Note Bernanke’s assumption (highlighted above) [that if the feds print massive amounts of money, a "helicopter effect will occur, and inflation will counteract the rampant deflation created by stagnant credit] in his argument that printing money would always ultimately cause inflation: “under a fiat money system“. The point made by endogenous money theorists is that we don’t live in a fiat-money system, but in a credit-money system which has had a relatively small and subservient fiat money system tacked onto it.
We are therefore not in a “fractional reserve banking system”, but in a credit-money one, where the dynamics of money and debt are vastly different to those assumed by Bernanke and neoclassical economics in general.
Calling our current financial system a “fiat money” or “fractional reserve banking system” is akin to the blind man who classified an elephant as a snake, because he felt its trunk. We live in a credit money system with a fiat money subsystem that has some independence, but certainly doesn’t rule the monetary roost—far from it.
Keen, an economist at Western Sydney University, is someone whose work I have just found, but who seems to offer a needed corrective to econometrics. As he says in this description of his method, he is taking a very different approach:
While I am an academic economist, I don’t build nor believe in the type of econometric models that dominate economics these days–generally so-called “New Keynesian” or “Dynamic Stochastic General Equilibrium” models.
Instead I build nonlinear dynamic models based on Minsky’s “Financial Instability Hypothesis”, and I have started constructing a strictly monetary model of a pure credit economy.
My predictions based on these models are qualitative rather than quantitative, but on the grounds of Minsky’s extremely prescient hypothesis the sheer scale of private debt that has been accumulated, and the abundant historical data on debt with which we can review past economic performance in the light of Minsky’s hypothesis, I have been arguing that this crisis is beyond bailouts.