What if We Faced Another Financial Crisis?

Clive Crook in Bloomberg: Investors are “asking whether 2008 might come round again. … On the face of it, the policy options for responding to another slump are fewer than last time. Governments have run big budget deficits to support demand, so there’s less so-called fiscal space for a new round of stimulus, or so the thinking goes. Interest rates are still at zero, and even the advocates of quantitative easing recognize that it ran into diminishing returns.”

Crook posits a “powerful remedy — one so politically toxic that it wasn’t used even in response to the crash of 2008. It goes by various names: helicopter money, overt monetary financing, quantitative easing for the people.”

The central bank “could drop cash from helicopters. More prosaically, it could mail checks to taxpayers. Equivalently, the government could cut taxes or build some bridges and cover the cost with bonds placed with the central bank. Each of these interventions, in effect, marries fiscal policy — meaning direct command over economic resources — to monetary policy.”

“When deflation is the problem, the prospect of inflation is the cure. Helicopter money would be a potent remedy for the sickness in question.”

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  • jgrillo

    This is a world economy and there are circumstances beyond our control. Higher interest rates could negate any helicopter drop by the Fed. If China continues to dump US bonds, this would result in decreasing bond prices and decreasing bond prices = higher interest rates.

    And of course, the result of higher interest rates, could be even a further strengthening of the dollar. Strengthening of the dollar and higher interest rates are suited for a “heated” economy. One quarter at 3.7% does not make for a “heated” economy.

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