Thursday, October 09, 2008

Warm up the helicopters!

"Helicopter Ben" warming up his helicopter fleet, preparing to drop $1.2 TRILLION in freshly minted dollars out the windows.

Federal Reserve chairman Ben Bernanke announced that the Federal Reserve would start buying both short term AND long term corporate bonds, both secured and unsecured. The proposal to buy long term bonds appears to be new. How will the Federal Reserve pay for this? Well... ""...the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes..." -- Professor Ben Bernanke, November 21, 2002

Does that answer your question?

Ramifications: Unknown. We are in uncharted territory here. The Fed has never bought up commercial debt before. *Never*. But everybody is scared of everything and is instead putting their money into Treasuries (the freshly-printed Treasuries that were printed up to pay for the "bailout", in case you're keeping score). Without the ability to roll over their bonds into new bonds as they expire, major corporations would run into a liquidity crunch and be unable to meet payroll, pay suppliers, and otherwise be in boatload of hurt. The people who got thrown out of work would have to go to the bank and get their money at the same time that they're unable to pay their debts. That in turn causes more banks to not have enough money to make loans, which in turn causes more people to be unable to meet payroll and pay suppliers. Wash, rinse, repeat, classic liquidity trap. Bernanke has a pretty good description in that paper above of what happens once you enter into that deflationary spiral. Read it. For an academic and professional economist, Bernanke's prose is surprisingly accessible.

So anyhow, "Helicopter Ben" is putting into effect the policies that he discussed in that paper linked above in order to create what Milton Friedman called a "helicopter drop" of money into the economy in order to prevent a classic liquidity trap like the one that sent the Great Depression spiralling out of control. Will it work? Nobody knows. It's never been done before. Indeed, people laughed at Bernanke when he proposed even the theoretical possibility of doing so six years ago and derided him as "Helicopter Ben". But this is what central bankers do when the political leadership is frozen and unable and/or unwilling to take effective action. The Fed has a printing press, and it's going to use it for all it's worth, even though throwing money out of a helicopter has to be the most ineffective way on the planet of getting money to where it's needed in the economy. But when you have a printing press and that's the only tool in your toolbox... so Bernanke is doing what he can do. Now, that hack Paulson, on the other hand...

So the question is, should I buy a wheelbarrow so I can carry a pile of $20 bills to my grocery store to buy a loaf of bread? I don't know. I'm just waiting for the next brick to fall. I think I can figure out the next thing that "Helicopter Ben" will do by reading the above-linked paper. I just don't know what the real economic impact of what he's doing is going to be. He thinks he knows. But this is unknown territory we're in here.

-- Badtux the Economics Penguin

1 comment:

  1. no one knows but whatever it is it aint good

    even if ben and henry were on the right track (and i dont think they are, but what do i know) -- they will be hamstrung by a HORRIBLE president, a fucked up congress (pork in the bailout bill) and a world that in all likelihood secretly wants us to sink


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