The other night (09/29/08), the ABC evening news ran a little cartoon to explain why Congress' failure to pass the Billionaire Bailout Bonanza would necessarily result in constriction of capital credit. The cartoon seems to have been produced by the same people who do the animated question-and-answer for PBS's America's Test Kitchen, which gives generally good information about cooking science piggybacked on bad animation. Unfortunately, in this case the animation was much better than the information.
While slickly presented and clever, the segment simply gave a quick rundown on how fractional reserve banking operates when based exclusively on existing accumulations of savings. It didn't call it "fractional reserve banking," of course, but kept referring to "recycling" currency, and described the multiplier effect — again, without calling it that.
The most damaging assumption underlying the explanation, however, was that existing savings are needed to finance business operations. This is the most basic Keynesian dogma, and the one most easily disproved — as it was by Dr. Harold Moulton (then head of the Brookings Institution in Washington, DC) in his 1933 monograph, The Formation of Capital.
To make matters worse, Keynes saw no problem with government creating money at will to finance its deficits, but flatly declared that creating money for capital formation was impossible. (The General Theory of Employment, Interest, and Money, 1936, II.7.5) (Don't try to figure that out. It doesn't make sense, and explains why trying to reason your way through a Keynesian economics course in college results in severe migraines. Malthus made economics dismal, while Keynes made it miserable.)
The cartoon did not explain where the money came from in the first place to start lending out to achieve the multiplier effect. The implication, however, was clear: the money will come from the Federal Reserve creating money to bail out the billionaires. The cartoon did not raise the possibility that the same mechanism could be used to create money to finance the acquisition of homes by ordinary people through Homeowners' Equity Corporations ("HECs") on divestiture of the State-owned properties via Community Auction Boards ("CABs"). Further, by changing from fractional reserve banking to a 100% reserve requirement, you would, ipso facto, end up with a currency backed by liens on hard assets instead of the government's ability to tax people.
Obviously Congress has locked itself into the Keynesian paradigm at a time when they should be investigating Kelsonian binary economics, especially as set forth in the second book Louis Kelso wrote with Mortimer Adler, The New Capitalists: A Proposal to Free Economic Growth from the Slavery of Savings (1961). The subtitle is the more descriptive and certainly more accurate portion of the title — but you can judge for yourself by downloading the free .pdf available from the Kelso Institute. You might want to alert your Senators and Representative to the existence of this little treatise. It's short enough that even a politician could find the time to get through it, and still find time to give the HEC proposal a once-over.
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