"And although there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks- ‘Where's our bailout?,' they ask -the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to famiies and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth." (The New York Times, April 14, 2009 "Obama Stands Firm on a Sweeping Agenda", by Peter Baker)
Obama's reference to the "multiplier effect" is straight out of Economics 101: a dollar injected into the income stream generates more than a dollar's worth of spending power, because when that dollar is spent it becomes someone else's income. It is then spent again, becoming a new recipient's income and is spent yet again. and then again, and ... Here's an example of Obama's Georgetown scenario, in which banks extend "loans to families and businesses" : a bank lends $5 million to build a factory. Out of this sum, the factory owner pays suppliers for, say, steel and concrete, and pays wages to builders. The suppliers and builders will spend (consume) their new incomes, which thereby creates new purchasing power for the recipients. And on it goes. The same kind of income chain is created when banks lend to "families": household spending becomes income to owners and employees of retail outlets, whose investment (by owners) and consumption (by employees) constitute further expenditures, which in turn... You get the picture. Read more.