Richard Koo explains balance sheet recessions

Economist Richard Koo is well known for his concept of  a ‘balance sheet recession’. In this short video he explains how the recent Great Recession, the Great Depression of the 1930s, and Japan’s economic stagnation since the 1990s are all examples of this, and what can be done about it.

A number of somewhat iconoclastic economists have explored the nature and consequences of asset-price bubbles, fueled by the accumulation of private sector debt, and their subsequent collapse, followed by private sector deleveraging (paying down debt). They include Koo, Michael Pettis, Steve Keen and Michael Hudson, the latter three being influenced by the late Hyman Minsky and his Financial Instability Hypothesis. The four of them proffer somewhat different solutions to the long stagnation that can follow the collapse of a debt-fueled asset-price bubble, which we are arguably still living through.

Koo favours a fiscal stimulus in which government spending exceeds revenue at a rate sufficient to prevent the economy collapsing as a large number of firms use their cash flow to pay down debt, rather than invest. This is what has been done intermittently in Japan. Koo argues that without the stimulus the Japanese economy would have experienced its own Great Depression, rather than simply years of stagnation.

Keen and Hudson favour a Modern Debt Jubilee in which much private debt is simply forgiven and wiped out, allowing households and firms to raise their spending on consumption and investment and drive economic recovery.

Pettis focuses his analysis on the current account imbalances across the global economy which in his view caused the build-up of debt. The unwinding of these imbalances is required to secure a more sustainable global recovery.

There is something to be said for the ideas of all of the above. I am keen to compare them and integrate the most important aspects, as their thinking overlaps to a significant extent. That will be the subject of a future post! In the meantime, I can definitely recommend watching the video as an introduction to Koo’s thinking.

Can we avoid another financial crisis? Steve Keen’s latest book

Professor Steve Keen is an economist working in the post-Keynesian tradition at Kingston University here in the UK. He is well-known as a critic of mainstream economics (see his excellent and wide-ranging book Debunking Economics) and its failure to predict or satisfactorily explain the Great Financial Crisis (GFC) and recession, which he did some years before it occurred. His latest book is Can we avoid another financial crisis?a 130-page polemic aimed at the intelligent layman.

Keen’s central thesis is that mainstream economics failed because it ignores the role of private debt creation by the financial system, known in the jargon as ‘endogenous money’. This grew unsustainably in many countries in the decades prior to the crisis and drove a boom in the real economy and, even moreso, in asset prices (stock markets and housing). Credit expansion in economies such as the US and UK started growing consistently more rapidly than GDP in the 1980s, following the deregulation of the financial sector. Although it was subject to cycles, the trend in private debt as a share of GDP was upward. When its growth slowed or even went into reverse, the result was a severe recession and the aftermath is still with us both economically and politically. Continue reading

Michael Pettis on the global economic outlook, negative interest rates and Charles Dickens

A short interview with Michael Pettis, an economist I greatly admire for his insights on the evolution of the world economy, economic history and especially China. He predicted that the Chinese economy, having boomed for most of the 30 years since Deng began reform in the late 1970s, would slow dramatically, and may even experience a ‘lost decade’ of slow growth due to its structural imbalances: excessive and poorly allocated investment, and now increasing financial fragility due to rising private sector debt. His work covers a broad range of issues, while his blog is mainly on China, and can be found here.

Keynes on bankers

800px-A1_Houston_Office_Oil_Traders_on_Monday“A ‘sound’ banker, alas! is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.”

John Maynard Keynes (1932), Vanity Fair, January (taken from The Essential Keynes, edited by Robert Skidelsky, p. 516)

UK debt reduction: how can ‘Spreadsheet Phil’ do it?

Money-poundsLast week the UK government’s new Chancellor of the Exchequer, Phillip Hammond, known to some as ‘spreadsheet Phil’, gave his first Autumn Statement to parliament. This outlines the state of the UK economy and the government’s finances, and announces new policies on government tax and spending.

The forecasts of the Office for Budget Responsibility for the UK economy’s likely trajectory over the next few years were somewhat gloomy, and laid much of the blame for this at the door of the decision to leave the EU, or Brexit. Growth will be slower, investment weaker, and public borrowing and debt higher than otherwise.

I will avoid reiterating details regarding the Autumn Statement that were covered in last week’s press, and instead focus on the potential for debt reduction and overall economic performance over the next few years, which the government is trying to manage and improve upon: the Prime Minister wants an economy that ‘works for all’. Fine aspirations indeed. Continue reading

Crash course on Hyman Minsky, who saw the financial crisis coming

A short interview with Professor L. Randall Wray, scholar at the Levy Institute, on the work of economist Hyman Minsky. Minsky’s work on financial fragility has become well-known since the financial crisis which began in 2007. He argued that ‘stability is destabilizing’: a stable economy and financial system will tend over time to lead investors to take on increasing levels of risk, which will eventually lead to a crisis. In the absence of ‘Big Government’ (fiscal policy) and a ‘Big Bank’ (the central bank), a depression is likely.

Wray has written a very readable book on the work of Minsky, Why Minsky Matters, which I reviewed for the Rethinking Economics project. Unfortunately they seem to have revamped their website and the review is nowhere to be found! I will post it on this blog tomorrow for those who are interested.

Fighting neoliberalism

“Absent a great rebalancing [away from neoliberalism], shared prosperity will become a relic of the past and the Great Recession will likely evolve into the Great Stagnation. If that happens, it is easy to imagine a Weimar-style political scenario in which prolonged mass unemployment and economic hardship release the genie of intolerance and hate.

For these reasons a great rebalancing is essential and urgent, but escaping the pull of neoliberalism will not be easy. There exist major political obstacles associated with vested interests and the capture of political parties. Orthodox economists dominate thinking about economics and economic policy, and market fundamentalism has a deep hold on the public’s imagination. In part, this hold is because of its rhetoric about freedom and individualism, which resonates especially strongly with US cultural images and values. But it is also because extremes are attractive, offering simple but false certainties.

In contrast, economic perspectives that recognize the need for balance also require judgement, and the exercise of judgement is difficult and challenging, being the ultimate expression of individual responsibility. Ironically, neoliberalism, which touts individualism, avoids that responsibility by its embrace of the extreme. That makes it both dangerous and difficult to dislodge, but, to borrow from Mrs Thatcher, if we want shared prosperity, there is no alternative.”

Thomas Palley (words from his 2012 book From Financial Crisis to Stagnation: The Destruction of Shared Prosperity and the Role of Economics)