According to recent reports on the BBC?s business website, Lord Turner has announced that the difficulties facing the UK?s plans for financial recovery are so challenging that UK authorities may be obliged to throw away the rule book in order to overcome them.
One of two leading contenders to succeed Sir Mervyn King, for Lord Turner, with his extensive experience and position to be even hinting that such a solution may become necessary is a clear indicator of just how serious the financial problems facing the country have become.
One example of how the financial crisis might be tackled is via so-called ?helicopter drops?, which is to say, that the government might consider sending each UK family a one-off ?bonus? of monies directly financed by money created by the Bank of England.
This radical approach requires insight into how previous attempts to try to strengthen banks have paradoxically achieved only further undermining of the UK?s economic recovery.
In effect, the Bank of England is lending money to the Government in return for a claim on the Treasury in the form of a gilt (government bond) purchased on the open market.
However, since both the Bank and the Government form part of the UK?s public sector, there arises the question of whether and when the money is paid back, hence the proposed ?helicopter drops? aforementioned.
As a method akin to quantative easing, Professor Miles of the Monetary Policy Committee has suggested, ?helicopter drops? present a lump sum ?temporary tax cut? in effect, financed by new government bonds, purchased by the Bank of England on the secondary market, with all the interest and redemption payments transferred back to the Treasury.
The purpose of such a policy would be to create more economic activity and prevent deflation. However it remains to be seen whether it would result in having a positive impact on activity, ensuring that the money gets through to the real economy.
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