“The Federal Reserve should give people free money,” he wrote, in order to make a point about monetary policy. “People would spend this money, increasing demand for goods and services, causing employers to hire additional workers to meet this increased demand and reducing unemployment in the economy overall.”
That’s all true. But it’s not the whole truth.
“This probably sounds like a crazy idea, but it isn’t,” Black claims. “People are a bit uncomfortable with the notion that the Fed can simply create money, but that is what the Fed does. Currently, under a program dubbed ‘QEIII’ (Quantitative Easing III), the Fed is creating money and, instead of simply giving it to people, is using that money to purchase mortgage backed securities in order keep mortgage rates low and increase the supply of money in the economy. This also boosts the prices of these financial assets, providing a windfall to those who own them.”
(Very important note: he’s not talking about the homeowners getting a windfall; he’s talking about the banks. The banks own those “mortgage backed securities.”)
The risk, of course, of simply printing money (no matter where the helicopter drops it) is inflation.
Black admits as much: “Give people some free money and they will spend it, boosting demand and the price level.”
But Black isn’t joking. Though he may not be suggesting real helicopters, he is saying the Fed should print more money.
“This was an amusing metaphor, not meant to be taken literally, but conceptually the Fed is able to create money out of thin air and give it to people,” he says. “(Fed Chairman Ben) Bernanke’s version of the ‘helicopter drop’ involved paying for tax cuts with free money from the Fed. Alternatively, the Fed could finance increased government spending on such things as infrastructure and education, leading to more construction workers and teachers being hired without any need to increase borrowing or taxes.”
Wait, haven’t we tried that before? Wasn’t it called the American Recovery and Reinvestment Act of 2009, commonly referred to as the Stimulus? Americans know that failed — from Cash for Clunkers to Solyndra to the politically driven bailout of General Motors. And it’s not a big mystery why; the “shovel-ready” projects weren’t.
The economic thinking behind the Stimulus and even the helicopter metaphor was an Englishman named John Maynard Keynes. But even he recognized the danger of printing too much money.
“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency,” he wrote in 1919. “The process engages all the forces of economic law of destruction and does it in a manner which not one man in a million is able to diagnose.”