Why Investors Are Listening for Helicopters at Central Banks

The helicopter money debate is a sign of the lack of faith in the global response to the financial crisis

By Richard Barley

  ECB President Mario Draghi pictured in February. Investors will be looking Thursday for more detail on the ECB’s planned corporate-bond purchases. Photo: AFP/Getty Images

That didn’t take long. No sooner had President Mario Draghi unveiled the European Central Bank’s latest easing effort after March’s policy meeting than he was asked about helicopter money. Expect more of the same this week.

In the short term, markets will be looking Thursday for more detail on the ECB’s planned corporate-bond purchases. Issuance has picked up and the spread between corporate and government bond yields has narrowed, but key questions on the size and composition of the program remain unanswered.

Longer term, the focus is likely to be on further ECB options, including helicopter money—essentially, direct injections of cash into the economy by the central bank. The prospect is a remote and radical one for now; the debate is theoretical, not practical.

But that the discussion is even taking place is noteworthy. It marks dissatisfaction with the sluggish nature of the economy and its recovery since the crisis. Policies that aimed to prop up the financial system and buy time by providing continuous liquidity support haven’t produced the kind of recovery that would generate confidence.

The ECB faces a particular problem in the criticism coming from Germany, amid warnings that monetary policy has hit its limits. It would be risky for a central bank to agree with that idea.

Even a hint in March that interest rates had gone as low as they could generated turmoil in markets. Signals that monetary policy still has room for maneuver have value.

The notion of helicopter money is enticing in an environment in which more liquidity and lower rates offer diminishing returns, and fiscal policy is politically taboo. In its most radical form, the central bank would distribute cash directly to the population, without taking any matching asset on its balance sheet. One way to think of this is as similar to an injection of fresh equity—a way to repair stretched finances.

There would be no upfront debt for governments to take on as a result. The cost would instead be borne over time from future income generated by the central bank. That relies on the assumption that a central bank, unlike commercial banks and companies, can run with a hole in its balance sheet because it can create money. The hope would be one of greater spending today, or if consumers pay down debt, expectations of greater activity tomorrow. Inflation expectations would be likely to rise.

Or so the thinking goes. Helicopter money’s seductive nature is also reason to mistrust it: there is no free lunch. Politically, it would introduce fresh tensions into a eurozone already riddled by them. Logistically, it could prove tricky. And it could induce fresh inertia on economic reform.

For the foreseeable future, the ECB will almost certainly stick with its calls for governments to do their bit to get the eurozone economy up to speed. So long as they are recalcitrant, though, the question of whether central bankers will have to do more won’t go away.

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