It’s Hard Being a Bear (Part Five): Rescued? | Steve Keen's Debtwatch

It’s Hard Being a Bear (Part Five): Rescued? | Steve Keen's Debtwatch
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Why does this model show that it’s better to give the money to the debtors than the lenders, in contrast to the case that Obama was sold, that it’s better to give it to the bankers?

Because the “money multiplier” model is effectively a mechanical, static, equilibrium model of the economy. Give the banks excess reserves, and they will lend them to the public, which will happily take on the debt. Once the reserves are fully lent out, the economy is back to equilibrium again.

In contrast, my model is a dynamic, non-equilibrium one, where the “circular flow” of money and goods is properly accounted for. In this system, you can think of the different bank accounts in the system as like dams with pipes connecting them of vastly different diameters.

When a credit crunch strikes, the pipes pumping the bank reserves to the firms shrink dramatically, while the pipe going in the opposite direction expands, and all other pipes remain the same size.

If you then fill up the bank reserves reservoir—by the government pumping the extra $100 billion into it—that money will only trickle into the economy slowly. If however you put that money into the firms’ bank accounts, it would flow at an unchanged rate to the rest of the economy—the workers—while flowing more quickly to the banks as well, reducing debt levels.

So giving the stimulus to the debtors is a more potent way of reducing the impact of a credit crunch—the opposite of the advice given to Obama by his neoclassical advisers.

This could also be one reason that the Australian experience has been better than the USA’s: the stimulus in Australia has emphasized funding the public rather than the banks (and the model shows the same impact from giving money to the workers as from giving it to the firms—and for the same reason, that workers have to spend, so that the money injected into the economy circulates more rapidly.

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