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Mc the Magician conjures up a free lunch

Image by 💛 Passt gut auf euch auf und bleibt gesund! 💛 from Pixabay

The economist, David McWilliams, writes a weekly opinion column for The Irish Times. It appears on Saturdays. For the past 8 weeks, the column has had a single theme as its backbone.

On 14 March, the headline over Mr. McWilliams’ piece read: “Why Central Bank must give everyone free money right now”. Headlines are often written by somebody other than the author of the article below them and can therefore be misleading about the content of the latter. However, in this case, the headline was bang on.

Mr. McWilliams wrote:

So, what should we do, when faced with a cash drain, prompted by a sudden slump in spending?

The Central Bank of Ireland should print money and deposit free cash into every citizen’s account and every business account…

It is called helicopter money…

One of the strangest aspects of intelligent humans is that we are very reticent to accept easy answers to big questions. We want things to sound difficult, because that allows us to conceive of convoluted and frankly “intelligent sounding” solutions. But when it comes to money in a panic, our understanding is governed by rules and notions that are simply wrong, parroted by people who don’t stop to think…

Is it free? Yes. Is it one-off? Yes. Can it be done? Absolutely!

Now is time to act. The central bank has to step up and show leadership, give the ECB notice and move swiftly and calmly. If not now, when?

The following week (21 March) under the headline: “The most critical objective is to keep businesses afloat”.

We need active, not passive. This can be done by the central bank simply “gifting” free money into the accounts of businesses and citizens to prevent a cash panic. We need to forget the banks as instruments of policy, bypass their lending departments — which are time consuming and charge interest on money they get for free from the ECB — and give money directly to the people…

You get money to people. The State doesn’t issue debt and therefore the debt ratio doesn’t rise and ultimately you stop the widespread panic.

And again on 28 March, under the headline “We need to totally reimagine economics”

As this column noted two weeks ago, we are on our way to “helicopter money”, which is free money given to all citizens. It will take lots of taboo-breaking within central banking circles to get there, but it will happen eventually in one shape or another…

We can start by refinancing Irish mortgages and availing of the ECB’s new commitment to finance everything that the banks need…

Unfortunately, our Central Bank has unforgivably abdicated in this crisis, precisely when it was needed.

Regarding mortgages, Mr. McWilliams’ point was that Irish banks could refinance their mortgage loan books at sub-zero borrowing costs from the ECB, thus enabling them to reduce their charges to borrowers into line with elsewhere in Europe.

If any or all of the Irish banks were to do this, it could be transformative and keep an additional €1.5 billion per year in ordinary people’s pockets.

Groundhog Day again on 4 April. Under the heading: “We must loosen up on financing pandemic spending now”

The only way I can see this working over a period of a few months is for a suspension of banking charges, a freezing of loan repayments and utility bills as well as “helicopter money” orchestrated by the European Central Bank. We’ve discussed this here in previous columns and it is coming…

Free money will cushion the blow, not just for small companies but also for the State…

It is absolutely essential that this emergency spending by the State, which might end up being close to 2 per cent of GDP, doesn’t push up debt/GDP ratios or usher in an austerity budget when this pandemic passes in order to rebalance the books.

In that article, Mr. McWilliams weighed in to support the issuing of so-called “coronabonds”, debt issued by the EU as a whole accessible to individual member States according to the fallout they might have suffered from the present crisis. Mr. McWilliams argued:

…the ECB must promise to buy these IOUs, which will have zero interest rates. Once the ECB backstops these coronabonds, private investors will hold them, knowing the ECB will buy them in unlimited quantities if the investor wants to sell.

And though the main theme on 11 April was captured in the headline: “We should reopen the youth economy first”, “helicopter money” struts the stage again:

…economists — the vast majority of whom have never run a business and tend to be employees, usually in the public sector — fail to understand the extreme urgency of now when it comes to cash flow.

And, more egregiously, they tend not to understand that the Central Bank can fix this potential catastrophe in crediting accounts by printing money. In a deflationary world, with unemployment heading towards 20 per cent, there is no inflationary risk.

On to 18 April (“Here’s how we can avoid the predicted depression”):

…the virus has the economy by the balls and until we can prise the virus off, nothing is normal. Therefore, policy has to be abnormal, one-off and absolutely focused in its determination to save businesses. Capitalism is suspended. A form of war communism is upon us until this virus is beaten. Part of that armoury is “free money” or helicopter money…

And 25 April (“Health crisis has now become a wealth crisis”)

The European Central Bank (ECB) has said it will do “whatever it takes” to save the European economy and the euro, meaning the Irish Central Bank has a green light to act as it sees fit.

One of the Central Bank’s jobs is to “magic up” money, and the Irish entity has the power to do so…

It costs nothing to print money or credit every business account with a zero — or two for that matter. This may seem odd to you, but this is the great trick of monetary economics. In the wrong hands at the wrong time, such as in Zimbabwe, a powerful central bank can destroy a country; but in the right hands at the right time, it can save a country.

We should print money and credit business accounts until every business has enough money to make sure it survives the Covid-19 shock…

The Government’s account should be similarly credited, so that State expenditure doesn’t raise debt ratios, interest costs or demand austerity in the future…

…the State could issue a perpetual bond to pay for everything. A perpetual bond is never repaid. There could be an interest rate paid, but this should be close to zero.

If the Central Bank undertook to buy it and provide infinite liquidity, the financial market would follow suit and use it as a proxy deposit…

You’d be amazed how many clever people hate easy answers. It’s natural to believe these things are complicated, but they are not.

Finally to last Saturday, 2 May (“How to avoid an economic depression”)

The European Central Bank (ECB) has underwritten the economy at borrowing rates below zero. As a result there should be no hesitation in borrowing more to tide us over.

We can also reprice existing debt to dramatically reduce the cost of outstanding debt, and we can boost demand to cushion the slump by putting money directly into people’s and businesses’ accounts.

` There is no time to waste. The Central Bank has to act now, and the new government must make saving small businesses its number one priority.

To summarise. Individuals, businesses and government are all severely financially stressed because of COVID-19. Our national economy risks cardiac arrest unless galvanised into recovery by an injection of substantial capital to all of these sectors. That capital can be provided at no cost or consequence to any of us by our Central Bank simply printing it; no need for dreary austerity or belt tightening at all. That the ECB has opened its sluice gates to buy state and private corporate debts in scale reinforces the plausibility of his case, but is not essential to it.

The idea that our unexpected economic woes can be resolved with a few keystrokes of the Central Bank computer rather than years of grim prudence is obviously attractive. It is the economic equivalent of the as yet unrealised dream of limitless energy from clean nuclear power generated by the fusion of nuclei rather than the dirty reality of today’s nuclear power fuelled by nuclear fission.

Mr. McWilliams’ articles attracted many comments to its website from the newspaper’s readers.

Some were straightforwardly practical. Parking the issue of whether “helicopter money” is wise policy, is it implementable? What about people who have no bank accounts? What about people and businesses who have several?

What is the right balance between speed and practicality on one hand and fairness on the other? Should there be some process of linking the list of personal bank accounts with the electoral register to ensure that money is distributed in a structured and transparent way? Should everybody get the same amount, regardless of circumstances?

But one can imagine these issues being worked through, even if with some difficulty.

Some comments doubted whether “helicopter money” would have the intended effect. Many of us might apply our “helicopter money” to pay off existing debts rather than spending it in the economy. And if we didn’t do that, we might feel safer just sitting on it until things return to normal, and anyway opportunities to spend it are severely limited right now.

These points don’t seem too important either. While “helicopter money” might not transmit with 100% efficiency to stimulating the blood flow of the economy, if it can do some good without simultaneously doing any harm, isn’t half a loaf better than no bread?

The highest order criticisms were that “helicopter money” is no more than a tempting delusion, a kind of fool’s gold.

Mr. McWilliams presented no figures about what amount of “helicopter money” we should all receive. But that he didn’t seem too bothered about adding another zero or two to the amount gifted to businesses is slightly worrying. He does say clearly that this is a “one off”. But, if there is a cost free way of easing the economic pains of individuals, commerce and government, why not just add the couple of zeroes and give us all the comfort of a cushion as well? And, if it is possible to add one or two zeroes “just like that”, why not three or four?

Some queried whether Ireland would be able to act unilaterally as a member of the Eurozone, pointing out that no other Central Bank within the Eurozone has dispensed “helicopter money”. Is that because, like all those public service economists, the heads of other Central Banks are all exceptionally stupid or because Mr. McWilliams is exceptionally clever?

Comments also raised questions about the other strands of Mr. McWilliams’ easily-available-free-money thesis. For example, regarding his suggestion that Ireland’s banks might refinance their mortgage books with ECB sub-zero funding and pass on the savings to borrowers, it was pointed out that the banks’ existing funding is bound by contractual commitments that can’t simply be “unwound” overnight. And would the assurance of sub-zero ECB funding continue through the 20–30 year life of mortgages, so that house buyers could count on continuing low rates on their loans?

Similarly regarding the suggestion that government funding could be eased by issuing “perpetual” bonds (i.e., entailing no repayment) at minimal if not zero interest, “backed” by the ECB, commentators queried whether the ECB charter allows it to provide perpetual funding and also why investors would buy bonds that were never going to be repaid?

Of course, there were many commentators arguing that “out of the box” ideas like Mr. McWilliams’ were just what we need in this time of crisis, rather than confining ourselves to the straitjacket of “neoliberal” financial orthodoxy.

I don’t have the expertise to judge the merits of Mr. McWilliams’ suggestions, but I want to direct two observations at the newspaper that published them.

First, Mr. McWilliams managed to extract 8 weekly opinion columns out of the same fundamental idea that there is a free lunch path out of our economic difficulty. While he presented some new ideas along the way, the last 7 pieces were essentially a recycling of the first. A newspaper that allows a columnist to do that is short-changing its readers if not insulting them altogether. Lazy editorial standards beget lazy writing.

But that’s a small point compared to the second issue.

Mr. McWilliams makes intensely profound claims in his articles. The economic fall-out from our handling of COVID-19 runs very deep; many billions of euro. How to clean up afterwards ranks closer to the really “big” issues of our time, like climate change or Irish unity, than important but second order issues like tidying up Health and Housing, Brexit even. Mr. McWilliams claims there is a low-cost, low pain solution to the economic crisis, entirely within our grasp at the press of a button. That is a big call.

By publishing Mr. McWilliams’ opinions, The Irish Times is not endorsing them as “right” in the sense of being accurate, truthful or beyond dispute, but it is conferring on them a lesser veneer of endorsement. Being a “newspaper of record” implies the application of some rigour of relevance and reliability to what it prints rather than just filling pages; the antithesis of an agnostic hosting platform like Facebook. By publishing them, the newspaper is implying that Mr. McWilliams’ views are “serious”. They merit reading and consideration — they might be right.

Put it another way. I doubt The Irish Times would allow any columnist to rehearse repetitively over several weeks the case that disinfectant can destroy COVID-19 — because doing so would establish the newspaper as an accessory to that “wacky” view, conferring legitimacy on it, even if not endorsing it as correct.

A truly “heavyweight” newspaper would do more for its readers than simply provide a platform for the expression of “big” views. If not actually adjudicating on them itself, it would at least “tool up” the reader to adjudicate them for him or herself by ensuring that the claims are authoritatively interrogated (not necessarily prosecuted) on its pages. Publishing comments by mainly anonymous, random readers, more opinionated than expert, does not count as meaningful critique.



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Daire O'Criodain

Daire O'Criodain

Former diplomat and aviation finance executive, active now mainly in not-for-profit sector. Living in rural Clare. Weekly posts on Wednesdays.