This a link to the video of Turner's address at the 4th Plenary meeting of INET. It focuses on the link between monetary issues, banking and the problems of inadequate aggregate demand. The presentation is technical but very well done. With a bit of effort it can be understood by folks without a background in economics. He argues that our financial system is inherently unstable. Debt contracts are very different from equity contracts. The value of the collateral supporting debt can rise or fall in value. For example, real estate can rise or fall in value. Therefore, debt financing is pro-cyclical. In good times we over value the collateral, and over-issue credit. In bad times we are reluctant to issue credit and over-leveraged households and firms do not demand credit. When we purchase equity we know that it can rise or fall in value, but the value is not based upon the price of the underlying collateral which is inherently unstable. Moreover, banks create money when they make loans. Therefore, the money supply is controlled by private banks which are not well regulated. He discussed the pros and cons of fractional reserve banking and argued that reserves should be in the 25-30% range instead of 10%, and that capital requirements should be much higher. This would limit the degree of leverage, but it reduces the risk of deflation and weak aggregate demand that we are have experienced as a result of over-leveraging.
He made a radical proposal about how we should increase aggregate demand. We should fund government fiscal deficits financed by central bank money. The US and Japan are doing this with monetary policy but fiscal policy has not taken advantage of lower interest rates. He suggested that taxes might be cut and financed by printing money. There is a taboo against this because governments can be irresponsible. It becomes a political economy issue rather than a pure macro issue.
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