The next logical step [would be that] the Government could tax all bank deposits and other risk-free savings. This would create a negative risk-free interest rate, encouraging savers either to invest in property, shares and other productive assets - or simply to save less and consume more. In either case, the result would be more consumption and physical investment, less unemployment and faster recovery from the slump.The next logical step after the collapse of a pyramid based on bad debt is apparently to punish those who did not take part by charging them de facto interest for the privilege of sitting the insanity out. Once you have driven interest rates to zero, I suppose there there is simply nowhere else to go.
The problem is not that Keynesian economists are wrong, it's that they are EXACTLY wrong: they zig when they should zag, they lower when they should raise, and they punish just about the only people who were not causers of the current financial crisis. Even worse, that they consistently find themselves wrong about the present* never keeps them from confidently promoting ideas for molding the future so counterintuitive** that only a PhD could believe they might possibly end in other than disaster and poverty. We will spend ourselves rich. We will borrow our way out of debt. These are the people who advised Bush, and they advise Obama as well. It's like reading a history book in real-time. A pop-up one with lots of clown cars in it.
But a funny thing happened on the way to Keynesian fantasy land: they forgot that people generally act in their own interest - if they cannot put their money in the banks, it does not mean they will buy stocks or government bonds or plastic Pokemon toys or all the things that Keynesians think are better for them than money to the bank.
I don't know what people will do - they might buy gold or bury coffee cans full of currency in the yard or shove it under mattresses. But I do know that a) what the Keynesians expect to happen will not happen, b) what the Keynesians do not expect to happen will happen, and c) they will quickly develop a completely new set of ideas that are absolutely certain to work.
Just as well as the last set.
* "I have been wrong about so many aspects of this crisis - as have most conventional economists and policymakers, whose views I broadly share." Seriously, it doesn't get more obvious than that.
** read: mind-boggling stupid.