Central bank stimulus is here to stay, but what if it fails?

November 14, 2013

If anyone still doubted that central bankers all over the world will keep interest rates at rock-bottom levels, those doubts should have been dispelled this week. Janet Yellen’s statement on Thursday to the U.S. Senate that the Fed has “more work to do” to stimulate employment, and that “supporting the recovery today is the surest path to returning to a more normal approach to monetary policy,” capped a series of surprisingly clear commitments to easy money from central bankers this week. On Wednesday Joerg Asmussen, a member of the executive board of the European Central Bank, and Ewald Nowotny, the Austrian central bank governor — both of whom had previously been reported as voting against last week’s surprise ECB rate cut — said that they might in fact support further rate cuts and even negative interest rates, as well as the possibility of breaking the taboo against U.S.-style purchases of government bonds. And Mark Carney, the Governor of the Bank of England, reiterated more strongly than ever that any early increase in British interest rates was out of the question, despite the fact that the outlook for the British economy has turned out to be much better than the BoE had expected.

But what if these zero interest rate policies produce disappointing results in the year ahead, as they have in each of the past four years? What if the world economy fails to spring back to life or just plods along with sub-par growth, despite all this stimulus, as has happened in each of the past four years?

With luck, these questions will not need answering because fiscal austerity has acted as a powerful headwind to economic recovery in the U.S., Europe and Britain and these budget consolidation efforts are now being relaxed. The new records on Wall Street and other stock markets suggest growing confidence among investors that monetary stimulus will finally deliver decent levels of growth next year — and this does indeed seem likely. But what if the optimism turns out to be wrong? What if the U.S. and Britain fail to grow by at least 3 percent next year, and what if Europe stays stuck with sub-1 percent growth and mass unemployment? In that case, the monetary and fiscal policy experiments since the Lehman crisis would have to be judged as failures — and that judgment would open the way to much more radical ideas than zero interest rates and QE. Such radical ideas would be of two opposing types.

If there is no significant improvement in growth and unemployment by this time next year, many conservative politicians and economists will argue that the post-Lehman stimulus policies were not just ineffective, but directly counter-productive. The whole approach of the past five years should therefore be reversed: politicians and central bankers should admit that they cannot “manage” employment and economic  growth; governments should concentrate on getting their finances in order, stop manipulating interest rates and allow market forces to do their work.

Whatever the theoretical arguments for such reversals — for example, that tougher budgetary policies would boost business confidence, that higher real interest rates would improve credit allocation and purge the economy of inefficient zombie firms — there is no chance in practice that governments in any of the major economies would respond to growth disappointments by doing less instead of doing more. The political risks would simply be too great for any government, regardless of its theoretical leanings, to impose tougher fiscal austerity or higher interest rates in an environment of weak growth and intractable unemployment.

A much more likely reaction to failure of the present stimulus attempts would be bolder experiments with new measures that act directly on consumer demand. The obvious way to do this would be to combine monetary and fiscal policy into a new form of unified stimulus that would put money directly into consumers’ pockets, instead of relying on trickle-down effects from financial markets, where wealthy investors become even richer because the central bank boosts asset prices by buying government bonds.

As this column has repeatedly argued, the Fed could have delivered vastly more powerful economic stimulus through its QE program if it had sent out a check of $270 every month directly to each of the 315 million U.S. citizens, instead of transferring the same $85 billion monthly to bond investors, as it has been doing now for over a year.

This kind of monetary “helicopter drop” was what Milton Friedman recommended for economies still facing persistent unemployment after interest rates were reduced to zero and Ben Bernanke strongly advocated “helicopter money” for Japan before he became Fed chairman.

Even a few months of free money distributions to ordinary American households would almost certainly have done more to encourage consumer spending and economic activity than years of conventional bond purchases by the Fed. Helicopter money would therefore have revived the economy more quickly and with much less expansion of the Fed’s balance sheet than conventional QE. So helicopter money would actually have been a more cautious form of monetary stimulus than QE, with less inflationary potential.

Why then was helicopter money never seriously considered, either in the U.S., or in Britain and Japan, where central banks have printed even more new money than the Fed, relative to economic size? Apart from the obvious vested interests of bond investors, bankers and other financial market participants who profit by acting as the conduit for monetary stimulus, the main obstacle to helicopter money is an ideological totem: central bank independence.

Helicopter money is economically equivalent to a tax cut that the government finances by selling bonds to the central bank. Monetary and fiscal policy are blended into a single decision and that means the barriers between central bankers and politicians are removed.

Since most central bankers are passionate about protecting their political independence, any discussion of combining fiscal and monetary decisions is today still taboo. But if current monetary policies fail to deliver an adequate economic recovery by next year, political pressure to break the monetary-fiscal taboo could become overwhelming and central bank independence will be doomed. No wonder central bankers are more committed than ever to economic growth.

PHOTO: Crew members check a helicopter on their arrival in Zhezkazgan November 10, 2013. REUTERS/Shamil Zhumatov


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It’s already failed because it’s never been aimed at helping ‘America’ to recover just the financial sector which is only above it’s high from 2007 by 1,000 points.

Posted by OuterLimits | Report as abusive

Japan has had ZIRP for 23 years now. Can’t any of these arrogant alchemists see that it was a total failure? Around the world we see these people vowing to continue there failed policies until they miraculously work. And nobody asks them “are you insane?”

Posted by wicomico | Report as abusive

It already has failed.

Posted by Cleansesociety | Report as abusive

“What if?”
This is indeed an odd question considering the fact that it has visibly failed, unless one is willing to include inflated stock prices as a tangible achievement.
The real problem is that no one has a clue how to stop this lunacy, no one thought about an alternative policy, and no one is willing to admit that we’re facing another economic earthquake partially induced by central banks’ extreme and prolonged policies.

Posted by reality-again | Report as abusive

I agree with the other comments it is already a failure.
We are simply trying to manipulate, either rest or stimulate a dying patient.
Neither will work.
The constant quantitative growth economy, based on excessive and artificial demand and consumption is simply unsustainable.
We have been cheating the natural system and its laws for a long time and we have run out of cards.
The human resources are already exhausted symbolized by social inequality, unemployment, los future prospects, depression, drug and alcohol use and so on, and the natural resources are also close to exhaustion.
The only question is if we have to wait for unprecedented global collapses, suffering to prompt changes in our modern socio-economic development, or we try to take pro-active steps right now to go before the inevitable blows?

Posted by ZGHerm | Report as abusive

I like the idea of direct distribution to the masses but instead of just giving the money away why not put people to work on simple public works projects?

I’m not saying build a highway for hundreds of millions of dollars and employ 100 people but rather get a lot of people working for $10-$15/hr doing things like picking up trash, clearing brush, creating fire breaks in the mountains, painting public buildings, washing windows, creating bike trails, etc. Basically longer term day labor on steroids financed by the QE budget. I know we can do things more efficiently (using less people) with modern tools but that’s not the point.

$85 billion a month is the same as 34 million full time jobs at $15/hr, now that’s meaningfull job creation!

Posted by hendersdc1 | Report as abusive

What is one of the definitions of insanity: Keep repeating what has already failed? After six years of monetary policy that has failed, why does the Federal Reserve keep at it? Has the Plutocracy that has benefited greatly from these policies completely dominated our federal government through a corrupt Congress and a lame Federal Reserve System that both favor the super rich?

Our economy is dying after six years of depression (according to Nobel Laureate Paul Krugman), but the Tenth of One Percenters are profiting mightily with their tax-free foreign bank accounts. Just ask Williard Mitt Romney. He says, “It’s all legal!”

Posted by ptiffany | Report as abusive

This easy credit bond purchase ZIRP program is doing exactly what it was designed to do. Although marketed as a boosting device for Main Street, it is simply a mechanism for which Wall Street gets bailed out and the debt can be monetized. It’s not about the broader population. That is just spin to keep the people subdued with hope. This is for exclusive members only, and the average individual is not in that club. It is, in effect, a form of looting from the middle in transfer to the top.

Posted by divinargant | Report as abusive

if you haven’t already, google some: basic income

Posted by satori23 | Report as abusive

Do economists stick their heads in the sand into some subterranean space insulated from the rest of the world and talk only to themselves? Each seems stuck in an arrested alternate reality of denial still believing that “the answer” lies in “growth” at a time when the world population is SEVEN BILLION and exploding!

Snap out of it! The world has ENOUGH urine and feces. I’m nobody, but even I can read the tea leaves well enough to see that there will be “…no significant improvement in [economic] growth and unemployment by this time next year…”.

We don’t need to wait that long to see that politicians and central bankers have only made a bad situation worse in both short term and long term. Yes, “…governments should concentrate on getting their finances in order, stop manipulating interest rates and allow market forces to do their work.”

If the “political risks” be too great of “…doing less instead of doing more… you advocate using “helicopter money” to put America’s economy onto the greased slide into a “Star Trek Economy” that no one can stop. Never mind that Gene Roddenberry is dead and cannot tell us how that worked or came into being.

The inconvenient truth is that the American economy (and a World economy that depends on it and it’s “leadership”) have entered a “new normal” of weak growth and escalating unemployment. Look around.

Millions upon millions of “jobs” have disappeared as inexpensive computers and powerful software have almost infinitely increased personal productivity. Lower management, clerks, construction coordinators, girls Friday, bookkeepers, draftsmen, designers, etc., all good middle-class positions that were the first step onto a progressive carousel of responsibility have not been “outsourced”…they are just GONE! Forever.

Society is doing that which is necessary with less and less people (except government, of course) yet humans keep popping out far more babies that must compete for fewer and fewer “jobs”. Class warfare is inevitable when those with a job and their own plans for their own future find more and more of their earnings confiscated by governments to feed more and more people without “purpose”.

Governments always “take care” of those utterly dependent on government FIRST, and the rest of us get to scramble for the leavings. We live in interesting times.

Posted by OneOfTheSheep | Report as abusive

Apparently people are expecting a return to the Good Old Days of 3 to 4 percent growth as though they deserved it by divine right. Why? Most of our long-term problems are due to excessive consumption and the resulting pollution, most seriously from CO2 causing Global Warming. The advanced standard of living we enjoy today will not likely persist without radical rethinking of how we price clean air, water, arable land, green energy and comfortable temperatures. We will be very lucky (and not necessarily deserving it one bit) if the standard of living 50 years from now is no lower than it is today.

Posted by Jim1648 | Report as abusive

Dear The Man or Woman can I have a million out of those billions please?

Posted by Cyberblunt | Report as abusive

We have to continue bond buying so our children can go into debt to pay for “stalk” market profits?

Posted by 2Borknot2B | Report as abusive

To grow in real term we should create more competitive domestic corporate tax environment. One that would induce corporation (even foreign) to invest more on domestic soil vs. importing and outsourcing from cheaper places.

For example, in California, if we compound federal and state taxes the fiscal pressure amount to be possibly the highest in the world.

Is not just printing more $ to help privileged bond holders and bankers or an helicopter one time $ sum to spend shopping that will turn this slump around.

Posted by robb1 | Report as abusive

The banking cartels have not siphoned enough money yet from Washington. They will work with our politicians as long as possible to keep lending them free money to lend back to the same government for a higher rate for as long as possible.

Corporate welfare. And experts say the USA is not a socialist country. We are worse than communism. We have created an elite group above the law – funded by our taxes to work this non-productive merry go round of lending to provide them socially assisted corporate welfare. Welfare that is in the billions not 40 dollars a week like grand ma gets. Capitalism never looked so crooked.

Posted by Butch_from_PA | Report as abusive

the ‘pass’ or ‘fail’ judgement is really a subjective conclusion……..you have to know what the Fed’s goals are.

they aren’t helping the economy, necessarily……..but they are enabling a concentration of wealth.

the Federal Reserve serves ‘Capitalism’,……don’t conflate that service with ‘helping the country’ or ‘free enterprise’, or ‘for all Americans’

Posted by Robertla | Report as abusive

Part of the reason why the Fed’s QE has turned out to be a failure of epic proportions is the inconvenient fact that if you ask Americans what they think of it, most would say it is just printing money in order to benefit the rich who invested in stocks, and for further enriching Wall Street financial firms.

Average Americans don’t see ‘growth’ anywhere around them, except on the news about the DJ and S&P breaking new records.
Few Americans believe QE is achieving anything positive these days, and most don’t see anything good coming out of it. Many see the dangers in it, while few believe pundits like Krugman who seem to promote the irrational notion that central banks can and should print money in unlimited quantities, pretty much ad aeternam.

Since printing money can be in some ways similar to taxation, and since the American people doesn’t have much to say about what the Fed do, QE is de facto a form of taxation without representation.

Posted by reality-again | Report as abusive

The U.S. needs new roads, highways, sewer and water systems, investment in medical and general research, guaranteed college education and seed money for start up companies. Money for research and production of green energy, especially injection geothermal power and to provide electric cars for all who want them. All the money going to the top is great for those who have the money to enforce electoral stupidity and the further rotting away of the middle class. Trickle down is not even trickle on anymore. People want to work. It’s the private banking system that has wrung out every drop of monetary wealth from the upper middle class on down. The writing on the wall would be visible save for the wealthy repossessing it last week in foreclosure.

Posted by Newsrocket | Report as abusive

Cyclical greed rules. Time to push it back and let public banks have a shot at it. it’s sure working in China. And in North Dakota…oh my!

Posted by Newsrocket | Report as abusive

It’s time for alternative or supplemental currencies that can be used within communities or distressed areas for jump starting local businesses. The current system is not adequate for reaching those most in need of stimulus.

Posted by Greenspan2 | Report as abusive

Good luck continuing with the insanity.

Short of VAT on imports to reverse the lost jobs, any business growth is a pipe dream other than – one business stealing from another in a growth stagnated environment going forward.

Posted by Mott | Report as abusive

If it fails the politicians will figure out 3 critical problems dam fast.

1. How to save themselves at the expense of everyone else.
2. Who to blame that can’t be held accountable.
3. How to stay in office.

Posted by JLWest | Report as abusive

zerohedge arrived at this conclusion years ago… The Western economic model is cooked! I wish it weren’t so, but sadly it is, the collective memory is short and we’re destined to repeat the same mistakes of the past.

Why people persist in listening to those doyens of finance and economics… when they are repeatedly wrong in their forecasts makes no sense.

How many times have you heard that a recovery is just over the horizon?

Posted by onlyif | Report as abusive

The banks needed to be nationalized or saved to have the business credit businesses and home buyers rely on. Two fiscal stimulus was used only monetary. You cannot push on a string as was said in economics classes, you cannot make people loan or borrow so monetary policy has limits as you said. But given the divide between the political parties it was the only game in town.

Also politician lie a lot. Since the sum real estate valuations exceeds many year’s GDP. The real estate bubble’s pop made possible by government encouraging bad mortgages was too big to stop.

No in government suggested ways to limit the number of mortgage loans when the price of the average hose exceeds some multiple of average salary the test of the existence of a bubble. Too many home owners are there to get rich on excess housing prices.

Posted by Samrch | Report as abusive

Helicopter money is being carried out in the UK through:
a) transfers to the banks through low interest and QE
b) transfers to a random selection of people through the PPI mis-sale rebate system.
Something like 11 billion UK pounds has been distributed this way, in sums that most people aren’t saving but spending.
By sheet fluke they have implemented a suitable response (though not really big enough).

Posted by SamIAmNot | Report as abusive

pssst….let me inform you on a little secret….it has failed..!

Posted by rikfre | Report as abusive