MatthewYglesias

Reader A.M. wants answers I can’t really provide:
We should recapitalize the banks with printed money. (Nationalizing them first, of course–we wouldn’t want shareholders benefiting.)
Here’s the logic:
Given:
- The banks need to be recapitalized in order to be non-zombies.
- The government will provide the capital one way or another.
- We ALSO are on the edge of a [...]

Reader A.M. wants answers I can’t really provide:

We should recapitalize the banks with printed money. (Nationalizing them first, of course–we wouldn’t want shareholders benefiting.)

Here’s the logic:

Given:

- The banks need to be recapitalized in order to be non-zombies.

- The government will provide the capital one way or another.

- We ALSO are on the edge of a deflationary spiral. Krugman has been warning us about this.

- One sure-fire way to get inflation going is to use seigniorage–print money!–to pay for government expenditures.

Therefore:

- We should print money to recapitalize the banks! (I guess the Fed would do it?)

The result is:

- The recapitalized banks can be re-privatized and function as solvent, independant institutions.

- The taxpayer doesn’t pay for it.

- People freak out a bit about printing money to pay for stuff, so “expected inflation” goes away from the edge of zero-to-negative.

Would this work or would it immediately cause a Weimar-republic-style hyperinflation? I ask you because you:

- like to think about these types of things

- are willing to consider crazy ideas just for the sake of argument

- have the power to get the attention of actual blogging economists.

I don’t think I fully understand all the issues here. But my guess is that we can’t do this. The reason we can’t do this is that one thing we enjoy as a country is the ability to borrow money in our own currency. That means that we’re not subjected to all kinds of crazy currency shocks and the need to maintain massive reserves and yen and euros to stabilize things the way a small and/or untrustworthy country would be. And I think we’d like to keep it that way. My suspicion is that repaying US banks’ creditors with funny-money would put an end to this quickly. That, in turn, would be a huge problem the next time we need to roll over our federal debt payments. The main reason we’re able to contemplate bigger short-term budget deficits is that at the moment we’re paying a low interest rate to borrow. Adopt this proposal, and we’d find financing the deficit much more difficult.

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