You have to love this guy, Steve Keen. Here is his 2012 INET Berlin presentation as part of the Instability in Financial Markets 3/5 series.
He has modelled the financial system and is trying to educate economists, politicians and all of us that in a credit-based economy, there are three sources of aggregate demand, and three ways in which this demand is expended:
1. Demand from income earned by selling goods and services, which primarily finances consumption of goods and services;
2. Demand from rising entrepreneurial debt, which primarily finances investment; and
3. Demand from rising Ponzi debt, which primarily finances the purchase of existing assets.
It is #2 and #3 above where the problem lies as banks are not restricted to endogenously expand the money supply in response to entrepreneurial or Ponzi Finance demands for funds. Basically banks lend first and look for the reserves second; not the other way around as is taught by traditional economics. Banks can always borrow the reserves from another bank as needed which appears to be a normal industry practise.
We therefore has two problems to solve:
1. IMPROVE THE SYSTEM: We need to protect ourselves from the growth in endogenous money by banks which allows for the unconstrained growth in borrowed money for Ponzi asset and investment bubbles. Two such important assets are real estate and company common stocks.
He has the “PILL” constraint to help out in the prevention of a real estate valuation bubble and ”Jubilee Shares” as the constraint to help out in the prevention of company stock valuation bubbles. Both interesting concepts. (Discussed around the 19 minute mark)
2. RESET THE SYSTEM: We need to get out of the current debt problem
The solution proposed here is QE given directly to to the public. How much ? Not sure. However if you have personal debts it must be used to pay off those debts and if you do not have debts you get a cash injection and can spend it into the economy or put in the bank for spending later ?! Thoughts on that ? Sounds inflationary !? Just give it to me !