Richard Koo on QE2, China and Balance Sheet Recessions

Below, INET’s Rob Johnson interviews Richard Koo, Chief Economist at Nomura and author of the 2009 book "The Holy Grail of Macroeconomics, Revised Edition: Lessons from Japans Great Recession" on how his theory on the Japanese balance sheet recession applies today.

Koo gave a speech at the 2010 INET conference in Oxford last year with a similar theme, which I reviewed in my post "Why The World Is Headed For A Balance Sheet Recession". In this talk he updates his thinking to incorporate events that have transpired since that time, including the Fed’s QE2 program. Koo’s take on quantitative easing is similar to mine in that he views the initial round of easing from 2009 as providing liquidity to the financial system as the shadow banking system shrank. In essence, the Fed temporarily took over the role of the shadow banking system. While the terms on which they provided liquidity were far too easy and helped to make it near impossible to disentangle individual liquidity from solvency issues, they were the lender of last resort, a perfectly legitimate function. QE2, on the other hand, is not a legitimate monetary action. It is a quasi-fiscal activity aimed at propping up the economy. It has led to an increase in risk, speculation and leverage.

Koo also talks at length about China and its role during and after the financial panic. His view is that China was quite successful in economic policy during the panic but has since gone overboard. He worries about a housing bubble there.

The video below has a lot more. It runs about 22 minutes.