Source (http://www.usatoday.com/news/opinion/forum/story/2012-09-25/ben-bernake-inflation-money/57840674/1)
QuoteThe Federal Reserve should give people free money. People would spend this money, increasing demand for goods and services, causing employers to hire additional workers to meet this increased demand and reducing unemployment in the economy overall.
This probably sounds like a crazy idea, but it isn't. People are a bit uncomfortable with the notion that the Fed can simply create money, but that is what the Fed does. Currently, under a program dubbed "QEIII" (Quantitative Easing III), the Fed is creating money and, instead of simply giving it to people, is using that money to purchase mortgage backed securities in order keep mortgage rates low and increase the supply of money in the economy. This also boosts the prices of these financial assets, providing a windfall to those who own them.
It also isn't a new idea. Federal Reserve Chairman Ben Bernanke earned the nickname of "Helicopter Ben" after suggesting that the Fed could employ the equivalent of Nobel Prize-winning economist Milton Friedman's humorous suggestion that money could simply be dropped onto the population from helicopters in order to prevent deflation. Give people some free money and they will spend it, boosting demand and the price level.
This was an amusing metaphor, not meant to be taken literally, but conceptually the Fed is able to create money out of thin air and give it to people. Bernanke's version of the "helicopter drop" involved paying for tax cuts with free money from the Fed. Alternatively, the Fed could finance increased government spending on such things as infrastructure and education, leading to more construction workers and teachers being hired without any need to increase borrowing or taxes.
Traditionally the Fed has relied on bank shot monetary policy. Expansionary monetary policy involves purchasing US Treasuries from banks, reducing interest rates in hopes of encouraging increased lending for business investment and home purchases. But the ability to encourage increased business investment in the middle of an extended recession is limited, and the demand for new houses has been slow to recover in the aftermath of the collapse of the housing price bubble. Purchasing mortgaged backed securities, instead of Treasuries, targets mortgage interest rates more directly, but with those rates at historic lows already it's unclear that this will have a significant impact.
They don't actually have to drop money out of helicopters, though that might be fun, but any equivalent policy would boost demand more directly than the current Fed programs. I'll be bold and suggest that this might even be a somewhat popular thing to do.
The only potential risk of this is increased inflation, though higher inflation is a potential consequence of any expansionary monetary policy, and the Fed has demonstrated its ability to reduce inflation when necessary. In any case, an additional bit of inflation would be welcome right now, as it would reduce the real values of fixed rate mortgages and help to decrease the number of "underwater" borrowers.
The Great Recession, with its long period of extended high unemployment rates, has caused unnecessary economic hardship for millions. Remarkably, there's a simple way to help people and improve the economy. Even more remarkably, we aren't doing it.
"Duncan Black holds a doctorate in economics."
Now that is just laughable.
I have to say, though, that creating money and giving it to people would be a lot more effective than creating money and giving it to banks, which is what's been going on.
The problem is that giving money directly to people doesn't really boost demand either because you usually run into two situations (out of the main 3): First, if you give people a couple hundred dollars, they will usually just put it in the bank and slowly trickle it out on various bills. Second, if you give people a little at a time, they will spend that extra money rather than save it, but it doesn't really improve the economic indicators because they don't really realize they are spending it and again, it is a trickle. The only time people notice the money and actually use it for increased demand for products is when they get a ton at once but that usually leads to reckless spending and no real long-term gain.
And, of course, the long-term inflation always eats away at the gains.