Instead Of Qe, The Fed Could Have Given $56,000 To Every Household In America

[Sancho Panza]

Yahoo Finance/Fiscal Times 18/9/14

'The Federal Reserve has been conducting a grand experiment since the U.S. economy tumbled into the Great Recession. After the housing market collapsed in 2008, the Federal Reserve lowered interest rates to rock bottom levels in hopes of boosting borrowing and spending. It also went a step further, buying trillions of dollars in Treasury bonds and mortgage-backed securities with the hope of boosting the housing market and therefore the economy.

The Fed acknowledged Wednesday that, as the economic recovery slowly builds, the grand experiment is now coming to an end. The Fed’s program of monthly bond purchases is now set to end next month and policymakers are looking ahead to raising interest rates for the first time since 2006.

But in an intriguing piece just published in Foreign Affairs, Brown University political economist Mark Blyth and London-based hedge fund manager Eric Lonergan argue the Fed could have done better by pursuing a far different type of grand policy experiment.

Related: The Threat That Could Scar the Economy for Decades

"Instead of trying to drag down the top, governments should boost the bottom," they write in an article titled: "Print Less But Transfer More: Why Central Banks Should Give Money Directly to the People."

The housing market can contribute nearly 20 percent to gross domestic product when it's humming along, but excessive home borrowing and the subsequent overheating of the housing market got the American economy into such trouble in the first place. So instead of policies meant to boost home buying, Blyth and Lonergan contend the Federal Reserve should instead give money directly to people. For the trillions already doled out to the financial sector via those “quantitative easing” asset purchases, every family in America could have been on the receiving end of $56,000. The result, the authors contend, would be an economic boost fueled not by re-inflating the housing market but by consumer spending, which accounts for nearly 70 percent of America's GDP.

The risk of higher inflation would be mitigated by the directness of this form of cash transfer: The Fed could turn on or turn off the money spigot whenever inflation seemed a danger. And the Fed would arguably need to print less money than it has spent on QE in order to spur spending because of this same directness.

Related: What Happens When the Fed Stops Propping Up Stocks?

Rather than doling out the money equally across every household in the U.S., giving the lowest income households the lion's share of this cash transfer could potentially reap even greater economic benefits. "Targeting those who earn the least would have two primary benefits," write Blyth and Lonergan. "For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality."

It's perhaps the ultimate populist, monetary-policy proposition, and not exactly a new one. Former Fed chairman Ben Bernanke proposed dropping "cash-from-helicopters" — economist Milton Friedman's term — as a solution to Japan's stagnant economy back in the 1990s, when Bernanke was still a professor at Princeton. And like the conservative Friedman, the liberal John Maynard Keynes was also a fan, proposing a similar scheme back in the 1930s.

Because the federal government wouldn't be asking the rich to give up any of their wealth in the form of redistribution via higher taxes, helicopter drops are an idea both the left and the right might embrace. Theoretically, at least. "Ideology aside," say the authors, "the main barriers to implementing this policy are surmountable." But given the country's polarized political system, ideology is precisely the problem, and very likely why an innovative idea like this one will never see the light of day.'

[mikthe20]

Been said here for a while, which is why QE obviously wasn't intended to help the people, but rather help the finance industry and the 1%.

[sPinwheel]

Been said here for a while, which is why QE obviously wasn't intended to help the people, but rather help the finance industry and the 1%.

So that it could trickle down.

[zugzwang]

Just a matter of time before they start throwing cash at Joe Six instead of the bankers. Forget 'escape velocity', that's never going to happen.

But beyond its crummy joke, the Fed has done something else: it has removed “Escape Velocity” – the economic surge in the US that has been falsely promised for five years in a row to rationalize soaring stock prices – from its vision of the future.

The Economic Projections of Federal Reserve Board members and Federal Reserve Bank Presidents, as the report is called, cut GDP projections for all years to come, as far as the Fed’s eye can see:

For 2014, policymakers cut their “central tendency” of GDP growth to 2.0% to 2.2%. That’s down from their June projection of 2.1% to 2.3%. The “range” of GDP growth dropped unceremoniously to 1.8% to 2.3%.

While they were at it, they cut the GDP growth projections for 2015 to a central tendency of 2.6% to 3.0%. For 2016, they nudged it down to 2.6% to 2.9%. For 2017, they figured it would languish at 2.3% to 2.5%. And in the “longer run,” GDP growth would even be below that. Here is what the slow-growth economic future of the US, as seen by Fed policymakers, looks like, after $3 trillion in QE and so many years of ZIRP that investors can’t even imagine what life might be like once the cost of capital is actually a decision-making factor again:

The light blue areas represent the “range” of the projections of policymakers. The darker blue areas represent the “central tendency,” which excludes the three highest and the three lowest projections in each year.

Next year, the economy might touch 3%. It would be the fastest growth for years to come. It would be peak growth. And Escape Velocity, that big economic acceleration that has been promised for years? Gone from the future.

http://wolfstreet.com/2014/09/18/fed-just-forget-escape-velocity-not-gonna-happen-ever/

Edited September 18, 2014 by zugzwang

[LC1]

So that it could trickle down.

[oracle]

So that it could trickle down.

so that $56000 could be spent on yet more pointless chinese tat.?

would surely be better not to offshore the tat-producing jobs in the first place

I dread to think how much international shipping costs for pointless tat are.

but there you go, that's governments for you

all in the name of egalitarianism they overfish british+scottish waters with foreign vessels..who land the booty, send it half way around the world to vietnam to get peeled and prepared..and then ship it halfway around the world back again to find it's way onto the shelves of your local tesco,

beam me up!! I want out of this madhouse!

the powers that be say interdependence is good

I think ebola is in the throws of dismissing that myth.

if that goes viral(literally)..then it will show these numpties up for what they are.

we don't have interdependence..we have over-dependence.

and the weakest link in the chain gets put under pressure..the whole lot comes tumbling down.

Edited September 18, 2014 by oracle

[oracle]

Just a matter of time before they start throwing cash at Joe Six instead of the bankers. Forget 'escape velocity', that's never going to happen.

ha.

soaring stock prices are a function of share buy-backs presently, not organic growth.

same as the US unemployment figures.

they look good because a lot of companies scaled back working hours to 29 to avoid paying obamacare, but hired a couple more people to fill the shortfall( not quite the 25% pro-rata but probably around 10%)

same amount of work done..no real growth.

[oracle]

don't knock reagan, he was actually one of the good guys.

after the assination attempt however the administration was de-facto ruled by the clandestine element( of which bush is far more culpable)

[oracle]

Just a matter of time before they start throwing cash at Joe Six instead of the bankers. Forget 'escape velocity', that's never going to happen.

well funnily enough the CFR have espoused such a plan already,

for CFR policy read protocols of zion-it's a near perfect match.

and who are the CFR?

oh they're all knights of malta!!!!!

NAILED!

(The true templars still remember)

Edited September 18, 2014 by oracle

[interestrateripoff]

Giving the money to the people at least would have created competition to earn the free money via providing goods and services.

However it still doesn't resolve the issue about what happens when the money runs out? Do we give everyone another $56k in "free money" to consume? That $56k would be creating artificial demand which isn't sustainable. However I do think it would have been better than simply giving it to the bankers, who's only effort to "earn it" was to place massive money losing bets.