Adair Turner, the former chairman of the U.K.Financial Services Authority, have called for “helicopter drops”: direct cash transfers to consumers through central-bank-financed fiscal deficits. Still others, such as former Fed Vice Chair Stanley Fischer and his colleagues at BlackRock, have proposed a “standing emergency fiscal facility,” which would allow the central bank to finance large fiscal deficits in the event of a deep recession. Despite differences in terminology, all of these proposals are variants of the same idea: large fiscal deficits monetized by central banks should be used to stimulate aggregate demand in the event of the next slump. To understand what this future might look like, we need only look to Japan, where the central bank is effectively financing the country’s large fiscal deficits and monetizing its high debt-to-GDP ratio by maintaining a negative policy rate, conducing large-scale QE, and pursuing a ten-year government bond yield target of 0.2%. Will such policies actually be effective in stopping and reversing the next slump? In the case of the 2008 financial crisis, which was triggered by a negative aggregate demand shock and a credit crunch on illiquid but solvent agents, massive monetary and fiscal stimulus and private-sector bailouts made sense. But what if the next recession is triggered by a permanent negative supply shock that produces stagflation (slower growth and rising inflation)? That, after all, is the risk posed by a decoupling of U.S.-China trade, Brexit, or persistent upward pressure on oil prices. Fiscal and monetary loosening is not an
appropriate response to a permanent supply shock. Policy easing in response to the oil shocks of the 1970s resulted in double-digit inflation and a sharp, risky increase in public debt. Moreover, if a downturn renders some corporations, banks, or sovereign entities insolvent – not just illiquid – it makes no sense to keep them alive. In these cases, a bail- in of creditors (debt restructuring and write- offs) is more appropriate than a “zombifying” bailout.
Fiscal and monetary loosening is not an
appropriate response to a permanent supply shock.
In short, a semi-permanent monetization of fiscal deficits in the event of another downturn may or may not be the appropriate policy response. It all depends on the nature of the shock. But, because policymakers will be pressured to do something , “crazy” policy responses will become a foregone conclusion. The question is whether they will do more harm than good over the long term. © Project Syndicate Nouriel Roubini , Professor of Economics at New York University's Stern School of Business and CEO of Roubini Macro Associates, was Senior Economist for International Affairs in the White House's Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the U.S. Federal Reserve, and the World Bank.
American Consequences
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