In a piece yesterday, Matthew Yglesias of Slate wrote what seems like a very simple solution to the current weak economy:
“Print Money. Mail Everybody a Check.”
He describes how the Fed should just print up money and mail everyone a check. Now, aside from the illegality of all that (which Yglesias notes) there is a much larger issue in all of this that I think is overlooked by most. Our monetary system is designed around private banks as the money issuers. Our government issues facilitating forms of money, but the vast majority of the actual money supply is loans that created deposits. In the case of government money things like cash (which is created by the US Treasury and shipped to Fed bank and then to member banks) facilitate the use of a bank account (such as having the ability to draw down funds via ATM for spending). Additionally, the Federal Reserve System exists almost entirely for one purpose – to support and facilitate the existence of the private banking system. In other words, the Federal Reserve System was created to bring oversight and efficiency to the payments system by creating the interbank market. These forms of outside money (cash and reserves) facilitate the use of inside money (bank money). They don’t directly compete with inside money.
And this is where the helicopter drop runs into a problem. If the Fed was created specifically to support the banking system in various ways then why in the world would it ever just print money and send it to people when that would clearly be cutting into the business that banks exist for? You can think of it as taking market share from banks as money issuers and banks aren’t in the business of trying to lose market share. A helicopter drop in the form of cash straight to households would compete with money issuance by banks who create money as debt. Of course, banks are in the business of making a profit by making loans (primarily) and the Fed’s entire existence is in support of this business. When the Fed enacts policy it is largely trying to influence the health of the private banking system because the banking system is how it interacts in the US economy. To circumvent the banking system like this appears to go against the Fed’s primary purpose for existence, which is NOT to serve its dual mandate, but to serve its dual mandate by FIRST supporting private banks (it can be no other way since the Fed works primarily THROUGH the banking system).
A helicopter drop sounds nice in theory, but the odds of this actually occurring are probably close to zero.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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