Money should be printed for populations, not banks!

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The US Fed is printing money to get the US out of a recession. The ECB is also printing money, with the same target in mind. In limited amounts, this is a good idea, but the central banks are going about it the wrong way: they are essentially printing money for banks and politicians. They should print money for populations and in order to do this, they have to set up individual accounts for the whole population.

So far, the central bankers have pumped money through the existing systems to friends in high places, bankers and politicians. They have so far been loathe to create new systems to print money for the people who actually have debilitating debts: individuals and their private companies.

Let’s unpack this and talk about how additional money is currently channelled towards ‘friends’ and what needs to happen to get money in the hands of those who would do useful things with it.

The US Fed first started printing money in 2008 by directly rewarding banks for having reserves, ie it just gave a quarter of one percent on all reserves. Then it dropped the cost of loans to banks: the ‘discount rate’ it charges to commercial banks is now a paltry 0.75%. So a bank can lend at 0.75%, also implying that bank-related major institutions can borrow indirectly at such low costs. What does a bank do with this cheap money, apart from giving its bosses a huge bonus of course? A particularly safe thing is to buy up government bonds, which the Fed counts as ‘safe’ and as a ‘reserve’. And what are the returns on the Federal bonds? Well, at the moment they are 1.88% for 10-year bonds, but they were roughly 4% in 2008 when the Fed started this game. So a direct and fairly safe profit is to be made by borrowing from the Fed at 0.75% and then lending it out again to the Fed (via the government) for 2-4%. Of course, investing abroad is even more lucrative. So, the roughly 2 trillion more money that the Fed has put into the US economy has partially ended up as 1.6 trillion in additional, idle, reserves in US banks (see here) who in turn have a fair whack of Treasury bonds directly or indirectly, and have of course also tried to park their money in lucrative foreign investments.

The Fed has also announced it will just directly buy up mortgage backed securities for more than its real worth, again sending money to banks, and more to banks that previously made worse investment decisions. Similarly, the Fed now and then buys entire vintages  of new government bonds.

In short, the Fed has printed money for bankers and governments, subsidizing government consumption, bankers’ bonuses, and crowding out commercial investment since the smart money will have been invested abroad to flee the dropping US dollar and get the higher foreign returns.

The ECB has similarly been printing money for bankers and governments, albeit somewhat indirect. It for instance doesnt like to directly buy bonds so instead gives loans to commercial banks at very low rates (such as 0.5%), who in turn give them those bonds as collateral. By borrowing from those self-same banks the same money at higher interest rates (say 3%), the ECB gives these banks a guaranteed income-stream that ensures the viability of the incredible bonuses the bankers award themselves. Somewhat deviously, the ECB does not disclose the prices on these buddy-buddy deals so the full extent to which money is given to befriended bankers is not clear! How convenient for them. And when the ECB is not ‘lending’ from commercial banks, they can always buy up government bonds at much higher returns than banks pay to borrow off the ECB.

Also, the ECB now directly buys up bonds, some 200 billion euros worth at the moment according to one source. The large combined holding of bonds mean it has now become a cheap financier of government consumption. And of course banks are just as loathe to lend to private investors as before, prefering instead to get into safe government bonds. When push comes to shove, as happened with Greece a while back, the ECB allows countries to simply not pay back the loans, or, equivalently, extend the loans till the far far future whilst giving back any interest rate up to that moment (zero-interest loans hypothetically paid back in the far future).

So the situation in Europe too is that the ECB is subsidizing government consumption and bankers bonuses.

It is crucial to realise that this method of money printing is not the economic ideal nor really necessary: it is just convenient and helps the direct friends of the central bankers. I know this sounds somewhat conspiratorial, but dont forget that central bankers come from and often return to the world of bankers and governments, so favours they do to that in-crowd come with personal returns to central bankers! ‘Mates helping mates’, we would say in Australia.

What is the alternative? To do money printing properly, ie to have what is known as ‘helicopter drops’ wherein every member of the population is given the same amount of new money to spend as they see fit. In stead of printing money for bankers and governments, one would give new money to the population. It then wouldn’t end up in bonuses but in things households care about: the education of their kids, holidays, cars, medicines, their own private business, paying back their stifling mortgage debts and their commercial loans, etc. Now, which method of money printing sounds more likely to help the economy and get rid of the shackles of bad debts: the hoarding of idle reserves in banks and inflated government consumption, or private investment and private consumption? The latter, of course, particularly since the most crippling debts are private.

Why hasn’t this happened yet? I suspect the main reason is that central bankers are members of the financial elite with an unhealthy disdain for the population, thus allowing themselves to think that giving money to their friends and future employers is ‘better for the economy’ than giving it to the ‘plebs’.

But there is also a convenient excuse, which is that we don’t have the institutions to do it. There is no mechanism to send, say, 10,000 Euro to every member of the Eurozone. Why not? Because no-one has a list of all the individuals living in the Eurozone. Neither do all those individuals have bank accounts. They aren’t even all registered by their own governments.

How come? The deep historical reason is that Napoleon did not conquer the whole of Europe and that there are hence outposts (like the UK!) that do not have a population register to start from. Many people don’t have passports, nor are their deaths properly recorded. More immediately, even in those countries with population registers, not everyone has a bank account because they are too young, too disabled, too old, etc.

So the easy excuse of the central bankers is that they simply have no mechanism to print ‘money for the people’ and hence are forced by circumstance to give it to their mates. But of course this really is just a form of laziness that masks elitism, for there is really no reason why the central banks could not set up a universal bank for everyone. It should create that public institution, just as it is the role in general for government to set up beneficial public goods!

So one practical way to go is to announce that everyone over 16 with a passport of a Eurozone country can register themselves for a bank account with the ECB, at which point their fingerprints and perhaps a photo of the eye is taken too to ensure minimal cheating. Upon receiving their ECB account they get 10,000 Euros in that account. The ECB can of course just out-source this job if it wants to. Ditto for the US Fed. What then would happen is that everyone first goes through their national system to get a valid passport and only then applies to the local ECB-registering office.

It would clearly be a massive operation to register the entire population with several pit-falls (just imagine the incentives to pretend a family member hasn’t yet died!), but that registry itself has all kinds of further useful purposes as it can become the main conduit for European and American taxation and subsidies. It is the kind of system we should want to have anyway, if only to get more efficient internet banking! And yes, public goods of this type are still being built in the modern world, but lately more by private companies than public ones. Just think of Google StreetView.

The simple message: if central banks think printing money is the way out of the debt crisis, they should print money for their people rather than just their befriended bankers and politicians!

10 Responses to "Money should be printed for populations, not banks!"
  1. Well, one of the reasons for giving money to the banks is that they were in pretty bad shape, and subsidies are cheaper than bail-outs/shutdowns.

  2. Isn’t that what happened here in oz in essence, with the first Rudd stimulus? The registry was just the taxation system, which I’m pretty sure that the governments of Europe would have.

  3. Sure you didn’t intend to publish this on 1st April, Paul? Was it somehow delayed? Eirher that or something strange has been added to the water. 🙂

  4. Baz,

    Yes, the stimulus here was very much like it.

    Peter,
    Nope, not joking. In fact I have expressed similar thoughts many times before, as have many other economists. Simply haven’t previously quite articulated what the obstacles were and the way round them. Why, are you a central banker?

  5. I totally agree. In normal times, monetary policy could be conducted by offering short term loans to people at the cash rate. Banking (maturity transformation) could be then completely separate from monetary policy.

  6. It’s tempting to agree in a simple-minded “power to the people” way. But, nepotic corruption is far preferable to someone like Rudd printing money to win votes.
    Hell, I don’t care – it will just hasten our transition to a more trustworthy currency like bitcoin. When I first found out about BTC, they were just $7 each; now they’re over $130! I’m still not selling.

    • the governance of this sort of thing is clearly important. As a system, the government of the day could use these accounts to quickly push money to households, much like happened in Australia at the start of the GFC, but it would involve the government getting into debt.

      Central using this possibility is a different matter. Clearly printing money for the population is not something to be used lightly. But smaller variations along the lines of Jim’s mortgage proposals would probably be a viable instrument.

  7. Paul,
    I am not a banker, just a simple scientist who meddles in economics in my spare time. For some strange reason I thought printing money was a strategy for reducing its value, rather than supplying “lollipops” for bankers or individuals. After all, the paper (or should I say “plastic”) has no intrinsic value at all. The paradox is that it only has value if collectively we all agree it does. The moment that collective agreement falters its value dissipates.

    And You should cash out your bitcoins into something a bit harder ASAP. That is a bubble that is bound to burst.

  8. Presumably the credit risk of making short term loans to the population is low and not an issue when printing money is the intention. When rates need to be positive, the RBA could make having an RBA facility a repeat game, (if you default, you forfeit the facility for 20 years) with a balance capped at a share of people’s taxable income. Changing the cap is a macro prudential tool as well. It is feasible because the cost of implementing banking IT systems have fallen so much (but the cost of migrating from an old to a system remains prohibitive).

  9. With regard to Jim’s policy, in Australia, the central bank used to loan directly to the population. The Commonwealth Bank had the reserve bank role (the Reserve Bank didn’t exist) and was completely owned by the Australian Government. It didn’t cause any big problems, but neither was it a panacea.

    Banks have always created money in exchange for debt contracts of some type, and the fact that money has to be paid back is what has made bank money of value. Whether the government or companies do it doesn’t make a big difference.

    I think Paul is talking about controlled creation of money that is then effectively given to people without any corresponding debt instrument. Some might regard this as a form of counterfitting, others as a practical measure to help keep inflation or nominal GDP on target.

    While a central bank or government giving money away has some similarities to counterfitting, provided it is done in a controlled manner and is of general benefit rather than for a small group’s gain at the general population’s expense, then I think it is different enough from counterfitting as to be something quite different. As Paul points out, some portion of what central banks do now is more like counterfitting, than widescale gifting of money would be.

    I also think that it is probably easier and in many ways better for the government to just create some money for itself and spend it, rather than give it to everyone. There is a history of some governments abusing this ability, but most governments don’t – they don’t engage in it at all. With a clear, public understanding and policy to carry it out in a controlled manner, either giving money away, or governments spending without corresponding debts should work fine.

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