On this topic, Kruman's blog today is a must read. (Plus - he has graphs! You know I love graphs.) To save you a couple of click throughs, here is the very Krugmanesque-sounding also must-read article by conservative economist John Makin, from the American Enterprise Institute (!?!) which prompted his post.
It is also the source of today's quote:
In fact, banks have virtually ceased to function as financial intermediaries since 2008, preferring to use the zero cost of money provided by the Fed to finance purchases of Treasury securities instead of supplying loans to households and small businesses. After a financial crisis, banks become much more risk averse, as is manifest in their willingness to lend only to the government instead of to households and businesses. That development is deflationary because it means that a sharp boost in the monetary base engineered by the Fed does not translate into faster monetary growth at a time when the precautionary demand for money has been boosted by elevated uncertainty.
I can't say for sure that the dysfunction of banking is the cause of the M1 multiplier collapse, but the timing is impressive, and it could hardly be mere coincidence. Maybe its the other way around, or they have some common cause.
While I love having both Krugman and Makin agree with me, I seriously fear things will become far, far worse before they get any better. B. Hoover Obama is not a progressive, and there is no political will to correct the ongoing depression. Meanwhile, Repugnicants and lots of other conservative economists, along with the E.U., are preaching austerity, which will be the ruin of us all.
There is no comfort in being right about this stuff.