Richard Koo on the balance sheet recession

In one of our frequent deviations from announced intention, we are pushing the Friday forecast back to Friday and today we are devoting the podcast to the presentation by Richard Koo at the INET conference in April.

Koo is chief economist at Nomura Securities, an advisor to the Japanese government, but notably was at a key desk at the Fed during the Latin American debt crisis of 1982, a fact which plays a part in his presentation.

This runs a little longer than a typical podcast, but Koo's talk raises many of the issues and perspectives we have featured here on Demand Side, filling in from a different angle. Koo suggests that the balance sheet recession is the missing element of the Keynesian revolution. We may not go so far, but it certainly brings things into clear focus.

Among the highlights, in monetary policy terms, we have tried everything and nothing has worked. Interest rates are at zero with little effect. Though he does not use the term, Koo very clearly illustrates the effect of rising savings on the multiplier. That is, as the consumption function falls, the economy sinks. We appreciate his note that when the Japanese ignored the IMF and OECD and their insistence on shrinking government deficits, they did better.

Before we start, there is one point we particularly agree with and one point on which we have some dispute. Perhaps unkindly, we dispute Koo's description of the leadership of Paul Volcker in the early 1980s, which he praises in the highest terms. While Volcker may have allowed the economy to escape the Latin American debt crisis by employing every legal, illegal and paralegal tool at hand, we should not lose sight of the fact that it was Volcker's monetarist experiment with the American economy which sent interest rates into the high teens and precipitated the crisis in the first place.

We particularly agree with Koo's assessment that the $8.9 trillion in benefits the Fed has provided the financial sector has only stopped the panic, it has not solved the recession. And dealing with the huge debt going forward will be the tough part.

Here is Richard Koo, speaking at the kick-off conference of the Institute for New Economic Thinking, Kings College Cambridge.

KOO

Richard Koo

very instructive. The video is embedded on the blog.

And a note. Because of bandwidth limitations, we take down our podcasts on one of the sites quite quickly. Sorry. If you missed any, check out the other site, demandside one word. As far as I am aware, both load with similar efficiency, though the British site is preferred by many.