Tuesday, January 27, 2009

Reaction to the Helicopter post

The helicopter post has had the most reaction of any post on this blog. I guess that is the territory when you suggest that the solution to the financial crisis is to literally throw money from helicopters. Nonetheless I wish I could get that sort of reaction to a more serious post.

The reaction to the helicopter post fell into three categories:

  • those that didn’t get it
  • those that got it but may have had ethical problems, and
  • those that understood it all too well.

I got one comment – via email – which explained very simply why the helicopter proposal wouldn’t work. I think that commentator’s argument is accurate – so – at the end I will lay it out and (tentatively) withdraw the helicopter proposal.

Those that didn’t get it

There seemed to be several comments (email and on blog) which suggested that it would be better if we just gave everyone a tax holiday (payroll, income, death duties depending on where in the political spectrum the commentator was).

This does not cut it. The purpose of the proposal (throwing money out of helicopters) was not to distribute money (for which plenty of effective mechanisms exist). The purpose was much more radical – to remove trust in money itself.

The proposal I made was remarkably cheap (a $2 billion solution to a multi-trillion dollar problem) and if it works it works for purely psychological reasons – which is that it is so reckless and irresponsible that nobody could ignore the inflationary impacts of Federal Reserve policy. Reckless and irresponsible (and small) was the charm of this proposal.

Indeed I suggested in the comments that it would work even better if Bernanke continuously surrounded himself with buxom prostitutes paid out of freshly minted moolah, but that image was just too horrific – even for this purpose (although it may be effective).

Some that simply got it

There were a couple of posts that simply got it. The cutest came from someone calling themselves the German Trader who put it very simply (if in very poor English):

You only give something away when you think it is worthless and what you get is of greater worth. While seeing the riots after Bens helicopters came past I surely want buy a new car.

Kieren (who I do not know) pointed out that the trick was really to produce inflationary expectations (and hence to get people to spend) without producing inflation. That is why this might work. The amount of money involved is small ($2 billion versus over $2 trillion in money supply) so its effect should also be small – but the expectations effect could be enormous. That was – in theoretical terms – what I was trying to achieve.

Some who got it and raised ethical objections

There were a few ethical objections raised – firstly by people who thought I was right that this policy would cause riots and deaths and then promoted more responsible ways of doing the same trick. The people killed in riots are collateral damage of a deliberately irresponsible policy. I don’t know how to weigh one life versus another – but this financial crisis will kill hundreds of people before it is over – either suicides or more bluntly hunger in some countries badly hit. The ethical objection is real – and I have no solution. The policy proposed is deliberately irresponsible – and irresponsibility causes death in some instances.

The main ethical objection I expected was about property rights and theft. I wrote the post in Australian hours and it was seen by Australian/Asians then English/Europeans and finally by North Americans.

I had to wait until American waking hours for someone to point out the obvious - which is that the policy being advocated was the deliberate theft of property (deliberate inflation being theft). Europeans somehow seem less concerned than Americans about property rights.

I am usually very harsh on government policies which involve the removal of property rights simply because those policies are usually counter-productive. There are plenty of posts on this blog along those lines. However those posts are argued on a facts-and-circumstances basis – the abrogation of property rights is argued as a problem in this instance and property rights are not automatically given full moral status. That is my position generally – honouring property rights is a good thing to do because it generally leads to better outcomes. I understand that some people (almost all Americans and including many readers of this blog) have raised property rights to full ethical status (along with for instance the rights to liberty etc). Not my ethics – but I understand – and the outcomes are usually OK so I am generally happy to leave that form of right wing fundamentalism alone.

I prefer argue for property rights from an outcomes perspective (as incidentally did many Modern Scots - esp Hume - but later Smith with regard to some economic matters*). Your blogger does not really wish to comment on the property rights as a moral precept here – other than to note for some people this really is fundamental. Just leave it at that.

The commentators that got it all too well

The comment on the post which got the most comment from other commentators was someone that got it all too well. The comment was that – as a result of this policy – some right wing “nut” would load a truck with fertilizer and diesel and blow up the Federal Reserve.

Some people objected to calling that person a nut – but I have no other word for suicide bomber of any persuasion. More to the point – this person – and eventually many others – would realise what this policy was about – which is removing all trust from dollars – and hence theft of one ideal that they hold quite dear.

The question which was raised in emails was about how you would reintroduce trust after you have destroyed it. I think that is actually a key problem. Trust is essential for an economic system in general – but trust in money at the moment is quite destructive as people would prefer hold enormous quantities of money rather than build real assets and employ real people. However you can’t build real assets and employ real people without trust either. The helicopter proposal is targeted at getting rid of trust in one place and one time only (the trust in money in the rare instance of a liquidity trap). Whether you can conduct a strike that surgical with a helicopter full of rolls of money is open for question. Military strikes are nowhere near as precise as the pictures on CNN.

Finally – the real objection

This came in an email from one of the most astute commentators on my blog:

It won't work because immediately after the drop, Congress would arrest Bernanke along with the entire Fed board (probably replace it with a money czar)…. Politicians would be forced to promise responsibility and accountability in the face of the threat of civil unrest - don't forget, a lot of people own guns legally in this country. There will be new laws designed to keep the value of the dollar. In the end, the dollar would get stronger, not weaker…

In other words the whole idea won’t work because it is actually not possible to be that irresponsible – that the underlying US system is sufficiently strong – that if Bernanke were that irresponsible he would simply be replaced.

If Bernanke can’t plausibly be quite that irresponsible we might as well park the helicopters.

And if you can’t use monetary policy to solve this recession then alas we are left with what appears to be two inferior choices (a) a fiscal expansion of gargantuan proportions or (b) letting the system burn and winding up in a great depression type scenario. Both are unpalatable – but I would vote for the fiscal expansion.

It would be much better to just load up that helicopter. Alas...


*There is a serious edit to the this post because I have not read theory of moral sentiments for twenty years and then did not finish it. I have pulled out my copy and I was wrong. I wasn't about Hume (who I have always thought right). Smith it seems thought that moral laws within the economic sphere were made by man - but outside Man was not capable of such moralizing. The rights to property seem - from my quick skim fall into manmade lot - but... suggestion withdrawn...



Anonymous said...

I cannot see why you should be so worried about the response when your ironic and seriocomic piece reveals the fundament of America's political and moral structure. Does that not prove that it is very serious?

Joe said...

Frankly, my problem with the scheme is that I don't see how we could possibly induce inflationary expectations - we're clearly within a very deep liquidity trap (the United States has doubles its monetary base, and all of it has ended up as banking reserves, with reduced lending to boot). I'd love to believe we can get inflation - but is it possible with direct government investment?

Anonymous said...

You should write a book called "John Locke, Market Fundamentalist."

Anonymous said...

i dont think paulson or berneke would get arrested for that.

I would camp out on the white house lawn if I thought i could get those blokes arrested for what they did with teh TARP.

in other news, you might be able to reintroduce trust (i agree thats the main danger)..if you had some kind of plan like weimeir germany saying the dollar is now being structured and is going to be backed by land or whatever.

I would however not agree with such a severe maneuver and honestly, I wouldnt trust those corrupt political inept beurocrats to get it right and not use it to screw the people further anyway.

sorry, they get 0 faith or trust from this taxpayer..they have however had to earn that..

lim said...

Just wondering whether we read the same version of Adam Smith's Theory of Moral Sentiment, cos the one I read seems to imply that moral laws are made by God instead of man.

Blank Xavier said...

BC wrote:
> Nonetheless I wish I could get
> that sort of reaction to a more
> serious post.

Your serious posts are typically accepted, because they make sense.

It's when you post something which people think doesn't make sense that you get reaction.

It's actually a testament to the quality of your normal material.

Anonymous said...

Brilliant, I loved the idea if nothing else for the pure radical nature of the proposal. Can I suggest that it may be useful if some of the money is dropped in big heavy packages preferably on top of a selection on bankers - Ken Lewis, Vikram Pandit, Fuld, Thain , Mack, Lloyd Blankfein, add Paulson in for good measure, take a couple of guys from the UK like Varlet, Diamond and of course Sir Fred. Might not solve the problem but it sure would be a serious deterrent to the moral hazard problem in the future.

sugam said...

A little introspection says that if I see a central banker throw money from helicopter I would move my savings to GOLD... if others also did the same it could lead to a severe depression... although I have no way to know what others would chose.. park money in commodities or spend it?

babar ganesh said...

wasn't there an artist who got NEA funds and handed out $20s at the mexican border and nearly got the NEA shut down when gingrich came in?

wunsacon said...

I must confess I didn't "get it" because I skimmed the article late at night while on cold medicine. (Yes, I'm using a weak variation of the Oxycontin defense.) I didn't realize you entertained the helicopter part literally. Even though you used the word "literally" in the headline, I still interpreted it as a rhetorical flourish.

My bailout plan recommendation was/is to simply give everyone an equal amount of money per capita (tax credit or check) rather than to give it to failed banks (TARP). And to keep giving until Americans' private and public debts become slightly more servicable again.

Why any bailout at all? I believe we'll eventually default (either a huge number of people individually and/or as a nation) in the absence of significant inflation. I expect most of the US will become like Detroit unless we do something. I would rather relive the 1970s than the 1930s, which I think is the choice we have to make.


If you don't mind, I'll post this on the original thread and the "Reaction" thread.

wunsacon said...

Giving money to average Americans to spend any way they wish is far more just than what we're doing now, which is to reward those who failed spectacularly.

David said...

Why can't people get the simple idea that deflation is not a menace. It is the natural way the economy heals itself. Things become cheaper so that people can actually afford things. I might be able to afford to buy a house on an acedemic salary if they drop another 30%.

Lord Bean said...

Isn't the helicopter scenario similar to the old joke about 2 economists walking down the street...they both see a 10 dollar bill on the floor but neither of them picks it up because 'there is no such thing as a free lunch'

If i saw Bernanke throwing money out of a helicopter i wouldn't bother picking up the cash.

hence this policy response would be ineffective

B Harvey said...

Wonderful proposal. Captivating comments. But I think we HAVE TO crash and burn via a depression. My reasoning is that the now broken system does have the machinery and laws in place for massive bankruptcy liquidation via Chaper 9. But our economy is not set up for controlling massive stimulus. The FED does not know how to steer that course. The last time it was tried in Japan or in the Depression it was not particularly successful and may have contributed to the run-up to the butchery of WWII. We fear the crash and burn liquidation because we can model and anticipate the horrendous costs to society and the economy. Quantitative easing may be the best solution - or Uncle Ben may be pis..ng in the wind. Collapse tells us that everything will hit the ground - but also that there will be real assets left standing once the dust settles

babar ganesh said...

i wonder whether you have considered the alternative, which is to drop a lot of helicopters into a pile of money. would that help anything?

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.