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What is the sense of the current bailout, in Krugman's "clear thinking" terms? People are "hoarding" money because they have to pay off their debts, or that it became scarce just as in the baby sitting co-op. But the money goes only to the financial stratosphere, with hardly anything "trickling" to the people wanting to do something. If money hoarding is the problem, what is the role of those 0.1-1.0% banking or "investing" professionals of money stockpiling? How much money do they keep and let it out?

Here is an excerpt from Steve Keen's blog:

In explaining his recovery program in April, President Obama noted that:

"there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks - `where's our bailout?,' they ask".

He justified giving the money to the lenders, rather than to the debtors, on the basis of "the multiplier effect" from bank lending:

the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth. (page 3 of the speech)

This argument comes straight out of the neoclassical economics textbook. Fortunately, due to the clear manner in which Obama enunciates it, the flaw in this textbook argument is vividly apparent in his speech.

This "multiplier effect" will only work if American families and businesses are willing to take on yet more debt: "a dollar of capital in a bank can actually result in eight or ten dollars of loans".

So the only way the roughly US$1 trillion of money that the Federal Reserve has injected into the banks will result in additional spending is if American families and businesses take out another US$8-10 trillion in loans.

by das monde on Wed Nov 18th, 2009 at 11:19:10 PM EST

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