# Time for Helicopter Ben to Drop Some Money on Main Street



## onq (13 Sep 2010)

*This is Ellen Brown's recent article in relation to why Quantitative Easing has not followed the textbook course of action in the United States.*

As anyone could have foretold, merely putting more money into the Banks hasn't worked - they have kept in on their shelves.
Reading further down the Article, we see that the Bank for International Settlements are again thinking of messing about with the Capital Lending Ratios.

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"*If bank reserves do not constrain bank lending, what  does? According  to the BIS paper, "the main ... constraint on the  expansion of credit  is minimum capital requirements." These capital  requirements, known as  "Basel I" and "Basel II," were imposed by the BIS  itself. It is  interesting that the BIS knows that the main constraints  on bank  lending are its own capital requirements, yet it is talking  about raising   them, in an economic climate in which lending is already seriously   impaired. Either the BIS is talking out of both sides of its mouth, or   its writers don't read each other."*
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This may help explain the reason why the Banks are reluctant to lend more IMO.
If assets devalue again they will be trapped in a deflationary spiral.
If the BIS raises capital rations again, those on the edge of their liquidity ratios will become bankrupt overnight - again!

This was the proximate cause of our current disaster IMO - the messing about with Capital Ratios by the BIS some years back.

Someone in the department of finance in each EU government needs to tell these people to stop.

In the meatime I invite comment from those who know on the comments below and particularly in relation to what, exactly, the BIS is at.

ONQ

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*Time for Helicopter Ben to Drop Some Money on Main Street*

                       Wednesday 08 September 2010


[broken link removed]


      [broken link removed]                                           *The Federal Reserve is proposing  another round of "quantitative easing," although the first round failed  to reverse deflation. It failed because the money went to banks, which  failed to lend it on. To reverse deflation, the money needs to be  funneled directly to state and local economies. The Fed may not be  authorized to "monetize" state bonds, but it COULD buy bonds issued by  state-owned banks.*
 In 2002, in a speech that earned him the nickname  "Helicopter Ben," then- Federal Reserve Chairman Ben S. Bernanke  famously said that the government could easily reverse a deflation, just  by printing money and dropping it from helicopters. "The U.S.  government has a technology, called a printing press (or, today, its  electronic equivalent)," he said, "that allows it to produce as many  U.S. dollars as it wishes at essentially no cost." Later in the speech  he discussed "a money-financed tax cut," which he said was "essentially  equivalent to Milton Friedman's famous 'helicopter drop' of money." You  could cure a deflation, said Professor Friedman, simply by dropping  money from helicopters.
 It seems logical enough. If there is insufficient  money in the money supply (deflation), the solution is to put more money  into it. But if deflation is so easy to fix, then why has the Fed's  massive attempts to date failed to do the job? At the Federal Reserve's  Jackson Hole summit on August 27, Chairman Bernanke said he would fight  deflation with his whole arsenal, including "quantitative easing" (QE) -  purchasing long-term securities with money created on a computer. Yet,   since 2008, the Fed has added more than $1.2 trillion to "base money"  doing just that, and the economy is still in a serious deflationary  spiral. In the first quarter of this year, the money supply actually shrank at a record annual rate of 9.6 percent.
 Cullen Roche at The Pragmatic Capitalist has an answer to that puzzle. He says that as currently practiced, QE is not really a money drop. It is just an asset swap:"[T]he Fed doesn't actually 'print' anything when it  initiates its QE policy. The Fed simply electronically swaps an asset  with the private sector. In most cases it swaps deposits with an  interest bearing asset."​The Fed just swaps Federal Reserve notes (dollar  bills) for other assets (promissory notes or debt) that can quickly be  turned into money. The Fed is merely trading one form of liquidity for  another, without raising the overall water level in the pool.
 The mechanics of how QE works were revealed in a remarkable segment on National Public Radio  on August 26, describing how a team of Fed employees bought $1.25  trillion in mortgage bonds beginning in late 2008. According to NPR:"The Fed was able to spend so much money so quickly  because it has a unique power: It can create money out of thin air,  whenever it decides to do so. So ... the mortgage team would decide to  buy a bond, they'd push a button on the computer - 'and voila, money is  created.'
 "The thing about bonds, of course, is that people pay  them back. So that $1.25 trillion in mortgage bonds will shrink over  time, as they get repaid. Earlier this month, the Fed announced that it  will use the proceeds from the mortgage bonds to buy Treasury bonds -  essentially keeping all that newly created money in circulation. The  decision was a sign that the Fed thinks the economy still needs to be  propped up with extraordinary measures."​"Extraordinary measures" was a reference to Section  13(3) of the Federal Reserve Act, which allows the Fed in "unusual and  exigent circumstances" to buy "notes, drafts and bills of exchange"  (debt instruments) from "any individual, partnership or corporation"  satisfying its requirements. The Fed was supposedly engaging in these  extraordinary measures to "reflate" the money supply and get credit  flowing again. Yet, the money supply continued to shrink. The problem,  as Roche explains, is that the dollars were merely being swapped for  other highly liquid assets on bank balance sheets. That this sort of  asset swap will not pump up a collapsed money supply has been shown not  only by the Fed's failed experiments over the last two years, but by two  decades of failed QE policy  in Japan, an economy which remains in the deflationary doldrums. To  reverse deflation, it seems, QE needs to be directed somewhere else  besides the balance sheets of private banks. What we need is the sort of  helicopter drop described by Bernanke in 2002 - one over the towns and  cities of the real economy.
 There is another interesting lesson suggested by two  decades of failed QE: it might actually be possible for the government  to "print" its way out of debt, without triggering the dreaded  hyperinflation long warned of by pundits. Swapping dollars for debt  hasn't inflated the circulating money supply to date because federal  debt securities already serve as forms of "money" in the economy.
*The Textbook Money Multiplier Model … and Why It Is Obsolete*
 Beginning with some definitions, QE is explained in Wikipedia like this:"A central bank ... first credit its own account  with money it has created ex nihilo ('out of nothing'). It then  purchases financial assets, including government bonds, mortgage-backed  securities and corporate bonds, from banks and other financial  institutions in a process referred to as open market operations. The  purchases, by way of account deposits, give banks the excess reserves  required for them to create new money, and thus a hopeful stimulation of  the economy, by the process of deposit multiplication from increased lending in the fractional reserve banking system."
​"Deposit multiplication" is the textbook explanation  for how credit expands as it circulates through the economy. In the  textbook model, banks must retain "reserves" equal to 10 percent of  outstanding deposits (including deposits created as loans). With a 10  percent reserve requirement, a $100 deposit can support a $90 loan,  which gets deposited in another bank, where it becomes an $81 loan, and  so forth, until a $100 deposit becomes $1,000 in credit money.
 The theory is that increasing the banks' reserves  will stimulate this process, but both the Federal Reserve and the Bank  for International Settlements (BIS) now concede that the process has not  been working in the textbook way. (The BIS is "the central bankers'  central bank" in Basel, Switzerland.) The futile effort to push more  money into bloated bank reserve accounts has been compared to adding  more apples to shelves that are already overstocked with apples. Adding  more reserves to a banking system that already has more reserves than it  can use has no net effect on the money supply.
 The failure of QE either to increase bank lending or  to inflate the money supply was confirmed in a March 24 paper by Federal  Reserve Vice Chairman Donald L. Kohn, who wrote:"The huge quantity of bank reserves that were created  [by QE] has been seen largely as a byproduct of the purchases [of debt  instruments] that would be unlikely to have a significant independent  effect on financial markets and the economy. This view is not consistent  with the simple models in many textbooks or the monetarist tradition in  monetary policy, which emphasizes a line of causation from reserves to  the money supply to economic activity and inflation."​The textbook model is obsolete because banks don't  make lending decisions based on how many reserves they have. They can  always get the reserves they need. If customers don't walk in the door  with new deposits, the bank can borrow deposits from other banks,  something they can now do at the very low Fed funds rate of .2 percent  (one-fifth of 1 percent). And if those deposits are not available, the  Federal Reserve itself will supply the reserves. This was confirmed in a  BIS working paper called "Unconventional Monetary Policies: An Appraisal," which observed:"[T]he level of reserves hardly figures in banks'  lending decisions. The amount of credit outstanding is determined by  banks' willingness to supply loans, based on perceived risk-return  trade-offs, and by the demand for those loans. . . .
 "The aggregate availability of bank reserves does not  constrain the expansion [of credit] directly. The reason is simple: ...  in order to avoid extreme volatility in the interest rate, _central banks supply reserves as demanded by the system_.  From this perspective, a reserve requirement, depending on its  remuneration, affects the cost ... of loans, but does not constrain  credit expansion quantitatively. ... [A]n expansion of reserves in  excess of any requirement does not give banks more resources to expand  lending. It only changes the composition of liquid assets of the banking  system. Given _the very high substitutability between bank reserves  and other government assets held for liquidity purposes, the impact can  be marginal at best_."​Again, one form of liquidity is just substituted for another, without changing the overall level in the pool.

*If bank reserves do not constrain bank lending, what  does? According to the BIS paper, "the main ... constraint on the  expansion of credit is minimum capital requirements." These capital  requirements, known as "Basel I" and "Basel II," were imposed by the BIS  itself. It is interesting that the BIS knows that the main constraints  on bank lending are its own capital requirements, yet it is talking  about raising  them, in an economic climate in which lending is already seriously  impaired. Either the BIS is talking out of both sides of its mouth, or  its writers don't read each other.*


*A Solution to the Federal Debt Crisis?*

 Another interesting aside arising from all this is  the suggestion that the government could actually print its way out of  debt - it could print dollars and buy back its bonds - without creating  inflation. As Roche observes:"[QE] in time of a balance sheet recession is not  actually inflationary at all. With the government merely swapping assets  they are not actually 'printing' any new money. In fact, the government  is now essentially stealing interest bearing assets from the private  sector and replacing them with deposits. ... [T]his policy response  would in fact be *deflationary* _not_ *inflationary*."​Roche concludes, "the _inflationistas_ have been wrong and the USA _defaultistas_  have been horribly wrong." The inflationistas are the pundits screaming  that QE will end in hyperinflation, and the defaultistas are those  insisting that the US must eventually default on its debt. Representing  both camps, for example, is [broken link removed], who writes:"In my opinion, the *US MUST default on its debt*. There are two ways to default. One is simply to renege on the debt.... The other way to default on the debt is to *inflate it away*.  I'm absolutely convinced that this is the path that the US will take.  If the US inflates enough, then over time (many years) the devalued  dollar will tend to reduce the power of the debts."​The failed QE experiments in Japan and the US  suggest, however, that there is a third alternative. Printing dollars to  pay the debt (referred to by Russell as "inflating the debt away")  might actually eliminate the debt _without_ creating inflation.  This is because federal bonds and Federal Reserve Notes are  interchangeable forms of liquidity. Government securities trade around  the world just as if they were money. A $100 bond represents a claim on  $100 worth of goods and services, just as a $100 bill does. The  difference, as Thomas Edison said nearly a century ago, is merely that  "the bond lets money brokers collect twice the amount of the bond and an  additional 20 percent, whereas the currency pays nobody but those who  contribute directly in some useful way.... Both are promises to pay, but  one promise fattens the usurers and the other helps the people."

 The Fed's earlier attempts at QE involved swapping  $1.25 trillion in mortgaged-backed securities (MBS) for dollars created  on a computer screen. As noted in the NPR segment, many of those  securities have come due and have gotten paid off, putting cash in the  Fed's till. The Fed now proposes to use this money to buy long-term  Treasury debt rather than MBS. That means the Fed will, in effect, be  buying the government's debt with dollars created on a computer screen.  The privately-owned Federal Reserve is not actually an arm of the  federal government, but if it were, the government would thus be  printing its way out of debt - just as Helicopter Ben proposed in 2002.  Recall that he said, "the U.S. government has a technology, called a  printing press" - the US government, not the central bank that has done  all the QE to date.

 Running the government's printing presses to pay its  bills has not seriously been tried since the Civil War, when President  Lincoln saved the North from a crippling war debt at usurious interest  rates by printing greenbacks (US notes). Other countries,  however, have tested and proven this model more recently. They include  Germany, which pulled itself out of a massive financial collapse in the  early 1930s by printing a form of currency called "MEFO bills"; and  Australia, New Zealand and Canada, all of which successfully funded  public works in the first half of the 20th century simply by advancing  the credit of the nation. China, Malaysia, Guernsey, Jersey, India,  Argentina, and other countries have also revived their economies at  critical times by this means. The US government could do this, too. It  could print dollars (or type them into electronic bank accounts) and  spend the money on the sorts of local public projects that would put  people back to work and get the economy rolling again.


*How to Reverse a Deflation: Do a Helicopter Drop on the States*

 The government could pay its bills by issuing  greenbacks as Lincoln did, but it probably won't, given the current  deadlock in Congress. Today, only the Federal Reserve chairman seems to  be in a position to act unilaterally, without asking anyone's  permission. Chairman Bernanke could execute his own plan and generate  the credit needed to get the economy churning again, by aiming his QE  tool at the states. After all, if Wall Street (which got us into this  mess) can borrow at 0.2 percent, underwritten by the Fed as "lender of  last resort," then state and local governments should be able to as  well. Chairman Bernanke could credit the Fed's account with money  created ex nihilo (out of nothing) and swap it for state and municipal  bonds at the Fed funds' rate.
 A "state" might not qualify as an "individual,  partnership or corporation" under Section 13(3) of the Federal Reserve  Act, but a state-owned bank would. Bruce Cahan,  an attorney and social entrepreneur in Silicon Valley, California,  proposes that the Fed could diversify its role by buying long-term bonds  in existing or newly-chartered, state-owned banks. These banks, which  would have a mandate to serve state and local communities, would more  quickly and accountably lend for in-state purposes than private banks do  now. They could be required to use accepted transparency accounting  standards to trace how the proceeds of their loans flowed into the  economy. Local needs would thus determine how best to jumpstart and keep  alive businesses and households that the "too big to fail" megabanks no  longer want to fund on fair credit terms. Adding a state-owned bank  would also bring competition to regional banking markets such as that of  the San Francisco Bay area, which are now dominated by out-of-state  megabanks. By funding state-owned banks, the Fed could inject  "liquidity" where it is most needed, in local markets where workers are  hired and real goods and services are sold.


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## Chris (13 Sep 2010)

I don't know where to start with this nonsense again, except to say what I have said before, that Ms. Brown does not understand the first thing about inflation and the financial crisis. You do not solve a crisis that was caused by too much debt, by trying to come up with ways to increase the level of debt. She also ignores that the very thing she is advocating, i.e. inflating the money supply, also crippled the very countries she lists.
Utter inanity is the best that can be said about it.


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## sunrock (14 Sep 2010)

I`m with mr Faber on this.Deflation can be prevented by printing money or QE ...that is it will prevent deflation in the currency of the country that does the QE.
All the big currencies are at it at the moment, even as deleveraging is taking place.It is working too.....otherwise we would have greater deflation.With the major currencies that are floating against each other ,that is O.K. because there is no real alternative to using the local currency buying in the supermarket.
In poorer countries, printing of money doesn`t work so well because that countrys currency gets downgraded by the markets and the locals use the dollar or euro or whatever, leading to more printing and hyperinflation.


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## onq (18 Sep 2010)

Chris said:


> I don't know where to start with this nonsense again, except to say what I have said before, that Ms. Brown does not understand the first thing about inflation and the financial crisis. You do not solve a crisis that was caused by too much debt, by trying to come up with ways to increase the level of debt. She also ignores that the very thing she is advocating, i.e. inflating the money supply, also crippled the very countries she lists.
> Utter inanity is the best that can be said about it.



It doesn't matter is everything this write says is irrelevant.
The role of the Bank for International Settlements is central to any economic recovery.
Yet it is unaccountable and apparently acting against our best interests.

You can fluff all of the other points in this article away - fine, discount them all.
But focus on these Swiss Cuckoos and their machinations of the Money Supply.
These are some of the architects of our current misfortune - the trail is clear.

ONQ.


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## tvman (19 Sep 2010)

onq said:


> This was the proximate cause of our current disaster IMO - the messing about with Capital Ratios by the BIS some years back.




I'm not sure if I understand you -  You think the proximate cause of the financial crisis was the overcapitalisation of banks?

tvman


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## Chris (22 Sep 2010)

onq said:


> These are some of the architects of our current misfortune - the trail is clear.



I agree, but not because they increased reserve requirements, but because everything they did before, i.e. increasing the money supply and lowering the reserve requirements. If they actually follow through with increased reserve requirements then this is positive for the economy. Unfortunately they will not increase nearly enough as is needed.


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