The phrase comes from economist Milton Friedman, who outlined the idea of a helicopter dropping money to individuals from the sky — but it has come to cover a range of different monetary policy ideas.
At its most simple idea of monetary finance is essentially that instead of stimulating the economy through buying assets from banks or other asset holders, central banks should invest directly in the real economy.
This would essentially take the form of the Bank of England partially financing the UK economy directly, rather than pushing the new money through the financial services sector, and could take many forms.
One way, for example, could be to lend to organisations such as the British Business Bank (a government agency, not a bank, despite the name) in order to fund SMEs or infrastructure. The British Business Bank could become a far more important funding source for the UK economy, given uncertainty over the future of the European Investment Bank’s role in the UK following Brexit.
Another could be for the BoE to lend to provide cheap lending directly to government under certain conditions, as it does with lenders under the term funding scheme.
Wage growth inflation remains stagnant in the UK, but the bank could feasibly stimulate the UK economy through a loan to government on the condition that it would be used to allow for a corporation tax cut, linked to companies raising their basic rate of pay.
Both these options are GlobalCapital “blue sky thinking” but the topic deserves some form of discussion if UK monetary stimulus is to continue.
The theory is fraught with political obstacles, Bank of England governor Mark Carney has himself been a vocal opponent, liking it to “a Ponzi scheme.”
The spectre of Zimbabwean or Weimer Germany style hyperinflation are also frequently summoned to dismiss such ideas. Both examples were frequently cited, too, in the run up to the introduction of the 'ordinary' quantitative easing programmes at the various central banks to have used the tool.
But, while the risk of inflation remains, the central bank quantitative easing programmes and extraordinary liquidity programmes so far have caused tremendous amounts of asset inflation and have distorted the market price of risk.
This has led to investors being forced to buy assets outside their normal risk profiles in order to hit yield targets.
For example the difference in spread between the standard UK prime mortgage sector and slightly riskier products such as buy-to-let, second lien mortgage loans and non-conforming mortgages has shrunk since TFS was introduced.
In fact yields have tightened across global asset classes through a lack of supply, and the creation of new money to chase the same assets.
While the value of bread remains stable, the yields on a sub-prime auto loan have sharply shrunk.
Many UK mortgage lenders will also admit that there was no real need for TFS and that lenders can easily fund themselves through securitization or other means.
The same phenomenon exists in corporate bonds, which the BoE buys in the secondary market.
For many in that market bank liquidity is seen as a nice thing to have rather than something which is fundamental.
There is also a real danger that lenders can lend below market levels, knowing that they can sell to central banks at a certain rate, creating a brand new originate to distribute model.
Giving governments an unlimited source of funding to enact whatever scheme they want clearly comes with huge risks — but even in direct monetary financing, independent central banks would still be the arbiter of the size of the economic stimulus and the conditions under which it is lent.
But instead of creating bubbles in financial assets, central banks would be putting money into the real economy in order to try and stimulate growth — which despite a relatively recent uptick has been anemic in western economies over the past decade under conventional QE.
The policy is closer to established economic thinking than it might seem. Former US Fed chair Ben Bernanke has written about “helicopter money” as an option for today’s Fed for the Brookings Institute and spoken about it extensively in the past.
Former FSA chair Adair Turner has also been a vocal advocate of monetary finance and has attempted to break the taboos surrounding it as an instrument of monetary policy in both papers he has authored and in speeches.
The role of QE was originally to stimulate the economy and to ease bank financing conditions.
Banks however now have more liquidity than they have had before, and investors are chomping at the bit to buy the financial products being taken on by central banks.
If, however, Mark Carney still feels the economy needs stimulus, he should try the unconventional method of investing in it directly.