Those of us who argue for monetary policy as a way for countries (and fake countries like the Eurozone) to escape a recession, even in an alleged "liquidity trap", recognise that any increase in the money supply should be permanent, and perceived as permanent, to do much good. Even some Keynesians, like Paul Krugman, recognise that monetary policy could do a lot of good if only it could be made permanent. He just doubts that any central bank could credibly commit to making it permanent.
One way for a central bank to credibly commit to increasing the money supply permanently is to increase the money supply by buying bonds, then publicly burn the bonds. Publicly trash the asset side of its own balance sheet. That means the central bank won't be able to buy back the money in future. So it's a permanent increase in the money supply, and seen as such. Helicopter money is a permanent un-backed increase in the monetary base. Burning the bonds burns the backing, and so burns the vacuum cleaner that might suck the money back up in future. It's like an invading army burning its boats.
A second way is to overpay for junk bonds. That's what the European Central Bank has just done. This second way is better than the first, because it creates a negative feedback loop between the amount of money created permanently and the amount of money that needs to be created permanently. As I shall explain. And for once, just once, it's actually an advantage that the Eurozone lacks a central fiscal authority. Because that means it's much harder for a fiscal authority to bail out the ECB if it gets into trouble, as I strongly hope it will, or be expected to. A bit of trouble, or the perceived likelihood of a bit of trouble, is just what the doctor ordered.
I had totally forgotten I had already written a post on a very similar topic over a year ago, until a comment by PierGiorgio Gawronski reminded me, by suggesting Mr Trichet publicly burn some of the ECB's assets. (My brain is failing.)
In my old post, I said that Ben Bernanke was betting on the economic recovery, using the Fed's own assets, by buying toxic waste. If there is no recovery, he loses the bet, the toxic assets become worthless, and the increase in the monetary base becomes permanent, because the Fed can't afford to retire the extra money. If there is a recovery, he wins the bet, the toxic assets are worth at least what he paid for them, and the increase in the monetary base can be temporary, because the Fed can afford to retire the extra money. That's the demand curve of recovery.
At the same time, the greater the extent to which the increase in the money supply is expected to be permanent, the greater the extent to which the economy recovers. That's the supply curve of recovery.
There's a negative feedback loop between the expected value of the assets and the expected degree of recovery. A demand curve for recovery, and a supply curve of recovery. Somewhere in the middle the two curves cross, and determine the equilibrium level of recovery, and the equilibrium degree of default on Greek bonds.
This negative feedback loop is a way around the "ketchup problem" (the central bank keeps banging the bottle trying to get some inflationary ketchup to come out, and then it all spurts out in a rush).
There was one thing wrong with my previous post. The Fed has a fiscal authority behind it, the US Federal government, that is (so far) solvent, and that might be expected to bail out the Fed if it lost the bet. Which would mean the Fed would be unable to credibly commit to increasing the money supply permanently.
Nobody understands how the ECB operates; and I think that includes the ECB itself. It's pointless looking at the rules, because the ECB, and Eurozone generally, just breaks them. It's some sort of economic/political judgment call. But there is no central fiscal authority for the Eurozone. And it's hard to get 16 governments to agree on anything, let alone stick with it. Especially if they have to come up with cold, hard, tax increases to bail out the ECB and buy back the cash. Especially given the amount of national animosity (already bad enough, from what I read and hear) that bailing out the ECB to cover a Greek default would bring.
So, it might just work for the ECB.