So it is entirely possible the opening for a Newer Deal in the US is in 2012, not 2008.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

We now know that banks have created other entities not called banks and outsourced money creation (through credit) to them, thereby depriving the central bank of control over monetary policy.

I don't think that is strictly true.

All money = credit (other than notes and coin) has been and continues to be created by private Banks. What they have done is to outsource the risk away from their own proprietary pool of Capital: totally, through securitisation; temporarily, through credit default swaps, and partially, through credit insurance.

Migeru:

Why are banks regulated? Because they are allowed to create money through credit via fractional reserve banking. How did it happen that banks were allowed to outsource this function to unregulated entities? Were the regulators asleep at the wheel or complicit?

One of the things that is needed is a crackdown on "off-balance" items and specifically to make it so that a bank can sell a loan only to another (regulated) bank, not to some unregulated off-balance-sheet entity.

Banks' economic function has essentially been to guarantee borrowers' credit, and they back this guarantee with pools of regulatory capital. Anyone else to whom such risks are outsourced in return for a premium or payment - and in particular the "Monolines" like Ambac - should indeed be much more closely monitored by regulators, who were sleeping on the job.

Migeru:

Or perhaps we need a complete overhaul of the money system, but don't hold your breath for that one.

The effect of a "Debt/Equity" swap of the type I advocate - and which IMHO offers the only viable solution to  the ongoing "Credit Crash" - is actually to monetise future land rental values.

There is no alternative to reversing the polarity of the monetary system in this way froma defcit basais to asset basis: nothing else "works" at an acceptable political cost (ie will maintain a functioning society).

Moreover, to do so requires no legislation. There is nothing stopping banks from implementing such restructuring right now.

"The future is already here -- it's just not very evenly distributed" William Gibson

How did it happen that banks were allowed to outsource this function to unregulated entities? Where the regulators asleep at the wheel or complicit?

Krugman answers:

Eventually, however, Wall Street did an end run around regulation, using complex financial arrangements to put most of the business of banking outside the regulators' reach. Washington could have revised the rules to cover this new "shadow banking system" -- but that would have run counter to the market-worshiping ideology of the times.

Instead, key officials, from Alan Greenspan on down, sang the praises of financial innovation and pooh-poohed warnings about the growing risks.

He is the epitome of the serious man who cannot break into "serious people". Him, with probably the best record of forecast and analysis around, is constantly dismissed as talking trash.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi