MNI INTERVIEW: Helicopter Money By Stealth May Pose Dangers

By Jason Webb

     LONDON (MNI) - The near exhaustion of central banks' existing monetary

policy toolkits and limited fiscal space makes some form of helicopter money

inevitable in major economies, but its political sensitivity could tempt

authorities to deploy it by stealth, increasing the risk of uncontrolled fiscal

spending and damage to institutional credibility, the head of the BlackRock

Investment Institute told MNI.

     Interest rates are already extremely low, and global debt is at records,

leaving little policy space to respond to the next significant economic

downturn, Jean Boivin, a former deputy governor at the Bank of Canada, said in

an interview. He advocates distributing central bank money directly to consumers

or businesses, and not via some indirect mechanism such as that of quantitative

easing, but noted that the likely political resistance to such a move may tempt

central banks to attempt to deliver so-called helicopter money without being

seen to do so.

     "The frontier between fiscal and monetary policy will become more blurred

over time, I think, one way or the other, and so it doesn't have to be full

blown helicopter money or deliberate helicopter money but it can happen by kind

of stealth," he said.

     In a paper written jointly with former Federal Reserve Vice Chairman

Stanley Fischer, former Swiss National Bank chief Philipp Hildebrand and

BlackRock's Elga Bartsch, Boivin argued for the establishment of standing

emergency fiscal facilities, to be activated when interest rates cannot be

lowered and inflation is set to fall badly short of target. The size of the SEFF

would be calibrated in order to achieve the central bank's inflation target and

it would be deactivated once its aims were achieved.

     The political challenges ahead of the creation of such tools could prompt

central banks to prepare them discreetly, said Boivin.

     "I think the idea that this is something that is likely to be happening

behind the scenes before we learn about it is pretty high," said Boivin, warning

that the cost of any lack of transparency in the eventual deployment of

helicopter money could be high.

     --BOUNDARIES

     "If it extends by stealth and we don't have a plan in place ... or a

framework it's going to be much harder to put boundaries on this," said Boivin,

"and once you open the door to some of these policies it might open the door to

reckless fiscal spending or it might critically undermine the credibility of the

institutions."

     "Under the pressure of immediately responding to a crisis, the temptation

to find a quick response will be, like it has always been, very high, and the

central banks are the ones that are the most apt to respond quickly," he said,

pointing to elements of monetary financing which have appeared in recent crisis

responses, such as equity purchases. "It is a dangerous, slippery slope, without

guardrails and this is why we have this mechanism proposal."

     In the meantime, he noted, the absence of a clear strategy with which

global central banks could tackle any future downturn given the decreasing space

for further use of their current tools is contributing to investor nervousness,

lowering yields and, as a result, further eating into the room available for

traditional monetary policy action.

     Methods for SEFF disbursement could vary according to different countries'

legal frameworks, according to the paper. In the U.S., Congress could create a

Treasury account at the Fed which would be filled to a pre-set limit, while in

the eurozone, the European Central Bank could issue perpetual, zero-coupon bank

loans directly to adult citizens.

     The size of such a facility would be smaller than a QE programme of similar

impact, as the stimulus it would provide would be much more direct, Boivin said.

     "The way to think about it conceptually is what kind of tax cut, what's the

size of the tax cut you would need to stimulate enough demand to stimulate the

inflation you need -- and the size of that fiscal stimulus is basically the size

of the facility that you would need," he said.

     For the moment, central banks still have some room to provide further

stimulus via their existing tools, Boivin said, although they are running out of

road.

     "Over the course of the next five years a significant downturn is something

that you need to put a significant probability on," he said, noting that while

the issue of helicopter money is not yet under active consideration by policy

makers, it is already "a live investment question."

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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