Kenneth Rogoff gives a different prescription for dealing with balance sheet recessions:
Many commentators have argued that fiscal stimulus has largely failed not because it was misguided, but because it was not large enough to fight a “Great Recession.” But, in a “Great Contraction,” problem number one is too much debt. If governments that retain strong credit ratings are to spend scarce resources effectively, the most effective approach is to catalyze debt workouts and reductions.
For example, governments could facilitate the write-down of mortgages in exchange for a share of any future home-price appreciation. An analogous approach can be done for countries. For example, rich countries’ voters in Europe could perhaps be persuaded to engage in a much larger bailout for Greece (one that is actually big enough to work), in exchange for higher payments in ten to fifteen years if Greek growth outperforms.
As I see it our key problem is that we’re mollycoddling the banks, just as the Japanese did. The big banks are insolvent. They were insolvent in 2008. They’re still insolvent. Propping them up just prolongs the agony.
I’m still trying to figure out what to do about a balance sheet recession. One of the ways I thought I’d approach it was by considering previous successful strategies other countries have used in dealing with their own balance sheet recessions. The only other example I could find was Japan (the country for which the term was coined) and 20 years later Japan is still going through its recession. Real GDP growth has never returned to the levels it experienced prior to 1992 and GDP growth in 1991, the last year of growth over 3%, was substantially lower than the average GDP growth over the preceding decade. I’m not finding this encouraging.