Yesterday Mark Carney said he was against negative interest rates and
helicopter money, but in reality he implemented a way of doing a
version of both. Let me explain.
When negative interest rates are discussed, we normally think about
savers, and the fact that they could avoid being charged to deposit
money in a bank by hoarding cash. But borrowers would have no problem
with negative rates: borrow £1000, and just pay back £990. The bank
they borrowed from would have, unless there were negative rates on
savings or they were getting a subsidy to lend.
Helicopter
money is normally thought of as the central bank sending a cheque to
every citizen. But the key point for economists is not the way the
money is distributed, but the fact that it is created by the central
bank and given away in return for nothing. (QE involves creating
money to buy assets.) Who the money goes to is of course important,
but it is not really the defining characteristic of the measure.
We normally think about monetary policy as changing the
interest rate. If rates are cut, that benefits borrowers but is bad
for savers. But suppose the central bank gave money to private banks,
on condition that this money was passed on in the form of lower rates
to borrowers. If it did this, but did not change the interest
rate, that would be helping borrowers but not hitting savers. The
Bank introduced such a scheme yesterday, called the Term Funding
Scheme (TFS). What is more, this subsidy for borrowers is financed by
creating money. Eric Lonergan argues
that the ECB is doing something similar, and if there is any insight
in this post I owe it to him (but if there isn’t it is my fault not
his!).
So
if you think the Bank has ruled out negative rates, you are half
wrong. In principle the Bank can expand TFS to make borrowing as
cheap as it likes, which could even mean negative interest rates for
borrowers. If you think the Bank has ruled out helicopter money, you
are half wrong. It is creating money to give away with nothing in
return, but just giving the money to one particular group: borrowers.
Now if you are a saver you might say why cannot I rather than
borrowers benefit from this money give away. But the Bank could argue
that without TFS it would have to reduce the
interest rate by even more than it has, which would make savers a lot
worse off. So compared to that outcome, you are better off. Whether
you find that convincing when you can always hold cash depends on the
cost of holding cash.
So
why did Mark Carney say that helicopter money was a flight of fancy,
when he was in fact doing something quite similar? It is a good
question to ask him. I suspect the real answer is that TFS looks like
the kind of thing a central bank does, but giving money to every
citizen looks like fiscal policy. But what it does mean is that in
terms of the basic macroeconomics, the Bank of England is now doing
helicopter money. But if you are neither a borrower or a saver and
feel aggrieved you are not getting anything, you know who to complain
to.
