Monday, 23 February 2015
Do central banks need assets?
Simon Wren-Lewis addresses the question as to why central banks don’t care for helicoptering. That’s the idea that central banks should simply create new money and distribute it to every household, or give the money to government with a view to government spending it on the usual public spending items: roads, education, etc. (or alternatively using the money to cut taxes).
As he puts it, “One reason why it is taboo among central banks is that they want an asset that they can later sell when the economy recovers.” I beg to differ.
If a central bank has NO ASSETS to sell, there’d be nothing to stop it wading into the market and offering to borrow at a rate just above the going rate for near risk free loans. That would have the desired deflationary effect.
Of course the latter “wading” is doubtless illegal under existing legislation in various countries. But that doesn’t matter: the law can easily be changed.
As to where a central bank would get the money from to pay the interest, obviously if the central bank just printed the money that would partially or wholly defeat the object of the exercise. That is, the effect of that printing would be stimulatory.
However, central banks normally make a profit every year and they remit that profit to the treasury. (Much of that profit comes from seigniorage) So if the central bank just debited that interest to its profit and loss account, then the treasury would get less at the end of the year, thus public spending on other items (roads, education, etc) would decline. The effect of that would DEFINITELY be deflationary: the desired effect.
And if the profits from seigniorage and so on weren’t enough to fund the above interest, then the central bank would just have to go along to the treasury (i.e. politicians) and say something like: “In order to implement the deflationary effect that we think is desirable, we’re going to need $X off you so as to fund interest on the money we’re borrowing”. And if politicians said “no”, then the central bank governor’s justifiable response would be: “OK then, I’ve told you what in my professional capacity I think needs to be done. If you don’t want to do it and inflation goes thru the roof, I’ll let the world know who’s to blame. And if you sack me as a result, I don’t care. I’d prefer a job where my professional expertise is appreciated even if it pays half as much.”