But, in any case, I'll try to summarize my takeaways from his thought experiments.
Basically, there are four sectors in the economy: the financial sector (banks), the corporate sector (businesses), the individual sector (households) and the government sector (which we'll ignore for now, although we know how it is behaving in order to try to fill in some of the gap from declining activity in the other sectors, though it seems unlikely that the marginal increase in government activity (so far) is sufficient to offset the marginal decrease in private sector activity).
The banks are principally in the business of (selling) offering loans to two of the other sectors: businesses and households (they really intermediate between the various parties in those sectors, receiving funds in from them, typically of shorter duration (deposits), and then lending it back out, typically of longer duration; of course, there's some leverage involved due to the fractional reserve system). The main point is banks have already offered too many loans, in the sense that many of those are at risk of not being paid back as expected, and, as such, the banking sector is not, for rational profit-seeking reasons, inclined to offer nearly as many new loans as had been the norm.
Non-financial corporations, meanwhile, in the business of selling goods, have an excess supply of those goods (both in terms of excessive inventories and excess capacity). Because the goods they sell are sold not in barter but for cash, an excess supply of goods implies an excess demand for cash.
Similarly, households have an excess supply of labour; they have more labour that they'd like to sell/offer to the business sector than the business sector is demanding or has need for. As such, individuals' excess supply of labour also implies an excess demand for money.
The central banks have recognized these issues. First, they pursued their conventional policy measure of dropping interest rates. This is normally done to spur increased lending (and to motivate private players to reduce their demand for cash, given that they can now receive less of a return on that cash) and thus spur economic activity. However, the central banks' goal of spurring lending has faced the constraint posed by what the banks are doing (or not doing). (They've also faced the constraint that households are starting to save to pay down debt; in this case, for households, lower rates have offsetting effects, as the lower rates hurt savers who earn less interest income, but helps debtors by lowering their interest burdens; nonetheless, lower rates don't satisfy the central banks' goal).
So the central banks recognize an excess demand for money in the private sector, and they endeavour to increase the supply of money. Except there's a problem with the mechanism which the central banks use to get more money into the system. They do that by buying bills and bonds from the public sector in exchange for the central banks' (electronic) cash (i.e. Q.E. or printing money).
Two problems: First, if, due to low rates, there's a liquidity trap, cash and bills are effectively inter-changeable; so printing money by taking bills out of the private sector's hands accomplishes nothing (exchanging an apple for an apple is no exchange at all). Second, even though bonds are not interchangeable with cash (there is a meaningful difference on the rates of return earned by each) (apple for canteloupe?), the bonds are being taken out of the wrong part of the private sector, i.e. the cash is being infused into the wrong part of the private sector. As Rowe says:
Just because one market is satiated with money does not mean that the economy as a whole is satiated with money. In a monetary exchange economy, there are as many different excess demands for money as there are goods (excluding money). If central banks "run out of ammunition" in one market, they can just switch to one of the other N-1 markets. And the market for very short term and very safe and very liquid bonds is a very peculiar market for central banks to be operating in anyway, just because they are so close to money.
Its the financial system that is the beneficiary of this money creation. But so long as the banking system continues to face the same constraints first mentioned (they have too many loans already on their books, and some portion of them are going bad; also, due to declining asset values and net worth and increasing unemployment, there's a decreasing number of creditworthy customers, particularly those who are in the market to increase their debt), there is no profit motive for them to do what the central bank hopes they'll do; sitting on idle cash is better than putting more loans (there are always new loans, but we're referring to net new loans) at risk of negative returns.
So the printing of money, like dropping interest rates, has no impact on either the corporate sector nor on the household sector, at least not until the problems in the financial sector are dealt with. And clearly that requires not just stop-gap measures such as we've seen to date (which do nothing more than stringing this crisis along and kicking the can down the road in the naive hopes that things start to get better soon and take care of themselves) but real measures to clean up the banks' balance sheets so that they are demonstrably and confidently solvent so that they are not just willing but eager to pursue their main line of business, offering loans (and not sitting idly on cash). This is where fiscal policy, as implemented in particular by Geithner and Paulson, has so far failed (and in Europe too and perhaps elsewhere, though Canada does not seem to face this issue).
Even that, however, while necessary, is not sufficient. Even healthy banks won't be willing to lend to an unhealthy private sector. So, given the limitations to monetary policy, both of the conventional and unconventional sort, fiscal policy must take precedence not just in restoring financial system stability (not the current ineffective Japanese way, but something more akin to the Swedish way), but of fully filling the private sector output gap (to stop the deterioration of the labour markets and give businesses a market for their excess goods).
[The preceding applies less to Canada, I think, than it does to many other economies, principally the U.S., but even for Canada it is at least relevant at the margin. Besides which, as exposed as Canada is as a small open economy that is reliant on exports, the normal business cycle dynamics, as opposed to financial crisis problems, are more than sufficient from global economic deterioration to overwhelm any internal positives Canada retains.]
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