Official Portrait of Ben Bernanke, former Chairman of the Federal Reserve.
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You’ll likely find this story as ludicrous today as we did 20 years ago. But as we’ve discovered, it’s no laughing matter.
I first heard “Helicopter Money” in November 2002 when a trader friend called and said, “Did you hear what that new guy on the Fed said last night? He said we should drop money, as if from a helicopter if we ever get as bad as the Japanese. LOL!”
It sounded absurd. I had no idea what my friend was talking about, but for the next week, that’s all you’d see on the internet: Ben Bernanke calling for “Helicopter Money.” His speech, or at least the helicopter part, went viral.
Back then, none of us knew who Ben Bernanke was; he was some obscure professor from Princeton who had just been appointed to the Federal Reserve. That was all we discovered when we googled his name. None of us were up on our economic history to know that Bernanke quoted Milton Friedman from years before.
But as Friedman and now Bernanke were proposing, if there were ever a time when the economy had its back against the wall, one solution to bring it out of a death spiral would be to pump unlimited amounts of money into the financial system — to drop money, as if from a helicopter, into the economy.
To all of us living in the real world, all this seemed like a pure, unadulterated, academic fantasy. For one thing, Japan in the early 2000s, with its aging population and declining economy, seemed far away from the American experience, so whatever application this “helicopter money” might have, it wasn’t for us.
Additionally, there were a couple of things that we didn’t know in 2002. First, this obscure Professor would become the Chairman of the Federal Reserve Board, arguably the most influential monetary policymaker in the country. Second, we were edging very close to Japan, and by 2007, we would be “turning Japanese,” to quote a popular song of the day.
Our Japanese moment came in Bernanke’s second year as Chairman of the Fed. It was the beginning of the Great Financial Crisis of 2007–09. Just like the US Depression of the 1930s, or indeed Japan’s troubled economy of the early 2000s, financial liquidity dried up, as chiefly bad real estate loans impacted the American financial system. Defaulted mortgages meant lousy debt on the books of mortgage lenders and, ultimately, money-centered banks. Citigroup, one of the big four American banks, was technically insolvent at the height of the crisis. If something weren’t done, the entire economic edifice would collapse.
This was the moment that something drastic was needed, and Bernanke was ready. Enter Bernanke and his helicopter money. For the first time, the Federal Reserve, in conjunction with the US Treasury, would inject funds directly into the economy. But in a stroke of marketing genius, the Fed would ditch the “helicopter money” moniker and instead invent the more regal-sounding “Quantitative Easing.”
The plan was simple: The Treasury would issue bonds. The Fed then purchased the bonds (placing them on the Fed’s Balance Sheet), and the purchase money was injected into the financial system. Altogether, the Fed expanded its Balance Sheet from roughly $900 billion to $2.25 Trillion, an injection of $1.35 Trillion.
Combined with a couple of other “slights of hands” by the Fed, direct support for the major banks, relaxation of certain capital requirements, and the utilization of Warren Buffett to manage issues on Wall Street, the nation came through the crisis fairly intact.
Or was it?
Eleven years later, a certain virus, labeled COVID-19 for the year it was identified, came at us. Initial reports were that this was a highly deadly pathogen that potentially could kill millions, as it apparently had done in China. America went into lockdown, offices closed, stores closed, and all but the “essential” were told to isolate themselves at home.
The economic impact was Great Financial Crisis 2.0. Again, liquidity dried up, placing banks and financial institutions at risk. If anything, this time, it was even worse than before. The terrible second quarter of 2020 saw the most significant drop in economic activity in our nation’s history — greater even than the Great Depression of the 1930s.
This time, all of Washington was ready; they’d been here before. In February 2020, just weeks after the COVID Pandemic had been verified, the US Treasury, along with the Federal Reserve, began injecting funds, taking the Fed’s Balance sheet from slightly over $4 trillion to nearly $9 Trillion, a total stimulus of almost $5 Trillion, an unheard of amount.
It would take months to determine just how successful this latest injection of Quantitative Easing had been, but early results were promising. In time, various government agencies (like the Bureau of Economic Analysis or the Bureau of Labor Statistics) would report that the economy was back on its feet and everything was normal.
But as Mark Twain quoted Benjamin Disraeli, there are “lies, damn lies, and statistics.”
What happens when you inject one-quarter of a nation’s income into the financial system? The gross domestic income (GDI) increased by nearly $5 trillion during the COVID-19 crisis. Of course, it's not real income, at least not as we think of income, the product of working men and women, corporations and institutions producing the goods and services that make up the economy.
Perhaps accountants can create a new class of income, let’s call it “helicopter income.” Pseudo-income created by those financial wizards in Washington to tide us through the bad times.
Of course, this new type of “helicopter money “ has a cost: more inflation, higher prices, and greater national debt. But it’s all worth it.
Remember, if another financial crisis ever comes, we always have helicopter money to fall back on.
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