Richard Koo

[oddlots]

What do we think of Richard Koo, creator of the "Balance Sheet Recession" analysis? The following quote seems clear enough for me to understand. Since a roughly Austrian analysis is what's favoured around here, and this could be reduced to "don't get into these problems in the first place," and this analysis isn't terribly helpful once, you know, you've "got into these problems," it seems to me we're in the market for a solution. Is Richard Koo's "solution" the base case?

If so, the austerity talk in Europe is a very bad omen, no? But what would Koo say to holders of European bonds and bank stocks. How does Koo's logic stop a run?

From Kedrosky:

[Quantitative easing is] useless until private sector deleveraging is over. When private sector is deleveraging, money multiplier is negative at margin. No monetary stimulus will work in such an environment where people are trying to reduce debt, even with zero interest rates, in order to repair their damaged balance sheets.

Until people realize that they have contracted a completely different disease called balance sheet recession where the private sector is minimizing debt instead of maximizing profits, a constructive policy dialogue is not likely to be possible. Once the exact nature of the disease is understood, the remedy (sufficient and sustained fiscal stimulus until private sector balance sheets are repaired) will become obvious to everyone.

[c1ue]

Re: Richard Koo

I believe Richard Koo is completely right as to what is happening in the short term.

But I think his prescription isn't - or at least is more of a variant of can kicking.

While IMF-style austerity measures have not been historically successful - the choices aren't limited to IMF-style austerity and QE/money printing.

The real world does allow such nuanced possibilities as austerity in programs which do not contribute either to present or future economic growth - defense in particular, many subsidies - while spending money on areas such as productive infrastructure, R & D, and industrial development.

The problem, of course, is that government bureaucrats have in general exhibited pathetically poor capabilities of executing on such a plan: ranging from bridges to nowhere, to TBTF bank bailouts, to GM bailouts, and onwards to ridiculous wind energy and 'energy conservation' window subsidies.

Of course this pathetic track record is as much due to corruption and the revolving door as anything else.