COLUMN-Helicopters' faint whirring heard in UK: James Saft
By James Saft
Oct 17 (Reuters) - It is one thing when commentators burble on about the possibility of outright central bank financing of deficits, it is quite another when a viable candidate to lead the Bank of England is reported to be thinking along these lines.
Reported of course is different from said, but a speech last week by Adair Turner, outgoing head of Britain's Financial Services Authority and a candidate to be the next governor of the BOE, may serve as a warning or a promise, depending on your view of money printing.
Turner, after ticking off the already extensive list of support the BOE has given to the Treasury and economy, held out the promise of more:
"We need to be ready if these measures prove insufficient, to consider further policy innovations, and further integration of different aspects of policy - to overcome the powerful economic headwinds created by deleveraging across the developed world economies."
Nothing but a hint there, but shortly thereafter two respected journalists, Robert Peston of the BBC and Simon Jenkins of The Guardian, reported that Turner believes that the BOE should simply forgive some bonds issued by Britain which it owns.r-bank-of-england
Given the opportunity to back away from the suggestion over the weekend at the IMF meeting in Japan, Turner hung the idea on Peston, who referred to the idea as "helicopter money," an image borrowed from a 2002 speech by Federal Reserve Chairman Ben Bernanke.
"The whole point of my speech on unconventional policies was to provide a justification of what we have done over the last three months in terms of unconventional policies," Turner said.
"I pointed out there were other things we can do. As for the specific idea of cancelling gilts or permanent monetization, I have to say that was reported by my good friend Robert Peston, but that was Robert's idea, not my idea."
That is not saying "never" or "I am not currently considering that."
While that could simply be a canny would-be central banker keeping his options open, his approach stands in marked contrast to that of Bernanke, who went out of his way recently to combat fears that the U.S. central bank was monetizing or planned to do so.
"Monetizing the debt means using money creation as a permanent source of financing for government spending," Bernanke said, going on to stress that his support of the economy would taper or reverse when the bank sold Treasuries or allowed them to mature.
My guess is that, regardless of who leads the BOE, this represents an advance in what feels to be an inevitable slide. Once introduced, especially under current circumstances, the conversion of large-scale secondary market purchases of government debt by central banks to outright monetization has an inexorable feeling to it. Firstly, monetization is hard to resist in a situation of extremis. If a government fails to be able to finance itself at what it considers an acceptable price it is hard to see the central bank making things worse by selling alongside panicking investors. Far more likely is that the central bank plays the role of its own government's lender of last resort.
Secondly, once we accept the rationale that conventional monetary policy is no longer effective and therefore quantitative easing is justified, it is simply another logical step to buy and destroy debt, rather than buy and hold. Given that the BOE owns UK bonds equal to about 25 percent of all debt stock and yet conditions are still, if not deflationary, pretty dire, the argument seems to apply as well now to monetization as it recently has to temporary QE. Allowing bonds to mature, effectively tightening policy, makes no sense within this argument, if you accept it.
Bernanke's preferred definition of monetization, that it is "permanent," is canny but hard to swallow. First, nothing is permanent, especially a government printing money; nature and markets will bring it to an end even if the central bank will not. As well, permanent hangs on the intention of the bank, which is harder to credit than its actions.
The somewhat terrifying prospect however is that, like conventional monetary policy, perhaps QE and its ugly cousin monetization really don't work in the current circumstances, at least as practiced. It is not as if the evidence, based on the experience in Japan over decades and more recently in Britain and the U.S., is all that supportive.
This leaves behind the rump risk, which is inflation, or rather inflation fed by panic. It will not be easy to get everyone else, who after all still own 75 percent of UK bonds and 90 percent of Treasuries, to simply stand still while the central bank monetizes.