INET Video: Richard Koo on Balance Sheet Recessions
Below is a video of Richard Koo from this past weekend’s INET conference in Bretton Woods giving us his latest thoughts on policy responses to a balance sheet recession. He believes that Europe, the U.S. and China have much to learn from Japan ‘s post-1990 balance sheet recession.
This speech is similar to the themes Koo discussed with INET’s Rob Johnson last month. Koo makes a strong case that we are witnessing a similar environment in Spain, Ireland, the UK and the US to what Japan experienced. The question is how do you deal with this. The choice is between increasing or decreasing aggregate demand – at least over the short-to-medium term. Those in favour of so-called expansionary fiscal contraction, if they are honest like Hugh Hendry and David Stockman, they acknowledge that this leads to a deep recession. And that means larger fiscal deficits over the short-to-medium term. However, they believe the recession is necessary to reduce resource misallocation and to quickly write down debts. Koo believes this is not appropriate because it leads to a debt deflationary spiral and depression. He recommends stimulus to aid recovery as the private sector deleverages.