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Why don't they prioritize paying their citizens directly (Americans in this case) over providing liquidity, repo, buying bonds, and lowering interest rates? I have a BA in Economics, so hope this isn't bad economics! I ask for central banks in general, not just the US Federal Reserve.

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SO we can afford this but not Medicare for All? Okay. Yeah, thanks.

Pretty basic distinction here, this action was undertaken by the Federal Reserve, which is not the same thing as the federal government. The Federal Reserve does not need to raise money from taxpayers, they have the authority to create new money for these operations.

Also, the Federal Reserve does not handle healthcare policy.

On Mar 16 2020, Federal Reserve cuts rates to zero and launches massive \$700 billion quantitative easing program. On Mar 17 2020, Fed announces move to help businesses get short-term funding in commercial paper market, and Mnuchin says Trump administration is looking to get cash to Americans 'immediately'. Why doesn't the Fed just donate that \$700B to poor private individuals?

On Friday Mar. 20 2020 morning, the Fed announced that it would be increasing the frequency of its 7-day maturity operations with the world’s major central banks: the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. The swap lines will now be offered daily instead of weekly.

The announcement comes one day after the Fed announced \$60 billion of swap lines each with the central banks of Australia, Brazil, South Korea, Mexico, Singapore, and Sweden. It also unveiled lines of \$30 billion each with the central banks of Denmark, Norway, and New Zealand.

On May 4 2020, the US Treasury Department announced Monday it is borrowing about $3 trillion this quarter. The money is being used in large part to subsidize economic rescue efforts in the wake of the coronavirus pandemic.

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    $\begingroup$ Just a few points: a) they are thinking of doing this already (check out the latest news, I think they plan to send a cheque to Americans over the next few weeks). b) It comes down to the monetary transmission channel. Decreasing interest rates increases investment, depreciates the exchange rate and incentivizes consumption by lowering cost of borrowing. One issue with helicopter drops like you suggest is that it might incentivize the "wrong" type of non-durable, non productive consumption. $\endgroup$
    – ChinG
    Mar 17, 2020 at 22:46
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    $\begingroup$ Keyword: "helicopter money" $\endgroup$
    – user253751
    Mar 18, 2020 at 14:49
  • $\begingroup$ The simple answer why they don't help the poor, is because politicians primarily respond to the demands of the rich, and the rich largely demand that politicians help the rich, not the poor. $\endgroup$
    – Steve
    May 11, 2020 at 12:31

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Central banks do not (usually) have the legal authority to do this. In contrast, governments (usually) do have the legal authority. And many do indeed use this authority to give money to citizens and often more to poorer citizens. (In fact, during the current crisis, many have done exactly that.)

(This question is a bit like asking why central banks don't issue parking tickets and other fines, or collect taxes, or run the military/charities/orphanages/anything else. It is conceivable that a country gives its central bank the power to do so. But as it so happens, most countries don't do this. Instead, they usually give such power to other authorities.)

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  • $\begingroup$ The obvious follow-up question would be: if they could do it, how would it affect the economy differently? $\endgroup$
    – user253751
    Jun 25, 2020 at 15:25
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Most federal banks don't have the legal authority to do this, but the notion is definitely sometimes discussed, often under the informal name "helicoptering money". Former Fed Chairman Ben Bernanke discusses his thinking on the subject here, and some economists have called for this response to the current economic crisis. Rep. Maxine Waters has proposed a bill that would authorize the Fed to do roughly this idea.

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This is a model similar to the so called "helicopter money" by Nobel-prize winning economist Milton Friedman, who proposed it in the famous paper "The optimum quantity of Money".Central Banks don't do it simply for two (economical) reasons: first of all it would be useless and, if effective, it can be dangerous. Putting aside the legal matters that Central Banks are not entitled to do so, I suppose that your questions is about why central banks cannot do it economically speaking. The key point to understand why is related to expectations, that - roughly speaking - are what people expect will be the economical situation tomorrow.

So, let's suppose that there is a sudden money drop, and that because of this everyone has a 10% increase in cash balances. Since the drop is sudden, not announced and it's a "one shot" event (meaning that people don't know if the drop will be repeated tomorrow) there is not a possibility that those people will spend the cash they received, since they don't know if the drop will be repeated. If it's true, the drop (that was done supposedly to boost aggregate demand) will not cause the desired effect, because people don't make expectations about that. That's because, at best, helicopter money is useless.

Now let's suppose that this drop will be repeated with a certain regularity (for instance, suppose that it will happen every Monday of the month). In this case people start making expectations, they will adjust their behavior and will start spending; because they know (or, at least, expect) that they will receive a certain amount of money as a consequence of the drop. So they'll start spending and that will boost the aggregate demand and will cause inflation. And that's because Helicopter money would be harmful: by making expectations, people will start to spend; and the more the drop is permanent, the more people spend and the more the inflation will be and the more people will require money to acquire the same amount of goods and services, and so the more the inflation will become severe.

Now you'll say: but that's the same that was (and still is, in reality) done with QE. That's not true, because unlike in the case of QE (where there is a sort of "asset swap", where the Central Bank purchases an asset and then it creates base money - M0 -) in the case of Helicopter Money there is not a similar operation. Also, unlike the QE (that is temporary, in fact Central Banks can withdraw from asset purchases anytime is needed) the Helicopter Money would be perceived as more permanent and then will be harmful to the economy and the general welfare. So that's because central banks don't do it.

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