Wednesday, December 3, 2014

The Guardian: We Should Cash Bomb the People - Not the Banks

Earlier this year we covered an article which appeared in the Council on Foreign Relations (CFR) publication Foreign Affairs. It was an article calling on Central Banks to just give people money directly to try and get the velocity of money flowing again. Of course, most analysts dismiss this as an unrealistic approach to the problem. But that doesn't mean it has gone away as an idea. Here The Guardian runs this article calling for basically the same thing. Some quotes, then some comments. Read the whole article to get full context.

First thing to note in these articles is that the authors clearly do not think that the QE and stimulus programs of the Central Banks have worked. Otherwise they would not propose such a controversial approach to the problem. Here is what the Guardian article has to say:

"Abandon helicopters. Use bombers. Bomb Germany, France, Italy, Greece, the entire eurozone. Bomb them with banknotes, cash, anything to boost demand. The money must go straight to households, not to banks. Banks have had their day and miserably failed to spend. From now on they get nothing."

"Five years after the financial crash it is nearly unbelievable that the eurozone’s lords and masters now confront renewed recession."

"The European Central Bank (ECB) murmurs about “quantitative easing” but is up against Germany’s furious protests. Ten per cent of the eurozone’s workforce is unemployed and one in five of its young. Greece has lost a quarter of its national product. The waste of resources is staggering."
. . . .  .

"The eurozone is heading towards what even the pro- EU Economist (magazine) calls "Europe's lost decade."

. . . . . 

"Britain and the US supposedly met this challenge by “printing money”, by quantitative easing (QE). This was a confidence trick. It claimed to release money “into the economy” to stimulate borrowing and thus spending. It merely channelled billions into bank vaults and boosted reserves. What did spill into the economy went to stock market inflation and obscene bonuses. In Britain it also leaked into the mad world of sub-prime housing subsidies. Otherwise, demand has remained dangerously sluggish."

. . . . . 

"John Muellbauer, professor of economics at Oxford, champions “QE for the people”. He points out that, as existing policies to revive Europe’s growth have faltered, “proposals for distributing money directly to citizens have been quietly gaining traction among critics of orthodox central banks.”
The article goes on to make a passionate plea to just print up money and hand it out to people and lists all the reasons this is a great idea. If you go back and look at the Foreign Affairs article, you will see many of the same points. In these articles, Central Bank policy is said to be failing and it's now time for desparate measures. And these articles are in mainstream establishment publications by respected authors. 

All this makes the world seem surreal and confusing. On the one hand we the people are told how well things are going and how successful these stimulus policies have been. On the other hand we have the IMF, the BIS (Bank of International Settlements), and many mainstream publications like these saying the policies have failed or that they have created dangerous asset bubbles they could lead to another financial crisis. We have covered all that here on the blog. Just visit the articles linked on the right hand side of the blog to find the warnings. Warnings like this and this. And people like Roubini saying this.

And, of course, there are Central Bank critics who think the idea of just printing up more money and handing it out to people is absurd. Here is an article posted on former US Budget Director David Stockman's blog site that argues strongly against this idea.

So where does all this confusing and conflicting information leave us? In the same place we have repeatedly talked about here on the blog. We must continue to follow events, stay informed, and stay alert. We cannot just accept whatever is said no matter what the source. We must insist on factual data to back up analysis and opinions. 

We cannot assume that there is no risk of another financial crisis just because we have avoided one for awhile now. Over time the truth always emerges. In 2015, it should get clearer as to whether things are as great as we are told (recovery taking hold) or if all the warnings about failure of these policies are more accurate. Both cannot be right. We will follow it here and see what happens.

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