Steve Keens, an original look into the financial crisis

Recently, Zerohedge wrote and article on an Australian professor, Steve Keen. The professor did correctly predict the financial crisis and is vocal that the US and Australia is still not in the clear.

One of the key points I got from his talk is that the current model of money supply is flawed. We should think of it like reservoirs and dams, with the dam controlling the flow of money to other reservoirs.

His idea is that dumping trillions of dollars in the reservoirs of banks will just make the water level higher and the rate of flow will not increase to the debt holders. The current economic posture of all this easing of monetary policy to the banks with tarp and asset buying with the fed is basically having little effect.

So, in the end, his conclusion is to actually give the money to the debtors, who have increased their flow the the creditors. This is the most simplest method of debt reduction. Basically he is saying, no pain, no gain. At some point when banks and restrict their flow of money, conventional monetary policy of increasing banks reserves do not work.

Intuitively, this probably explains why government programs like the cash for clunkers and home buyer tax credit had a major bang for your buck effect (money went to debtors), while the TARP program (money went to banks) looks like a failure.

There are some spillover effects of the current government monetary easing in that it does put extra income into consumer's pockets but not that much as many homeowners are on fixed loans. Generally, though the effects are not enough.

This idea does confirm the deflationists' point of view in that if the money is not flowing any faster to the debtors, you will still have the debtors de-leveraging. We should give the money to the debtors and wait to see if the economy will start leveraging up again, then we will have more sustainable growth. But again, this kicks the bucket down the road until another debt crisis hits us.