Sunday, January 29, 2012

Easy to See

At Broad Oak Blog, an ephemeral link in the sidebar -- Steve Keen: giving money to debtors 3x more effective than giving it to banks


In the second half of the lecture, I use the model developed in the first half to show that money is not neutral in a credit-based economy–a higher rate of money creation results in a fall in unemployment–and also model a credit crunch. I also model two government policies to counter a crunch: giving money to the banks (which Obama did) and giving it to the debtors (which the Australian government did). Conventional money multiplier theory argues that the former is more effective; I show that the latter is about three times better than the former.


It's very simple.

1. There's too much debt; that is the problem. So the solution is to reduce debt.
2. If you "give money to the banks" you're not reducing debt.
3. If you "give money to debtors" there's some chance they will reduce their own debt.

Quantitative easing started out as a plan to buy up toxic assets, to relieve the banks of risk. Sure, and the Federal Reserve took on that risk by taking on those assets.

But why were the assets "toxic"? Because people couldn't afford to make the payments.

The money that the Fed created from nothing to buy those assets would have been better used to pay down debts that people couldn't pay. The banks would have got the money anyway, and the toxic assets would have been destroyed.

I don't know how you would calculate a number and say it's three times better my way or Steve's way or Australia's way, than it is to do it the Fed's way. But it is easy to see which method would would better, and which method has not worked.

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