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Wheeling @ Weeden

Wheeling @ Weeden

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Published by: zerohedge on Feb 12, 2010
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 Provocative, insightful, groundbreaking, bril-liant...ever since last  February, when I raced through the copy of  
Richard C. Koo’ 
s latest book that a friend had   just given me for my birthday, I’ve beenchomping at the bit tointerview the chief  economist at the
Nomura Research Institute 
. But  Richard works inTokyo, travels inces-santly and some things  just take time. Which,as it happens, is thesame thing, along withloads of sustained,speedy and substantial   fiscal stimulus, that he argues is required for aneconomy to work itself out of a “balance sheet recession” with a minimum of self-inflicted dam-age. Koo’s theory and his prescriptions for what currently ails the world are as fascinating asthey are unconventional. Considering the woeful track record of orthodox economists (across theentire spectrum from liberal to conservative) indiagnosing, much less treating, the body eco-nomic as it has been wracked with credit ills, Koo’s fresh perspectives, grounded in the searing experience of Japan’s Great Recession, demand careful consideration.
You called your book,
“The Holy Grail of Macro Economics, Lessons from Japan’s Great Recession,” 
yet I imagine the firstreaction you hear from a lot of Americans isthat the U.S. isn’t Japan. That the culturesare far too different for this country to learnanything from Japan’s miserable post-bub-ble economic journey.
Right, I can’t tell you how many times I haveexperienced that. But ever since
Martin Wolf
mentioned my book in his column in the
 Financial Times
last January, I’ve found that suddenly the whole world has been paying a lot more attention.
It never hurts to have your book called “bril-liant” by someone who knows his stuff.
A lot of people had read it before Martin Wolf mentioned it, and had told me that they found it extremely useful. Economists like
Laura Tyson.
Reprinted with permission ofwelling
Listening In
 Richard Koo: Speedy, Substantial And  Sustained Fiscal  Stimulus Is Only  Rx For Economies As Private Sectors Shed Leverage
KOO’s “Good News”
 Nomura Economist Says GDP Needn’t Fall In “Balance Sheet Recession” 
Guest Perspectives
William hester
 Recovery Ready?  Joblessness Level  Says Economy Too Anemic To Support  Rebound 
Michael Lewitt
“Cash For Clunkers”  Is Apt Metaphor  For The Economy 
10 Years & Counting 
Acute ObservationsComic Skews
But since Wolf’s piece came out, I’ve been invitedto give presentations to numerous governmentsaround the world, trying to explain what actually happened to Japan and why something similar canhappen in other parts of the world, as well.
Which ones?
The Dutch government was the most anxious tosee me. They said, “Just come over. We’ll pay for everything.” So I made that trip. Spent twofull days with a few ministers and many top-ranking bureaucrats, talking about balancesheet recessions. I have also been invited to theBank of England’s policy round table. I wasinvited by the Central Bank of Kazakhstan, by Poland. I’ve done a presentation for the EnglishFinance Ministry; one to Australia’s Treasury.
The U.S. is conspicu-ous in its absencefrom that list.
 Well, the U.S. govern-ment hasn’t invited meto do anything directly yet. However, I go to Washington once a year because I used to havea very generous doc-toral fellowship fromthe Board of Governorsof the Fed in the early ’80s, and it is my way of paying back that debt.Every year, I give a pre-sentation to the Fed. I must say that for a long time, ever since I started talking about this con-cept of a balance sheet recession, I was bashedand bashed and bashed, every time I’d give a seminar at the Fed. Only in the last three yearsor so have they begun saying, maybe you areright that this kind of thing can actually hap-pen. But many Fed staffers now are aware of margument and what has to be done to deal with balance sheet recessions. Meanwhile, the CSIS,the
Center for Strategic International Studies
, which is really more of a national security,rather than an economic, think tank, has alsoinvited me to present at two big events it hassponsored in Washington. The most recent, last  year, exposed a lot of Congressional staffers tomy ideas. So, at least some people in the capitalare aware of what I have been saying. What’smore, I’ve recently seen a major change in tonefrom
Larry Summers
, the director of the WhiteHouse National Economic Council. Eventhough he endorsed my book which argues that once you have a balance sheet recession youhave to have fiscal stimulus centered on govern-ment spending for the
duration of theperiod in which the private sector is minimizing debt, Larry actually was promoting, until not too long ago, the idea of the “three T’s.” Saying that fiscal stimulus had to be “targeted, timely and
.” That last part of his argument,“temporary,” is extremely dangerous in thistype of recession.
Why do you say that?
Because until the private sector is finishedrepairing its balance sheets, if the government tries to cut its spending, we’re going to fall intothe same trap President 
Franklin Roosevelt
fell intoin 1937, and that Prime Minister
fell into in 1997, exactly 70 years later.The economy will collapse again and the secondcollapse is usually far worse than the first col-lapse. And the reason is that, after the first col-lapse, people tend to blame themselves. They say,“I shouldn’t have played the bubble. I shouldn’t have borrowed money to invest —to speculate —in these things. But a second collapse affectseveryone, not just the bubble speculators, and it also suggests to the public that all the efforts tofight the downturn up to that point —all themonetary easing, the low interest rates, quanti-tative easing —they all failed and even fiscal pol-icy failed. Once that kind of mind set sets in, it  becomes 10 times more difficult to get the econ-omy going again. So the fact that Larry wastalking about “temporary” fiscal stimulus hadme very, very worried. That whole Larry Summers idea that one big injection of fiscalstimulus will get the U.S. out of the recessionand everything will be fine thereafter probably led to
President Obama
saying he’s going to cut his budget deficit in half in four years.
Reprinted with permission ofwelling
Kathryn M. Welling
Editor and Publisher
 Published exclusively   for clients of  Weeden&Co.LP 
Lance Lonergan
National Sales Manager(800) 843-9333 or(203) 861-7670lance@weedenco.com
Thomas Orr
Director of Research(800) 843-9333tom_orr@weedenco.com
Noreen Cadigan
Director of Research Sales(203) 861-7644ncadigan@weedenco.com
Jean M. Galvin
Business Manager/Webmaster(203) 861-9814 jean_galvin@weedenco.com
Karin-Marie Fitzpatrick
Editorial Assistant fitz@weedenco.com
Subscriptions:Pat Quill
(203) 861-9317pquill@weedenco.com
Deirdre Sheehan
(203) 861-7636dsheehan
Published biweekly on Friday mornings, by 
,a research division of  Weeden & Co. LP.145 Mason Street Greenwich, CT 06830.Telephone: (203 ) 861-9814Fax: (203) 618-1752
Copyright Warning and Notice:
It is a violation of federal copyright law to repro-duce all or part of this publica-tion or its contents by any means. The Copyright Act imposes liability of up to $150,000 per issue forsuch infringement.
does not license or authorizeredistribution in any form by clients or anyone else.However, clients may print onepersonal copy and limitedreprint/republication permis-sion may be made availableupon specific request.Copyright 2009, K.M. Welling.
 All rights reserved.
Too optimistic,you’re saying?
My view is that, if thisis a full-fledged bal-ance sheet recessionand we see U.S. house-holds increasing sav-ings rates and delever-aging happening allover the economy, it  will be very difficult toconvince people tochange that behaviorquickly. Because witheverybody doing it allat the same time, theeconomy will be weak,asset prices will be weak and that just pushes the goal of repairing private sec-tor balance sheets evenfurther away. Once theU.S. has fallen into thistype of recession, it  will be in there for a  while —and fiscal stimulus will be needed forthe whole period, if you want to keep GDP fromfalling.
Let’s back up for just a second here andexplain what you mean by a “balancesheet recession.” What made the GreatDepression and Japan’s Great Recessiondifferent, in your view, than the gardenvariety cyclical recession?
The key difference is that in the typical cyclicalrecession, private sector balance sheets are
 badly affected and people, at the most funda-mental level, are still forward-looking. So, when you bring interest rates down and peopleare still trying to maximize profits, there will besome response to those lower interest rates.People borrow money, they purchase something and the economy starts moving forward.
But, in a balance sheet recession?
In these cases, after an asset pricing shock,after a bubble bursts, the private sector’s bal-ance sheets are under water. When that hap-pens, the first priority of people in the privatesector becomes
to minimize debts
instead of tomaximize profits and if there are enough under- water balance sheets around, even if you bring interest rates down to zero, still nothing hap-pens. People with balance sheets under water will not be increasing their borrowings andthere won’t be too many willing lenders to thoseguys, either. So the effectiveness of monetary policy goes out the window, exactly as hap-pened during the Great Depression in the U.S.and in Japan during the 1990s —and as is hap-pening in the U.S. this time around. It’s a caseof actions that are perfectly rational on themicro level turning disastrous when engaged inat the same time by an entire economy.
So there’s a fallacy of composition at work?
Exactly. But the government cannot tell people
to repair their balance sheets, right? Theprivate sector
repair its balance sheets before outsiders find out how bad its financialhealth actually is. In order to retain credit rat-ings and so forth, the private sector has nochoice. It 
to repair its balance sheets by paying down debt. My argument is that, if thegovernment did nothing to counter this situation,the economy would shrink very, very rapidly.Debt repayment and the savings of the privatesector would end up stuck in the banking system because there would be no borrowers even at verlow interest rates. So the economy will be losing demand equivalent to household savings pluscorporate debt repayment each year. That ishow I think the U.S. got into the Great Depression in the 1930s. But the ray of hopehere is that 
if the government comes in and bor-rows the money which now is just sitting in the
Reprinted with permission ofwelling
To subscribe to
or to hear aboutthe otherresearch productsWeeden offers, pleasecontact:Pat Quill(203) 861-9317pquill@weedenco.comDeirdre Sheehan(203) 861-7636dsheehan

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