Greg Mankiw reminds us that Paul Krugman once recommended sensible policy:
My favorite book by Paul Krugman is Peddling Prosperity, which I once assigned in a course and still often recommend to students. A reader recently reminded me what the book says about the use of fiscal stimulus (page 32):
When monetary expansion is ineffective, fiscal expansion…must take its place. Such a fiscal expansion can break the vicious circle of low spending and low incomes, “priming the pump” and getting the economy moving again. But remember this is no by any means an all-purpose policy recommendation; it is essentially a strategy of desperation, a dangerous drug to be prescribed only when the usual over-the-counter remedy of monetary policy has failed.
Everybody flunked accounting:
Commercial Banks as a system don’t loan out anything. They create money when they make loans
Money creation is not self-regulating
You can’t take money out of the banking system (only the FED can)
Savings transferred through the intermediaries never leaves the CB system. The intermediaries are the customers of the CBs.
Savings held within the commercial banking system are lost to investment or to any other type of expenditure.
From the standpoint of the economy the banks shouldn’t pay for something they already have. Payments on savings raise all interest rates, induce disintermediation among the financial intermediaries, shrink real-gdp, & decrease CB profits.
The solution to our non-bank/housing problem is to get the money creating depository institutions out of the savings business.