Just print money and give it to everyone. Please.
Like any banker, I remember my first bailout fondly. It was January 1995, and like the other bailouts during my twenty-year career it wasn’t called a bailout, but a market-stabilization package.
Mexico had gotten itself into deep financial trouble, partly because US bankers had invested too heavily in it. When the Mexican party came to an end many US financial firms (my own included) were in so heavily they risked collapsing.
Faced with his first crisis, President Clinton put together a $50 billion package for Mexico, $20 billion from the US, despite a reluctant congress. It was sold the usual way of selling these things, with claims that it would be bad for everyone if the markets fell apart.
The bailout passed, and Mexico, the markets, my firm, rebounded. It was particularly good for bankers, including me, salvaging my early career from an early end.
The Mexican bailout would become the general model for regulators and politicians for the next two decades. When markets got into trouble they would be saved under the auspices that what was good for markets was good for the economy, and ultimately good for everyone.
But there is a much simpler, and far fairer, way to ensure that a market crisis isn’t bad for the economy and bad for everyone. Bailout everyone, not just the bankers.
How? Just have the government print money and hand it to each citizen. This isn’t an idea coming from the Occupy Wall Street drum circles. It is a well-regarded idea amongst economists (Who know it as “Helicopter Money”). Including right-wing and left-wing Nobel Prize winners. Including Ben Bernanke.
The usual answer to why we don’t do this is that it isn’t politically feasible and there is no precedent.
1) That has never stopped bank bailouts, which often require a great deal of political and regulatory ingenuity to jam through. (TARP cough TARP)
2) It is a symptom of a system built by and for the bankers to benefit themselves. It is the equivalent of saying, “We can’t do it because we have never wanted to do it.”
That we don’t do it this way isn’t just a small economic quibble with no impact. The most visceral anger I hear from voters across the country is directed at bank bailouts, which they see as evidence of a rigged system.
They are right. The system is rigged in the sense that our primary method to stimulate the economy also conveniently bails out bankers.
After Mexico, regulators and politicians kept doing whatever to prop up markets. The crash of the hedge fund LTCM in 1998 brought immediate attention from the Federal Reserve. The dot com implosion also brought dramatic action in the form of massive interest rate cuts by the Federal Reserve. Each one propped up the markets, inflating assets a tad more. It also taught investors to always buy.
The process of continually bailing our markets continued and continued, until it all toppled in the massive global financial crisis of 2008. Then, when markets and firms started to collapse, regulators and politicians responded as usual, this time with a $700 billion package for the banks (TARP).
All of the responses, cutting rates, bailing out markets, are the textbook things to do. But again, the textbook thing to do is unfair, which is not lost on voters, many who rightfully ask, “Where is our bailout?” Which is a perfectly fine question.
But the system ran into a problem the texbooks couldn’t easily handle. All the past rate cuts and policies had left interest rates at zero, so they couldn’t be cut anymore. This would have been the perfect time to print money and hand it out to everyone to get the economy going again.
We didn’t do that. Instead we favored the banks again. This time printing money and using it to mostly buy US Treasuries, which were mostly owned by banks. It was called QE and it kind of worked and kind of didn’t. It worked for the markets, which rebounded and soared.
Yet it hasn’t seemed to work for the economy or for workers wages, which have rebounded but have also chugged along long like a sick train since.
Why don’t we just print money and give it to each person? We can do it by giving each citizen $1,000, or more if needed. It is possible that every citizen would take their $1,000 and buy long-dated US treasuries. Which would be the same as QE.
Far more likely though, everyone would do whatever they wanted with their money. Buy cars, go to the movies, buy drugs. Whatever. It would get the economy going again, which would get the markets going again. It would also be much fairer.
Again, the response to this is “the system isn’t built to do that. It isn’t part of the Federal Reserves mandate. It isn’t politically feasible.” Which is all true and also all very damning! That we can’t do the fair thing is why many people want to blow up the system.
Many politicians and regulators and pundits look at the Brexit vote. They look at Trump supporters and think, wow, a large number of voters are voting to blow up the economy. They see this as a sign the voters are delusional, or suicidal. I see it as a sign they are part of an unhealthy unfair economic system with huge structural problems. Ones that require us trying something very different.
So. JUST PRINT MONEY. JUST GIVE IT TO EVERYBODY. OK!
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A few other points.
A) Another response against printing money is, “What about inflation?”
1) We need inflation! That is what we want right now since many countries have negative rates.
2) We do have inflation. Just a different type. Why is everyone so upset when bread prices rise 5% over a year, but not upset when Apple stock price rises 100%?
B) Another response is, “You are just bribing angry voters.”
1) So what. The present system is bribing bankers, and given how much money many past regulators (Robert, cough cough, Rubin) have personally made of the bailouts, bankers are also effectively bribing politicians.
C) Fun thought experiment for bond geeks. Since rates are negative and zero, does that mean the next 10 year, or 20 year, or 30 year will be issued with zero coupon? Should be. If so, you could imagine as rates continue to go negative issuing a 100 year zero. Or perpetual zero. Which is the same as the accounting game of printing money. Point is. We are in a weird world right now.