Has Bernanke lent his helicopter to the RBZ?

Ben Shalom Bernanke, the former chairman of the US Federal Reserve Bank (Fed) who architected the much-maligned and equally much-revered and so-called quantitative easing (large scale purchases of long-term financial assets calculated to depress interest rates), is nicknamed Helicopter Ben. He earned this moniker after suggesting the Fed, in an extreme hypothetical case in which a series of monetary policy interventions would fail to reverse a future US deep recession or depression, could as a last resort introduce what he called helicopter money.
The Brett Chulu Column

In hiring the helicopter money idea, Bernanke leased it from Milton Friedman, widely regarded as the engineer of monetary policy. To illustrate that a country faced with the malady of deflation had a powerful lever to pull to reverse deflation, Friedman gave a hypothetical example: he asked his audience to imagine a helicopter hovering over the expanse of the US dropping wads of US$1 000 notes to the public. Friedman guessed that the US public would gladly accept this windfall and spend it, thereby firing up the economy out of a deflation-saddled recession.

Friedman was suggesting a novel idea in which creation of new money (read as printed money) would finance public tax cuts as opposed to financing public tax cuts through government borrowings. This is what Bernanke called helicopter money.

Bernanke’s public relations consultant advised him to drop the usage of the term helicopter money as it was deemed unfitting and undiplomatic in view of the stately stature of the Fed chair’s office. Bernanke relented and has since substituted helicopter money with the term money-financed fiscal policy. Bernanke saw money-financed fiscal policy as extending to the creation of new money aimed at supporting one-time large-scale government spending to stimulate an economy in a comatose, essentially an ideological merger between Keynes Inc. and Friedman Inc., very strange bedfellows.

Ordinarily, a country’s reserve bank is confined to influencing the economy through interest rates and controlling the quantity of money circulating. The Ministry of Finance or Treasury is normally mandated to pull the levers of government spending and taxation to sway the economy in a desired growth trajectory. It’s convention that there is a wall of separation between Treasury and the country’s central bank. Helicopter money and money-financed fiscal policy as suggested by Bernanke is a one-time removal of this wall of separation, calculated to pull an economy from a deep and extended recession.

The IMF prefers a softer term in place of helicopter money: quasi-fiscal activities. The Reserve Bank of Zimbabwe (RBZ) during the tenure of its maverick governor, Gideon Gono, used helicopter money to finance economic interventions breaching its statutory mandate. Typically, a reserve bank channels any new money through banks, leaving banks to do the lending. When a reserve bank side-steps banks and directly finances sectors of an economy, this constitutes a usurpation of the role of the Treasury. This is what happened when the RBZ created and financed the plethora of its famous supply-side schemes at the height of our economic meltdown (2004-2008).

Do you still recall the RBZ’s Productive Sector Facility, Agricultural Sector Productivity Enhancement Facility, Farm Mechanisation Programme, Parastatals and Local Authorities Re-orientation Programme, Operation Maguta, Maize Delivery Bonus Scheme, Basic Commodities Supply-Side Intervention Facility and Critical Skills Retention Programme? The list is much longer.

In a paper titled Role of Central Bank Intervention Under Extraordinary Circumstances, the RBZ stated: “The IMF’s staff presentation to the Zimbabwean authorities in December 2007 noted that the quasi-fiscal losses were incurred in connection with activities that go much beyond central bank functions and these include subsidies to public enterprises and exporters …”

The RBZ, through this paper, attempted to articulate an intellectual foundation to justify its intrusion into the fiscal policy arena — the main argument advanced was that under extraordinary circumstances (sanctions cited as the main reason) it was defensible for the central bank to stray into fiscal policy to stimulate supply of goods and services. The RBZ cited the Fed’s quantitative easing as a precedent — specifically, the RBZ latched onto the argument that the Fed had pumped money into investment banks which traditionally fell outside the Fed’s purview.

The current Export Bonus Scheme, seemingly formulated by the RBZ, looks like a throwback to quasi-fiscal activity.

The IMF in 2007 stated categorically that subsidies to exporters by the RBZ constituted quasi-fiscal pottering.

Last week, Finance minister Patrick Chinamasa, in an interview with the Zimbabwe Independent, explained that for every US$100 of exports, an exporter will be given US$5 on top. This bonus is said to be financed by a US$200 million loan from the Africa Export and Import Bank (Afrexim Bank). Clearly, this is not a loan to exporters. It’s arguably a form of tax cut to exporters, supposedly financed by government debt. Tax cuts are not the legal mandate of the RBZ. Normally, one would expect the Treasury to be taking the lead in communicating and articulating such fiscal interventions and not the central bank.

Apologists of a central bank–driven fiscal move could make the case that the RBZ and the Treasury are working as a tag team and thus who takes the lead is a non-issue in view of the magnitude of the prevailing cash shortages. An argument could be made that though the RBZ Act spells out that the bank is to craft and implement monetary policy, the law does not explicitly prohibit it from puttering in quasi-fiscal activities. It could even be further debated that Part II(6)(1)(g) of the RBZ Act points that our central bank is a “fiscal agent” of the state.

However, fiscal agency denotes the Treasury as the sole authority legally empowered to originate fiscal strategies, with the central bank coming in to facilitate these by virtue of being the government’s banker. Without plain evidence of Treasury leadership in this matter, one is forced to second-guess the origin of the Export Bonus Scheme with the RBZ’s strategists. If this indeed is the case, then the central bank is acting primarily as a fiscal architect and not as a fiscal agent.

Is the RBZ using helicopter money to finance the export incentive? It’s difficult to say. It is not clear if bond notes constitute money creation or debt money. Ordinarily, it is not difficult to judge between debt and created money. What complicates our current scenario is that bond notes are said to be going to act as a surrogate to the US$200-million loan from Afrexim. What further muddies the matter is that it would appear the government dishing out this loan as free money to exporters. This is not exactly a Friedman-type of intervention because it’s a highly selective private sector tax cut, not a public one.

Arguably, US$200 million is too little firepower to jolt our economy out of the deflation hole we are currently stuck in.

A mission from the IMF is reported to be due in the country soon. Will they, like their predecessors, tell the RBZ in no uncertain terms they can’t accept Bernanke’s helicopter?

Chulu is a management consultant and classic grounded theory researcher. He has published research in an international peer reviewed academic journal. — brettchulu@consultant.com