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Richard Koo: American Politicians Know Nothing About Balance Sheet Recessions…

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October 24, 2012 – Comments (4)

Agreed

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Richard Koo: American Politicians Know Nothing About Balance Sheet Recessions…
from PRAGMATIC CAPITALISM by Cullen Roche

http://pragcap.com/richard-koo-american-politicians-know-nothing-about-balance-sheet-recessions

In his latest note, Richard Koo of Nomura shreds US politicians for their lack of understanding regarding the current macroeconomic situation. In a few paragraphs he says Krugman, Summers, Obama and the entire Republic party have misunderstood the crisis and its necessary fix.  Of course, Koo is best known for the idea of the Balance Sheet Recession.  Here’s where he say virtually no one has understood the macroeconomic landscape and grades President Obama as a solid D for understanding:

    -- Summers also unable to break out of “yang” mindset

    Like Princeton Professor Paul Krugman, Mr. Summers had high expectations for the Fed’s monetary easing measures. But monetary accommodation has had a limited impact because the US economy is in a balance sheet recession, and the Fed has been unable to spark the kind of recovery they envisioned. That, in turn, led to more disappointments.

    Although both Summers and Krugman have argued strongly for the need for fiscal stimulus, their inability to give up on
    monetary accommodation suggests an inability to break away from the orthodox mindset that private-sector agents always seek to maximize profit.

    All in all, I would rate the Obama administration a 6 (out of 10) on its understanding of balance sheet recessions today, compared with a 2 when Mr. Obama took office in 2009.

    -- Republicans have zero understanding of balance sheet recessions

    That said, the Obama administration has provided as much fiscal stimulus as it could and has kept the US economy out of a deflationary spiral.

    The Romney camp, in contrast, appears to have almost no understanding of balance sheet recessions. The team’s policy prescriptions are based on the orthodox view that smaller government will spur private economic activity.

    Paul Ryan, Mr. Romney’s running mate and a strong believer in fiscal consolidation and small government, is expected to have a large say on economic policy in the event the pair win the election. His statements are closely watched because Mr. Romney’s views seem to change so frequently, making it difficult to determine what he really believes, whereas Mr. Ryan has an extensive congressional record and his statements are consistent.

4 Comments – Post Your Own

#1) On October 24, 2012 at 12:16 PM, amassafortune (29.71) wrote:

If the Fed had targeted 2% deflation instead of inflation, bought troubled MBS assets for 80 cents on the dollar instead of full price, targeted an S&P floor of maybe 1,100 instead of today's malinvestment wealth effect level, supported a mark-to-market rule change that eased into declaring assets at approximate market value instead of the 2008 top-tick fraudulent price, and would begin to raise the discount rate by even 1/10th of 1% to signal savers they will not be forgotten forever, I think we might be able to find the bottom. 

All people need are signals that a true market is returning, no matter what the level it settles at, and they will ease back into it as long as they have a job that covers their higher needs first.

Every round of QE indicates a true market is not yet possible and the U.S. dollar itself becomes less valuable with each easing move.  

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#2) On October 25, 2012 at 8:13 AM, binve (< 20) wrote:

Hey amass,

I hear you that the Fed's intentions with QE are very dubious. QE1 was necessary because it was trying to open up liquidity when the financial markets really were locked up. But QE2, Twist, QE3... is the Fed trying to force/scare investors up the risk curve. However most people still think that QE is inflationary when in fact it is slightly deflationary: see http://marketthoughtsandanalysis.blogspot.com/2011/02/follow-up-qe-is-not-inflationary.html . As Warren Mosler has made the analogy, QE is a crop failure for the dollar when the crop report says it was a bumper crop: http://moslereconomics.com/2011/05/12/qe2-captblogain-your-ship-is-sinking/ . After the misinformation gets disseminated and digested, the real mechanics manifest.

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#3) On October 25, 2012 at 1:46 PM, GNUBEE (24.47) wrote:

Hey E,

For the moment I'm just scratching my head as the Fed's propulsive efficency of future QE seems to be rapidly decreasing.

I just keep looking over my shoulder trying to catch the moments when the stockpile of decreasingly non-propulsive dung begins to unwind.

As always, you make for a good read.

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#4) On October 26, 2012 at 9:42 AM, binve (< 20) wrote:

Hey Gnubee,

I hear you about the Fed and QE timings. Here is an interesting point Cullen Roche made on the subject: http://pragcap.com/ben-its-qe-low-sell-high-not-qe-high-sell-low

Thanks man!

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