Helicopter Money:  Now…or Never!

By Shlomo Maital   


   Univ. of Chicago Prof. Milton Friedman, Nobel Laureate,  wrote famously that “that price inflation should be regulated with monetary deflation and price deflation with monetary inflation.”  He  quipped that price deflation can be fought by “dropping money out of a helicopter.” (Optimum Quantity of Money. Aldine Publishing Company. 1969. p. 4.)

   Well, it looks like the desperate central bankers, in America and Europe, are about to rent helicopters. Because the standard approach, pushing monetary reserves into the system so that banks can expand their lending (to one another and to businesses) simply has failed.  The banks are not lending the money, even though they can, because they don’t believe they will get it back.  They don’t trust one another, and they don’t trust other businesses.  Besides, they have such huge holes in their balance sheets, they need the money more than they need the interest on the loans they make. 

   It has been suggested, for a while, that central banks make loans directly to people, rather than to banks.  For a long while, this idea was rejected. Now, desperate, both the FED and the ECB are considering this wild idea.  Drop money out of helicopters, a la Friedman – i.e. lend directly. 

   How would this work?  Writing in the Wall Street Journal, Jonathan Lahart explains: 

  “With the Federal Reserve running out of options, maybe Fed Chairman Ben Bernanke will finally get the chance to live up to his “Helicopter Ben” moniker. But he’d have to get creative to do it.  Hey, you never know…The helicopter drop began as a thought experiment by Milton Friedman – what would happen if a helicopter flew over a community and dropped cash? – that economists have since tapped as a way a central bank could boost growth in an environment where interest rates are ultra low.   To engineer a helicopter drop, the Fed would have to not just print money, but print it and give it away to people without them providing anything (labor, stocks, etc.) in return. So absent using actual helicopters, the Fed would have to come up with some sort of method of getting the cash into people’s hands. The one Mr. Bernanke suggested in his famous 2002 helicopter speech was for Congress to pass a broad-based tax cut with the Fed buying the debt the government issued to fund the cut.    In today’s political climate, convincing a gridlocked Congress to go along with the idea Mr. Bernanke laid out is an obvious nonstarter. So here’s a modest proposal: The Fed should start buying trillions of dollars in lottery tickets.    Think of it. The Fed’s lottery purchases would boost the level of lottery payouts that winners received, boosting their spending power. If nobody won, the cash would go into the coffers of the 43 states that run lotteries, allowing them to cut taxes or increase spending. And on the off chance that the Fed won, it simply wouldn’t bother to collect. The only real question is what numbers the Fed should play. For symmetry’s sake, some combination of zeroes seems best.”

   There are better ways to engineer helicopter money.  And the idea is quite serious.  If banks won’t lend, well, let the Fed do it directly.  Against the Fed charter? Congress is opposed?  Desperate times require desperate measures. And looking at Ben Bernanke on TV recently, we are living in desperate times.