Yves here. I must confess to not having read Frances Coppola’s new book, but based on Martin Wolf’s and Michael Hudson’s recap of its thesis, I am at a loss to understand how Coppola could see her “people’s quantitative easing” as anything other than another subsidy to banks and bank lending. More and more economists have concluded that the level of financialization in advanced economies serves as a drag on growth. The IMF determined that the optimal level of financial development was that of….drumroll….Poland.
I am even more puzzled by her reluctance to let creditors bear the costs of poor lending decisions. Keeping them from eating their bad cooking would incentivize bad practices and help support poorly run institutions. None other than the Japanese warned the US early in the crisis not to repeat their mistake, which was failing to write down bad loans early on. But as Mark Blyth pointed out in a presentation that we featured yesterday, the 2008 crisis diverged from past major economic breakdowns in that the authorities have been able to prevent a reset and avoid a shift towards policy and institutional changes that strengthen the position of labor relative to capital. Despite its populist branding, Coppola’s scheme is yet another effort to shore up a status quo that is past its sell-by date.
By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is “and forgive them their debts”: Lending, Foreclosure and Redemption from Bronze Age Finance to the Jubilee Year
This short book makes the obvious point that Quantitative Easing aimed at raising asset prices that helped keep banks solvent and enriched financial investors, but did not help the overall economy – the People. The aim – and effect – was to inflate asset prices for real estate, stocks and bonds, thereby saving banks from having to foreclose and suffer losses as property prices fell back in line with the ability to pay and with realistic rental values. So basically it was financial institutions and investors who were saved, not the economy and its debtors.
Who then are “the people” that Coppola advocates saving? I was disappointed to find that the main “people” that her “helicopter money drop” alternative seeks to help are banks. “The people” are only an intermediary, serving to pass most of the helicopter money on to their creditors. Her solution is “debt monetization,” a money drop that “would be used in the first instance to pay down debts” (p. 128).
The new money would flow right through the hands of “the people” to their bankers, although Coppola gives a hand-wave to the hope that: “Any money left over after debts were discharged would be given directly to the individual: they could either spend the money or add it to their savings.”
In Coppola’s reform, the first task would be to enable the economy’s debt overhead to be carried. But why not just write down the debts – especially the bad debts, the junk mortgages and junk bonds of zombie companies? Is it really desirable for the economy to keep providing the financial sector with more and more money to lend out? Isn’t that simply a means of keeping Ponzi finance alive and thriving? Coppola doesn’t pay much attention to the fact that without writing down this vast burden, economies will remain subject to financial overlordship.
For me, writing down the enormous post-1980 gains of the One Percent would be a real gain for “the people.” It also would promote economic stability instead of top-heavy financial liquidity claims on the economy. But Coppola worries that this would be unfair on an inter-personal level: A debt “jubilee could be every unfair to people who are too poor to have debts or too responsible to over-borrow.” Also, “for every debtor there is a creditor,” and the creditor class (a.k.a. the One Percent) would lose. “Somehow, a debt jubilee would have to avoid hurting savers,” she insists (p. 67). This means avoiding “hurting” banks and investors that have made reckless or outright fraudulent loans.
Coppola’s helicopter money to pay down debts thus would leave in place the top-heavy overgrowth of financial claims in today’s indebted economies – letting the ultimate debt deflation accumulate even further, to end in an even more necessary and deeper debt writedown as an alternative to the kind of mass foreclosures that the Obama era sponsored on behalf of the bankers (and to the great benefit of Blackstone’s real estate grab from the homes and properties liberated by the financial “free market”).
I cannot blame any author for not writing a different book. But monetary policy only can do so much. Purely monetary writers tend not to recognize that the debt overhead and FIRE sector constitute a rentier overhead that is distinct from the “real” economy, wrapped around it. Discussion of a fairer tax and regulatory structure, especially a tax on the FIRE sector’s economic rent, is outside the range of Coppola’s book.
Coppola attributes opposition to spending QE into the real economy instead of into the financial sector and its elites to “fear of government, and indeed of democracy” (p. 116). Indeed, she points out that “QE for the Banks had little democratic legitimacy, particularly in the EU.” Yet she claims that it is not true that central banks conducted this policy to benefit bankers. It is as if this were an unintended consequence.
Wiping out banking and other financial claims against debtors is to me a virtue of a debt jubilee, not a shortcoming. The economy cannot be stabilized without bringing the financial claims of banks and bondholders back in line with the ability to pay. Coppola’s helicopter money would subsidize the overgrowth of debt with a bailout that would need to be followed by an exponential sequel in the next crisis, and so on in ad infinitumuntil a moratorium finally was declared and debts written off.
The aim should not be to give people money just to pay the banks. The aim should be to help them get on with their real life in the real economy by writing down their debts so that such bailouts are not needed. Wouldn’t it be better to wind down this overgrowth? Why would we want to go along the road of exponentially rising bailouts in a charade of giving people money to pay banks that will have used the overgrowth of debt to search out ever more risky outlets, derivatives gambles, debt-financed private equity takeovers and LBOs?
Not to realize that this has become our economy’s financial dynamic is to be part of the problem, not part of the solution. Bailing out the financial sector feeds the growing debt overhead. Why would one want to do that – unless you belong to the One Percent?