All sorts of people have jumped on the bandwagon of declaring our present downturn a “balance sheet recession”, following Richard Koo’s analysis of Japan’s now decades-long economics doldrums, although whereas in Japan’s case it was corporate balance sheets that were in trouble here in the States it’s household balance sheets.
That may well be true. Arguendo, let’s assume it is true. What is the proper policy for dealing with a household balance sheet recession?
Pointing to Japan’s model doesn’t help much. Japan has tried fiscal stimulus and quantitative easing to an alarming level and their economic doldrums continue.
Propping up insolvent banks and companies whose business models have passed their sell-by date may be a Good Thing and may even be necessary but that doesn’t necessarily do anything to rejuvenate household balance sheets.
Increasing employment is unquestionably a Good Thing but it, too, doesn’t necessarily do much to resolve ailing household balance sheets. Indeed, it seems to me that a focus on employment (not to mention insolvent banks and moribund companies) is dealing more with the effects than with the cause.
Follow-up question. One of my operational beliefs is that you can tell more about a person’s, a group’s, or an institution’s intentions by what they do than by what they tell you that their intentions are. Everybody wants to be thought well of. Judging solely by the actions of the Federal Reserve and the Obama Administration what are their intentions?
Judged by actions, I think they are trying to buy time.
Steve
If it were a normal, ordinary cyclic downturn, just letting time go by is probably as good a strategy as any. That’s what George H. W. Bush argued. It didn’t work out too well for him.
Time will pass regardless of what we do and a cyclic downturn will inevitably transmogrify into a cyclic upturn in the fullness of time. That doesn’t explain the Bush and Obama Administrations’ strenuous efforts at trying to re-inflate the bubble, propping up the banks, or trying to resuscitate GM.
If they really, truly felt that the banking system itself was in jeopardy, why didn’t they demand, say, actual reforms from the banks? It’s like Weekend at Bernie’s. They’ve just put shades on them and are propping them up in chairs with drinks in their hands.
Heck, they demanded more from freaking GM than they did from the big banks. I note in passing that the choice to prop up big banks and close small ones has resulted in more consolidation of the financial services sector. That’s a formula for disaster.
I note in passing that the choice to prop up big banks and close small ones has resulted in more consolidation of the financial services sector. That’s a formula for disaster.
That’s not a bug, that’s a feature. At least for those running the show.