Wednesday, March 11, 2009
richard koo presentation
this is easily the most lucid explanation of what is afoot globally, and it illustrates the massive if somehwat accidental triumph of japanese fiscal policy in the 1990s as well as the desperate need of massive government deficit spending today to avoid the dire economic consequences of a debt deflation.
around 38 minutes he discusses fat spreads, a topic john hempton hammers on. the trouble koo spots is that demand for funds in a balance sheet recession falls to nothing in spite of zero nominal interest rates. this is also why koo believes that monetary policy -- even quantitative easing -- is useless, as he explains from minute 46 on, as the money multiplier goes negative. per paul krugman, goldman sachs agrees.)
this also highlights what a devastating economic contraction the united states is in for unless a second round of fiscal stimulus hits the books this year -- one which will so cripple tax receipts that deficits will needlessly widen dramatically.
around 45 minutes, he notes a major difference between the united states and elsewhere, particulaly in japan, is the nature of non-recourse loans. if walkaways become prevalent, government involvement will need to be yet deeper to counteract the effect.
at 1:01, he discusses the futility of competitive devaluation as a monetary policy tool used toward mercantile ends.
at 1:04, koo forecasts -- contra my concerns -- that there will be absolutely no funding issue as the amount of funding needed should equal the increased domestic savings held in the banking system as the government is counteracting the paradox of thrift/fallacy of composition. that means no forex crisis, no interest rate rise -- unless monetary policy is pursued to weaken the dollar.
at 1:17:30, koo in response to a question says that, although the dollar will likely weaken to close america's massive current account deficit, the currency is not likely to suffer a collapse in a world full of the same problems. (indeed on many measures, american problems are less than others' -- for example, great britain.)
he also says banks must be instructed not write off losses too quickly; writedowns should be slow and gradual to prevent necessary government capital injections from vaporizing and the credit crunch will not be mitigated and systemic risk will continue to be an issue stalking the markets. this is an explicit endorsement of lifting FAS 157, and maybe the most justifiable one i've heard.
earlier mentions of koo here and here.