Helicopters’ faint whirring heard in UK: James Saft

October 17, 2012

Oct 17 (Reuters) – It is one thing when commentators burble
on about the possibility of outright central bank financing of
deficits, it is quite another when a viable candidate to lead
the Bank of England is reported to be thinking along these
lines.

Reported of course is different from said, but a speech last
week by Adair Turner, outgoing head of Britain’s Financial
Services Authority and a candidate to be the next governor of
the BOE, may serve as a warning or a promise, depending on your
view of money printing.

Turner, after ticking off the already extensive list of
support the BOE has given to the Treasury and economy, held out
the promise of more:

“We need to be ready if these measures prove insufficient,
to consider further policy innovations, and further integration
of different aspects of policy – to overcome the powerful
economic headwinds created by deleveraging across the developed
world economies.”

Nothing but a hint there, but shortly thereafter two
respected journalists, Robert Peston of the BBC and Simon
Jenkins of The Guardian, reported that Turner believes that the
BOE should simply forgive some bonds issued by Britain which it
owns.r-bank-of-england

Given the opportunity to back away from the suggestion over
the weekend at the IMF meeting in Japan, Turner hung the idea on
Peston, who referred to the idea as “helicopter money,” an image
borrowed from a 2002 speech by Federal Reserve Chairman Ben
Bernanke.

“The whole point of my speech on unconventional policies was
to provide a justification of what we have done over the last
three months in terms of unconventional policies,” Turner said.

“I pointed out there were other things we can do. As for the
specific idea of cancelling gilts or permanent monetization, I
have to say that was reported by my good friend Robert Peston,
but that was Robert’s idea, not my idea.”

That is not saying “never” or “I am not currently
considering that.”

While that could simply be a canny would-be central banker
keeping his options open, his approach stands in marked contrast
to that of Bernanke, who went out of his way recently to combat
fears that the U.S. central bank was monetizing or planned to do
so.

“Monetizing the debt means using money creation as a
permanent source of financing for government spending,” Bernanke
said, going on to stress that his support of the economy would
taper or reverse when the bank sold Treasuries or allowed them
to mature.

INEXORABLE

My guess is that, regardless of who leads the BOE, this
represents an advance in what feels to be an inevitable slide.
Once introduced, especially under current circumstances, the
conversion of large-scale secondary market purchases of
government debt by central banks to outright monetization has an
inexorable feeling to it. Firstly, monetization is hard to
resist in a situation of extremis. If a government fails to be
able to finance itself at what it considers an acceptable price
it is hard to see the central bank making things worse by
selling alongside panicking investors. Far more likely is that
the central bank plays the role of its own government’s lender
of last resort.

Secondly, once we accept the rationale that conventional
monetary policy is no longer effective and therefore
quantitative easing is justified, it is simply another logical
step to buy and destroy debt, rather than buy and hold. Given
that the BOE owns UK bonds equal to about 25 percent of all debt
stock and yet conditions are still, if not deflationary, pretty
dire, the argument seems to apply as well now to monetization as
it recently has to temporary QE. Allowing bonds to mature,
effectively tightening policy, makes no sense within this
argument, if you accept it.

Bernanke’s preferred definition of monetization, that it is
“permanent,” is canny but hard to swallow. First, nothing is
permanent, especially a government printing money; nature and
markets will bring it to an end even if the central bank will
not. As well, permanent hangs on the intention of the bank,
which is harder to credit than its actions.

The somewhat terrifying prospect however is that, like
conventional monetary policy, perhaps QE and its ugly cousin
monetization really don’t work in the current circumstances, at
least as practiced. It is not as if the evidence, based on the
experience in Japan over decades and more recently in Britain
and the U.S., is all that supportive.

This leaves behind the rump risk, which is inflation, or
rather inflation fed by panic. It will not be easy to get
everyone else, who after all still own 75 percent of UK bonds
and 90 percent of Treasuries, to simply stand still while the
central bank monetizes.

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