Even critics of quantitative easing have to admit it had some positive effects. It saved the banking system from collapsing, pushed up house and stock prices, and also helped contribute to lowering the unemployment rate.
What it has not done however, is create run away inflation. The reality after six years of extraordinary monetary policy is a consumer price index not rising but almost falling.
Central bankers like inflation because it makes paying back debt easier. The Federal Government for example would benefit with the national debt standing at 101 percent of GDP.
Central bankers don’t like—and aren’t allowed—to directly fund the government. And yet that’s exactly what the former chief of the British Financial Services Authority is proposing.
“When you make quantitative easing permanent it ceases to be a liquidity exercise and becomes a mechanism for allowing governments to run fiscal deficits which do not create a future debt servicing liability,” says Lord Adair Turner, head of the regulatory body from 2008 to 2013.
The problem with quantitative easing now is that the government is still debt financing expenditure through the issuance of bonds.
These bonds eventually end up at the Fed through QE but will have to be repaid later by the tax payer.
To avoid this future drag on economic activity and therefore inflation, Turner suggests to make a part of the past quantitative easing permanent.
“The central bank does an accounting exercise on the asset-side to turn them into an irredeemable, zero interest asset from the government,” he says. Without interest and maturity, the bonds would effectively become normal money, which has already been spent.
To go beyond asset price inflation and increase economic activity in the future, Turner suggests the following: “I would give the central bank the authority to do a certain amount of money-financed deficits. The money goes to the people directly in the form of a tax cut, new public investment, public expenditure, etc.”
To control the potential abuse of this power, which eventually could lead to too much inflation, the central bank could have the authority to control the amount of “helicopter money,” a phrase originally coined by former Fed chief Ben Bernanke, issued.
“I think you can separate the decision about the amount, which would reside with the central bank, from the decision about how specifically to deliver the boost, which can be made by the government,” says Turner.