoin, blockchain, Bretton Woods, capital controls, Carmen Reinhart, cashless society, central bank independence, cryptocurrency, debt deflation, distributed ledger, Edward Snowden, ethereum blockchain, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial exclusion, financial intermediation, financial repression, forward guidance, frictionless, full employment, George Akerlof, German hyperinflation, illegal immigration, inflation targeting, informal economy, interest rate swap, Isaac Newton, Johann Wolfgang von Goethe, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, moveable type in China, New Economic Geography, offshore financial centre, oil shock, open economy, payday loans, price stability, purchasing power parity, quantitative easing, RAND corporation, RFID, savings glut, secular stagnation, seigniorage, The Great Moderation, the payments system, transaction costs, unbanked and underbanked, unconventional monetary instruments, underbanked, unorthodox policies, Y2K, yield curve

This issue is significant, because in practice, it can be hard to credibly promise that a new fiscal program will be temporary: if people don’t believe the program will be withdrawn in a timely manner, the stimulus effect on impact may well be quite modest.13 One idea that has gained some traction is for the central bank to print money and hand it out to consumers. Ben Bernanke suggested this perfectly reasonable paradigm when he was a Fed governor back in 2002 as a solution for Japan’s deflation problem. No good deed goes unpunished, and some critics starting calling him “Helicopter Ben,” because his advice for Japan drew on Milton Friedman’s analogy to dropping money from a helicopter. Lately, the idea has become fashionable again. Lord Adair Turner, former chairman of the United Kingdom’s Financial Services Authority, has advocated central bank–financed transfers in his 2015 book on debt, and the helicopter money often appears in op-eds and the blogosphere as a growth elixir.14 There is nothing fundamentally wrong with the idea.15 However, it is important to realize that helicopter money does not really add any new instruments to the arsenal of macroeconomic stabilization tools.

Because there is so much confusion surrounding helicopter money, it is worth pausing on this point for a moment. If the economy is not at the zero bound, helicopter money is essentially the same as having the Treasury present a $500 check to every household (or person), paying for it by issuing debt, and then having the Federal Reserve buy up the debt in full by using standard open market purchases of bonds. On impact, the private sector ends up with higher wealth in the form of cash, and there is no increase in bonds. If the economy is at the zero interest rate bound, the only difference is that the central bank would use quantitative easing to mop up the newly issued debt. Helicopter money can only expand the options if it is accompanied by some other institutional change. For example, if the introduction of helicopter money is accompanied by a change in the central bank’s inflation-targeting preferences, then of course there will be added effects.

The third reason the zero bound has been so problematic is that real interest rates have trended down dramatically, falling below zero at very short horizons, and roughly 1.5% at very long horizons, both well below more “normal” levels. The reasons real interest rates have fallen are many, but some of the main factors include high savings from fast-growing emerging markets and aging populations in advanced economies, factors that in 2005 Ben Bernanke famously pointed to in describing the “global savings glut.”2 Since 2008, intense post–financial crisis regulation and risk aversion have also pushed real interest rates down.3 Another important factor is slower growth. Some economists, such as Northwestern University’s Robert J. Gordon, argue that the root cause of post–financial crisis slow global growth is a sharp trend drop in the rate at which productivity is increasing, due above all to a declining rate of economically valuable inventions.

pages: 248 words: 57,419

The New Depression: The Breakdown of the Paper Money Economy by Richard Duncan


asset-backed security, bank run, banking crisis, banks create money, Ben Bernanke: helicopter money, Bretton Woods, currency manipulation / currency intervention, debt deflation, deindustrialization, diversification, diversified portfolio, fiat currency, financial innovation, Flash crash, Fractional reserve banking, income inequality, inflation targeting, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, market bubble, market fundamentalism, mass immigration, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, private sector deleveraging, quantitative easing, reserve currency, Ronald Reagan, savings glut, special drawing rights, The Great Moderation, too big to fail, trade liberalization

EXHIBIT 5.9 World: Total Foreign Exchange Reserves minus Gold, 1948 to mid-2011 Source: IMF, International Financial Statistics Notes 1. At the Conference to Honor Milton Friedman, University of Chicago, November 8, 2001, on Milton Friedman’s Ninetieth Birthday. 2. Murray N. Rothbard, America’s Great Depression, Ludwig von Mises Institute, first published 1963, p. 13. 3. Remarks by Governor Ben Bernanke, At the Federal Reserve Bank of Dallas Conference on the Legacy of Milton and Rose Friedman’s Free to Choose, Dallas, Texas, October 24, 2003. See also Ben Bernanke’s book, Essays on the Great Depression (Princeton, NJ: Princeton University Press, 2000). 4. U.S. General Accounting Office. Federal Reserve System: Opportunities Exist to Strengthen Policies and Processes for Managing Emergency Assistance, GAO-11-696. 5. Federal Reserve Press Release, November 25, 2008, 6.

That flood of foreign capital threw fuel on the credit boom that was already underway there thanks to the elimination of the requirement that dollars be backed by gold and the near elimination of the requirement for the financial system to hold liquidity reserves. Thus, the creation of foreign fiat money and its investment into the United States was the third “financial innovation” responsible for the extraordinary proliferation of credit in the United States in recent decades. EXHIBIT 2.1 Total Foreign Exchange Reserves, 1948 to 2007 Source: IMF Fed Chairman Ben Bernanke blamed the flood of foreign capital entering the country on a global savings glut. That is nonsense. The citizens of other countries did not save so much that they were unable to find profitable investment opportunities at home and therefore were compelled to invest in the United States, as Bernanke’s theory suggests. The glut that inundated the United States was a glut of fiat money created by central bankers intent on manipulating their currency in order to boost their countries’ exports.

Financial Account Balance, 1970 to 2007 Source: IMF From 1971 to 2007, total foreign exchange reserves increased by $6.7 trillion. Over the same period, the surplus on the U.S. financial account amounted to $6.3 trillion. The former funded the latter. Such a large surplus on the U.S. financial account could not have occurred had central banks outside the United States not created so much fiat money. Alan Greenspan and Ben Bernanke have frequently attempted to explain the massive surplus on the U.S. financial account by blaming a global savings glut and by citing the overwhelming attractiveness of the U.S. financial markets relative to those elsewhere. The true explanation is that a dozen or so central banks have printed nearly $7 trillion worth of fiat money between 1971 and 2007 (and $3 trillion more subsequently) in order to manipulate the value of their currencies so as to achieve strong export-led growth.

pages: 182 words: 53,802

The Production of Money: How to Break the Power of Banks by Ann Pettifor

Ben Bernanke: helicopter money, Bernie Madoff, Bernie Sanders, bitcoin, blockchain, borderless world, Bretton Woods, capital controls, Carmen Reinhart, central bank independence, clean water, credit crunch, Credit Default Swap, cryptocurrency, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, distributed ledger, Donald Trump, eurozone crisis, fiat currency, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, interest rate derivative, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, light touch regulation, London Interbank Offered Rate, market fundamentalism, Martin Wolf, mobile money, Naomi Klein, neoliberal agenda, offshore financial centre, Paul Samuelson, Ponzi scheme, pushing on a string, quantitative easing, rent-seeking, Satyajit Das, savings glut, secular stagnation, The Chicago School, the market place, Thomas Malthus, Tobin tax, too big to fail

Again, the motive behind this activism is justifiable and the aim is indeed honourable – to ensure that a publicly resourced central bank benefits the whole of society and not just bankers. But let us examine the proposals for ‘helicopter money’ more carefully. Just as with calls for the nationalisation of the money supply, the calls for central bankers to use their powers for wider purposes come from across the political spectrum. Positive Money’s economist Frank van Lerven has produced a helpful list of the main protagonists and an excellent overview of the public money creation debate.32 •Strategic QE – Proposed by the New Economics Foundation •Green QE – Proposed by Victor Anderson, endorsed by Molly Scott Cato (MEP) •Helicopter Drop – Proposed by Ben Bernanke (and a number of others) and based on Milton Friedman’s ‘Helicopter Drops’ paper of 1948. •People’s QE (based on Green Infrastructure QE) – Proposed by Richard Murphy and Colin Hines.

Challenging the economics profession Part of the reason there is so much public confusion about money, banking and debt is that the economics profession stands aloof from the financial system, declines (on the whole) to understand or teach these subjects, and arrogantly blames others (including politicians and consumers) for financial crises. As evidence of this arrogance, Professor Steve Keen in Debunking Economics cites the words of Ben Bernanke, governor of the US Federal Reserve at the time of the crisis: ‘the recent financial crisis was more a failure of economic engineering and economic management than of what I have called economic science.’7 The ‘economic scientists’ of the profession (and many on the Left) have also systematically ignored or downplayed the monetary theory and policies of the genius that was John Maynard Keynes – theory and policies that could have averted the 2007–09 crisis.

The Banking Law Journal, May 1913 The notion – developed by Adam Smith – that the wealth of a nation is measured not by monetary values, but by its capacity to produce goods and services. Andrea Terzi, INET Conference, April 2015 Bernanke breaks a taboo The date was 15 March 2009. Just months before, the bankruptcy of an investment bank, Lehman’s, had led to financial mayhem. The 2007–09 Global Financial Crisis was in its earliest stages. But on that day something historically unprecedented happened. Ben Bernanke gave the first-ever broadcast interview by a Federal Reserve bank governor to an American journalist. The journalist was Scott Pelly. The show was CBS’s iconic 60 Minutes. The day before the interview, Mr Bernanke’s Fed – the world’s most powerful central bank – had undertaken something exceptional as part of a routine monetary operation. The board had agreed to loan $85 billion to AIG – an insurance company that wasn’t a bank at all, and should never have had an account with the Fed.

pages: 466 words: 127,728

The Death of Money: The Coming Collapse of the International Monetary System by James Rickards


Affordable Care Act / Obamacare, Asian financial crisis, asset allocation, Ayatollah Khomeini, bank run, banking crisis, Ben Bernanke: helicopter money, bitcoin, Black Swan, Bretton Woods, BRICs, business climate, capital controls, Carmen Reinhart, central bank independence, centre right, collateralized debt obligation, collective bargaining, complexity theory, computer age, credit crunch, currency peg, David Graeber, debt deflation, Deng Xiaoping, diversification, Edward Snowden, eurozone crisis, fiat currency, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, G4S, George Akerlof, global reserve currency, global supply chain, Growth in a Time of Debt, income inequality, inflation targeting, information asymmetry, invisible hand, jitney, John Meriwether, Kenneth Rogoff, labor-force participation, labour mobility, Lao Tzu, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market design, money market fund, money: store of value / unit of account / medium of exchange, mutually assured destruction, obamacare, offshore financial centre, oil shale / tar sands, open economy, Plutocrats, plutocrats, Ponzi scheme, price stability, quantitative easing, RAND corporation, reserve currency, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, special drawing rights, Stuxnet, The Market for Lemons, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, trade route, uranium enrichment, Washington Consensus, working-age population, yield curve

His low-rate policy led directly to an asset bubble in housing, which crashed with devastating impact in late 2007, marking the start of a new depression. Within a year, declining asset values, evaporating liquidity, and lost confidence produced the Panic of 2008, in which tens of trillions of dollars in paper wealth disappeared seemingly overnight. The Federal Reserve chairmanship passed from Alan Greenspan to Ben Bernanke in February 2006, just as the housing calamity was starting to unfold. Bernanke inherited Greenspan’s deflation problem, which had never really gone away but had been masked by the 2002–4 easy-money policies. The consumer price index reached an interim peak in July 2008, then fell sharply for the remainder of that year. Annual inflation year over year from 2008 to 2009 actually dropped for the first time since 1955; inflation was turning to deflation again.

Of these components, investment may be the most important because it drives GDP not only when the investment is made, but in future years through a payoff of improved productivity. Investment in new enterprises can also be a catalyst for hiring, which can then boost consumption through wage payments from investment profits. Any impediments to investment will have a deleterious effect on the growth of the overall economy. Lack of investment was a large contributor to the duration of the Great Depression. Scholars from Milton Friedman and Anna Schwartz to Ben Bernanke have identified monetary policy as a leading cause of the Depression. But far less work has been done on why the Great Depression lasted so long compared to the relatively brief depression of 1920. Charles Kindleberger correctly identified the cause of the protracted nature of the Great Depression as regime uncertainty. This theory holds that even when market prices have declined sufficiently to attract investors back into the economy, investors may still refrain because unsteady public policy makes it impossible to calculate returns with any degree of accuracy.

Beginning in 2010, the United States initiated a cheap-dollar policy, intended to import inflation from abroad in the form of higher import prices on energy, electronics, textiles, and other manufactured goods. The cheap-dollar policy was made explicit in numerous pronouncements, including President Obama’s 2010 State of the Union address, where he announced the National Export Initiative, and former Federal Reserve chairman Ben Bernanke’s Tokyo speech on October 14, 2012, in which he threatened trading partners with higher inflation if they did not allow their currencies to strengthen against the dollar. Since the United States wanted a cheap dollar, it wanted a strong euro in dollar terms. In effect, the United States was using powerful policy tools to strengthen the euro. Why this obvious point was lost on many U.S. analysts is a mystery, but a permanently weak euro was always contrary to U.S. policy.

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The Dollar Meltdown: Surviving the Coming Currency Crisis With Gold, Oil, and Other Unconventional Investments by Charles Goyette


bank run, banking crisis, Ben Bernanke: helicopter money, Berlin Wall, Bernie Madoff, Bretton Woods, British Empire, Buckminster Fuller, California gold rush, currency manipulation / currency intervention, Deng Xiaoping, diversified portfolio, Elliott wave, fiat currency, fixed income, Fractional reserve banking, housing crisis, If something cannot go on forever, it will stop - Herbert Stein's Law, index fund, Lao Tzu, margin call, market bubble, McMansion, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, oil shock, peak oil, pushing on a string, reserve currency, rising living standards, road to serfdom, Ronald Reagan, Saturday Night Live, short selling, Silicon Valley, transaction costs

Nor did he foresee the stock market bubble before it popped in 2000. And he somehow missed the recession of the early 1990s. Greenspan’s successor, Ben Bernanke, didn’t get it either. As chairman of the President’s Council of Economic Advisers in October 2005, he told Congress that he wasn’t concerned about a housing bubble. A year and a half later, in March 2006, deep into the mortgage meltdown, he testified as Fed chairman that problems in the subprime market were “contained.” Yet by the fall of 2008, the U.S. Treasury was pumping money seemingly without limit into Freddie Mac and Fannie Mae, two congressional creations that were responsible for 42 percent of U.S. home loans. Criticism of Fed chairmen, whether Alan Greenspan or Ben Bernanke, would not be justified on the grounds that they do not have perfect knowledge. No one does. But their craft is predicated on the assumption that they can allocate resources more knowingly and set interest rates with a wisdom superior to the realities of supply and demand.

We, some of the world’s richest people, had to borrow from them, some of the world’s poorest, to keep our federal beast fed. And Mr. Snow thought the Chinese needed to take a lesson from us? “They’re just heeding the advice of that ancient Chinese sage Ben Franklin,” I said. “It’s difficult to translate from the original Chinese, but it goes something like this: A penny saved is a penny earned!” But Mr. Snow had been listening to a different Ben, a Princeton economist named Ben Bernanke, who served as chairman of Bush’s Council of Economic Advisers when he offered up his “they save too much” theory. This Ben, now the chairman of the Federal Reserve, and the rest of the Washington wizards know better than Ben Franklin. They would have the Chinese spend their way to prosperity. His advice for the Chinese is bad enough for them, but what about for us? Just who does Secretary Snow and Chairman Bernanke think will fund America’s debt if the Chinese don’t?

Gold had its biggest one-day move in history on Wednesday, September 17, roaring up $70 in the market, up a total of $84 in after-market trading; Reserve Primary Fund, the nation’s oldest money market firm, “broke the buck,” its share value falling below the $1.00 money market fund standard, thanks to losses from its holdings of Lehman securities; that day the Commerce Department reported housing starts hit a seventeen-year low in August, down 33 percent from a year earlier. In the midst of events, Treasury Secretary Henry Paulson and Ben Bernanke met with President Bush. It was Thursday, September 18. The New York Times reported months later that Bush wondered aloud that day, “How did we get here?” One wonders whether those in the room were the best people to ask. None of them had been among those raising alarms as the market distortions were put in place. As good a question would have been, “Why are we doing this?” The explanations the public got were that the authorities’ whir of activity would save the “financial system.”

pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf


air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping,, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy, zero-sum game

In particular, I am not convinced that the decline in macroeconomic volatility of the past two decades was primarily the result of good luck, as some have argued, though I am sure good luck had its part to play as well. Ben Bernanke, Governor of the Federal Reserve Board, 20043 The past is a foreign country. Even the quite recent past is a foreign country. That is certainly true of the views of leading policymakers. The crisis that broke upon the world in August 2007, and then morphed into a widening economic malaise in the high-income countries and huge turmoil in the Eurozone, has put not just these countries but the world into a state previously unimagined even by intelligent and well-informed policymakers. Gordon Brown was, after all, a politician, not a professional economist. Hubris was not, in his case, so surprising. But Ben Bernanke is an exceptionally competent economist. His mistakes were, alas, representative of the profession.

The first is the normalization of monetary policies of the high-income economies. The second is an economic slowdown that has structural roots. The third is the slowdown in China, the world’s most powerful engine of economic growth. The last is the search for export-led growth by high-income economies, particularly in the Eurozone and Japan. The Monetary Normalization of High-Income Economies In May 2013, Ben Bernanke touched publicly on the mere possibility of ‘tapering’, or reducing the rate at which the Federal Reserve was expanding its purchases of US Treasury bonds, which were then $85bn a month.18 This, note, was not an announcement of any reduction in the rate at which the Fed would purchase assets: that was not to come until December, when the Fed announced that it would reduce the rate at which it purchased assets by $10bn a month.19 Also note that this was not an actual tightening.

It is a world that has seen huge shifts in the relative size of economies and in the direction and scale of capital flows. It is a world that has seen downward shocks to the rate of inflation. It is also, it turns out, a world that is hugely crisis prone. How that has worked out is the topic of Chapters Four and Five. 4 How Finance Became Fragile [A]t this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system. Ben Bernanke, 5 June 20071 When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing. Charles ‘Chuck’ Prince, Former Chairman and Chief Executive of Citigroup, 9 July 2007, Financial Times2 You never know who’s swimming naked until the tide goes out. Warren Buffett3 Simply stated, the bright new financial system – for all its talented participants, for all its rich rewards – has failed the test of the market place.

The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory by Kariappa Bheemaiah

accounting loophole / creative accounting, Ada Lovelace, Airbnb, algorithmic trading, asset allocation, autonomous vehicles, balance sheet recession, bank run, banks create money, Basel III, basic income, Ben Bernanke: helicopter money, bitcoin, blockchain, Bretton Woods, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, cashless society, cellular automata, central bank independence, Claude Shannon: information theory, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, complexity theory, constrained optimization, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, David Graeber, deskilling, Diane Coyle, discrete time, distributed ledger, diversification, double entry bookkeeping, ethereum blockchain, fiat currency, financial innovation, financial intermediation, Flash crash, floating exchange rates, Fractional reserve banking, full employment, George Akerlof, illegal immigration, income inequality, income per capita, inflation targeting, information asymmetry, interest rate derivative, inventory management, invisible hand, John Maynard Keynes: technological unemployment, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, knowledge economy, labour market flexibility, large denomination, liquidity trap, London Whale, low skilled workers, M-Pesa, Marc Andreessen, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, natural language processing, Network effects, new economy, Nikolai Kondratiev, offshore financial centre, packet switching, Pareto efficiency, pattern recognition, peer-to-peer lending, Ponzi scheme, precariat, pre–internet, price mechanism, price stability, private sector deleveraging, profit maximization, QR code, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, Real Time Gross Settlement, rent control, rent-seeking, Satoshi Nakamoto, Satyajit Das, savings glut, seigniorage, Silicon Valley, Skype, smart contracts, software as a service, software is eating the world, speech recognition, statistical model, Stephen Hawking, supply-chain management, technology bubble, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Nature of the Firm, the payments system, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, trade liberalization, transaction costs, Turing machine, Turing test, universal basic income, Von Neumann architecture, Washington Consensus

As a result, markets and institutions have exercised a growing influence on the conduct of managers of non-financial firms (Zorn, 2000), and households and non-financial firms have become progressively tangled in financial products and markets. Furthermore, as financialization continued its widespread infiltration, it was widely cited as a good thing under the guise of being a mechanism that allowed us to tame risk. As stated by Ben Bernanke in a speech to the Eastern Economic Association in 2004, “One of the most striking features of the economic landscape over the past twenty years or so has been a substantial decline in macroeconomic volatility…” Along with this cultural transition was the talismanic standing rendered to the importance of credit for economic growth. But, as seen in the previous chapter, the issuance of increased amounts of debt leads to debt overhang and the shifting of the debt burden from private to public sectors.

Evidently, there are oppositions to these statements, as many regulators continue to sing the praises of the progress made in the last six years. Shortly after Kashkari’s statements, Janet Yellen, the current chairman of the Federal Reserve, issued a statement that took a stance against the regional Federal bank president, stating, “I certainly have not arrived at the conclusion that my colleague has…. I’m pleased with the way things are going” (Heltman, 2016 ). Three months after Kashkari’s speech, Ben Bernanke published a blog post titled “Ending ‘too big to fail’: What’s the right approach?”, in which the former two-term chairman of the Federal Reserve argued against major structural changes that forced the break-up of large firms, stating that large firms have cost advantages, greater diversification of risk, the ability to spread overhead costs over a variety of activities, and the capability to offer multiple interconnected products and services at a global scale.

The greater the volatility, the more likely it is that economies will be face severe downturns requiring central bank interest rate cuts (Rogoff, 2016), and therefore the more likely that we will need to indulge in negative interest rates. Third, an increasing tendency to save in emerging economies coupled with ageing populations in developed economies have had a net effect of reduced investment, and hence further perpetuate low interest rates. This was what Ben Bernanke alluded to when he hypothesised about a “global savings glut.” It is for these reasons that central bankers have been indulging in negative interest rates and debating upon their use. Owing to the rarity of the long-term use of this policy instrument, it remains to be seen whether negative interest rates will be an effective solution to the problems of low inflation 136 Chapter 3 ■ Innovating Capitalism and near-zero interest rates.

pages: 475 words: 155,554

The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge by Faisal Islam


Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, British Empire, capital controls, carbon footprint, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, G4S, ghettoisation, global rebalancing, global reserve currency, hiring and firing, inflation targeting, Irish property bubble, Just-in-time delivery, labour market flexibility, light touch regulation, London Whale, Long Term Capital Management, margin call, market clearing, megacity, Mikhail Gorbachev, mini-job, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, Pearl River Delta, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, Right to Buy, rising living standards, Ronald Reagan, savings glut, shareholder value, sovereign wealth fund, The Chicago School, the payments system, too big to fail, trade route, transaction costs, two tier labour market, unorthodox policies, uranium enrichment, urban planning, value at risk, working-age population, zero-sum game

At the University of Chicago the success drips off the faculty walls. The university boasts nine Nobel prize-winners in economics. They transformed the discipline and then fanned out across the world transforming Western and then developing economies with their commitment to free markets and sound money. Robert Lucas is one of the Chicago Nobel laureates. He told me that the bailouts were wasted, but that the quantitative easing being practised by Ben Bernanke’s US Federal Reserve was ‘following the Friedman prescription’. He expressed a concern about inflation later down the track, because reversing printing money is ‘hard to do politically’. Lucas said that economists overestimate their abilities: ‘You had a bunch of guys who thought they knew a lot. It turns out we didn’t know a damn thing about the stability of the banking system, so it’s back to the drawing board and we’ll see what comes out of it.’

A furious debate also raged in the USA about a huge new trillion-dollar bout of QE, of the kind tried in Britain – buying US Treasury bonds. In turn that raised questions about the real motive behind such a move, with an assertive China suspecting that this was a backdoor dollar devaluation. In the primaries for the US presidential election of 2012, one Republican candidate even suggested that QE was a form of treason, and presidential nominee Mitt Romney promised to fire the Fed chief Ben Bernanke. There is some irony in Washington looking to a London-style QE when there was so little evidence that it had been a success. And, yes, at the same time, influential voices in Britain were pushing for the adoption of a more US-style variety of QE aimed at stimulating a broader range of activity. Back in 2009, people in the Treasury wanted the magic money to be used to stir the mortgage bond market into life, or for more direct lending to companies.

Even at low interest rates this loan from the Bank of England to the Treasury had earned a hefty amount of interest (known as coupon payments). About £37 billion of QE ‘profits’ were sitting in a Bank of England bank account. The Treasury had initiated talks with the Bank about what it called ‘cash management operations’. Around the time of those talks the interviews for a new governor of the Bank of England were taking place, and there had been some loose talk from some candidates about so-called ‘helicopter money’, which essentially would involve cancelling the debt owed to the Bank in order to fund a boost to Britain’s flagging economy. On 23 October 2012, Sir Mervyn King made the following comments in a speech in Wales, thought at the time to be referring to these radical suggestions about monetary policy. ‘When the bank rate eventually starts to return to a more normal level, as one day it will, the Bank would then have no income, in the form of coupon payments on gilts, to cover the payments of interest on reserves at the Bank of England that we had created.

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The Corruption of Capitalism: Why Rentiers Thrive and Work Does Not Pay by Guy Standing

3D printing, Airbnb, Albert Einstein, Amazon Mechanical Turk, Asian financial crisis, asset-backed security, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, Bernie Sanders, Big bang: deregulation of the City of London, bilateral investment treaty, Bonfire of the Vanities, Bretton Woods, Capital in the Twenty-First Century by Thomas Piketty, carried interest, cashless society, central bank independence, centre right, Clayton Christensen, collapse of Lehman Brothers, collective bargaining, credit crunch, crony capitalism, crowdsourcing, debt deflation, declining real wages, deindustrialization, Doha Development Round, Donald Trump, Double Irish / Dutch Sandwich, ending welfare as we know it, eurozone crisis, falling living standards, financial deregulation, financial innovation, Firefox, first-past-the-post, future of work, gig economy, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, housing crisis, income inequality, information retrieval, intangible asset, invention of the steam engine, investor state dispute settlement, James Watt: steam engine, job automation, John Maynard Keynes: technological unemployment, labour market flexibility, light touch regulation, Long Term Capital Management, lump of labour, Lyft, manufacturing employment, Mark Zuckerberg, market clearing, Martin Wolf, means of production, mini-job, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, Neil Kinnock, non-tariff barriers, North Sea oil, Northern Rock, nudge unit, Occupy movement, offshore financial centre, oil shale / tar sands, open economy, openstreetmap, patent troll, payday loans, peer-to-peer lending, Plutocrats, plutocrats, Ponzi scheme, precariat, quantitative easing, remote working, rent control, rent-seeking, ride hailing / ride sharing, Right to Buy, Robert Gordon, Ronald Coase, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, sharing economy, Silicon Valley, Silicon Valley startup, Simon Kuznets, sovereign wealth fund, Stephen Hawking, Steve Ballmer, structural adjustment programs, TaskRabbit, The Chicago School, The Future of Employment, the payments system, Thomas Malthus, Thorstein Veblen, too big to fail, Uber and Lyft, Uber for X, Y Combinator, zero-sum game, Zipcar

Over $150 billion left China in just one month in 2015, mainly through Macau and underground banks.13 Capital inflows to China and other emerging markets have also generated considerable private credit. According to Matt King of Citigroup, emerging economies accounted for three-quarters of global ‘private money creation’ between 2010 and 2015. Flows of $8 trillion into those economies generated $5 trillion of credit annually.14 Much of that went into fuelling property bubbles at home and abroad. Ben Bernanke, former chair of the US Federal Reserve, and economists at the International Monetary Fund (IMF) are among those arguing that the combination of loose monetary policy, financial innovation and the savings glut in emerging market economies is responsible for housing price bubbles in Britain, the USA and elsewhere.15 This has contributed to the growth of wealth inequality and a revival of landlordism.

BASIC INCOME PILOTS: QE FOR REAL PEOPLE The 2008 crash, the perception that the global economy is facing secular stagnation, and fears, however misplaced, that the technological revolution is creating a future of labour displacement, have led to growing calls for basic income pilot schemes of one sort or another; some have been carried out. Before considering them, it is worth commenting on one misguided approach and one great missed opportunity. The misguided proposal is that stagnation justifies ‘helicopter money’, an image first suggested by Milton Friedman in which central banks would print money and throw it out of a helicopter for people to spend. In early 2016, this idea was garnering increasing interest, including from Mario Draghi, head of the European Central Bank. Martin Wolf of the Financial Times concluded that central banks should ‘be given the power to send money, ideally to every citizen’.18 But the main objection to ‘helicopter money’ is that it would leave economic policy in the hands of bankers rather than democratically accountable bodies. The missed opportunity was a big one. Recall that in 2015 the European Central Bank (ECB) began a ‘quantitative easing’ programme that pumped into financial markets the equivalent of 10 per cent of Eurozone GDP.

See 15 For a fuller review of those claims, see Standing, 2014, op. cit., Article 25, pp. 306–37. 16 T. Paine, The Political Writings of Thomas Paine, Vol. II (New York: Solomon King, 1830), p. 422. 17 G. Standing, ‘Why basic income’s emancipatory value exceeds its monetary value’, Basic Income Studies, 10 (2), 2015: 193–223. 18 A major hedge-fund guru, Ray Dalio, has argued in much the same way: R. Wigglesworth, ‘Helicopter money on the horizon, says Ray Dalio’, Financial Times, 18 February 2016. A senior staff member of Goldman Sachs has, rather predictably, argued against the idea. F. Garzarelli, ‘Central banks have safer options than a helicopter drop’, Financial Times, 27 April 2016. 19 M. Blyth and E. Lonergan, ‘Print less but transfer more: Why central banks should give money directly to the people’, Foreign Affairs, September/October 2014. 20 This is a point made by other economists, such as Anatole Kaletsky.

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How Will Capitalism End? by Wolfgang Streeck


accounting loophole / creative accounting, Airbnb, basic income, Ben Bernanke: helicopter money, Bretton Woods, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, centre right, Clayton Christensen, collective bargaining, conceptual framework, corporate governance, creative destruction, credit crunch, David Brooks, David Graeber, debt deflation, deglobalization, deindustrialization,, eurozone crisis, failed state, financial deregulation, financial innovation, first-past-the-post, fixed income, full employment, Gini coefficient, global reserve currency, Google Glasses, haute cuisine, income inequality, information asymmetry, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, labour market flexibility, labour mobility, late capitalism, liberal capitalism, market bubble, means of production, moral hazard, North Sea oil, offshore financial centre, open borders, pension reform, Plutocrats, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, post-industrial society, private sector deleveraging, profit maximization, profit motive, quantitative easing, reserve currency, rising living standards, Robert Gordon, savings glut, secular stagnation, shareholder value, sharing economy, sovereign wealth fund, The Future of Employment, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transaction costs, Uber for X, upwardly mobile, Vilfredo Pareto, winner-take-all economy, Wolfgang Streeck

In 2008, the year at the end of which he was widely expected to join the Obama administration as head of the National Economic Council, that fund paid him a respectable $5.2 million for his part-time efforts. During that same year, Summers also collected more than $2.7 million in ‘speaking fees’ from several Wall Street firms, among them $130,000 from Goldman Sachs for one afternoon appearance. When Obama was considering appointing him to succeed Ben Bernanke at the Federal Reserve, Summers removed himself from the list for fear of having to report on his sources of income at his confirmation hearing. 52See ‘Eric Holder, Wall Street Double Agent, Comes in from the Cold’, Rolling Stone, 8 July 2015,, last accessed 12 August 2015. 53Goldman Sachs was Obama’s second-biggest single supporter in 2008. See ‘Barack Obama (D): Top Contributors, 2008 Cycle’, at

For an interesting assessment of the applicability of underconsumption theory to post-2008 capitalism, see John Bellamy Foster and Fred Magdoff, The Great Financial Crisis: Causes and Consequences, New York: Monthly Review Press 2009. 33Presumably also because he would have had to declare the substantial income he received from Wall Street firms after his resignation from the Obama administration at the end of 2010. See ‘The Fed, Lawrence Summers, and Money’, New York Times, 11 August 2013. 34The same idea had been put forward in 2005 when Ben Bernanke, soon to follow Alan Greenspan at the Fed, invoked a ‘savings glut’ to account for the failure of the Fed’s ‘flooding the markets with liquidity’ to stimulate investment. Today Summers casually subscribes to the view of Left stagnation theorists that the ‘boom’ of the 1990s and early 2000s was a chimera: ‘Too easy money, too much borrowing, too much wealth. Was there a great boom? Capacity utilization wasn’t under any great pressure, unemployment wasn’t under any remarkably low level.

Paul Krugman, ‘Secular Stagnation, Coalmines, Bubbles, and Larry Summers’, New York Times, 16 November 2013,, last accessed 4 August 2015). 25If ‘quantitative easing’ continues to have no effect on the economy as a whole, or if central banks have to write off too many of the assets that they have bought with fresh money, the last bullet of monetary policy, and perhaps of policy generally, would be dishing out ‘helicopter money’ to citizens, perhaps by sending each taxpayer a cheque of, say, $3,000, circumventing the banking system in the hope that this would, finally, result in a take-off of effective demand. But it would equally be possible that people will invest their free cash in asset markets, causing another bubble, or was it to deleverage, or stuff it into their mattress. That, one suspects, might be the final end of capitalist wisdom. 26I have dealt with this subject in more detail in Wolfgang Streeck, Buying Time: The Delayed Crisis of Democratic Capitalism, London and New York: Verso Books 2014. 27Apart, of course, from the replacement, by their united colleagues on the European Council in 2011, of the prime ministers of Italy and Greece with functionaries of international haute finance. 28Schäfer and Streeck, ‘Introduction’., Politics in the Age of Austerity. 29The political opposition of business to Keynesianism and its consequences for political economy has nowhere been better explained than by Michal Kalecki, ‘Political Aspects of Full Employment’, Political Quarterly, vol. 14, no. 4, 1943, pp. 322–331. 30Indeed, as growth rates fell, profit recovered while wage shares declined.