8/18/2019 Richard Koo - Balance Sheet Recession

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Richard Koo – approach to crisis

Zero IR

QE

Fiscal stim

Budget def 

Guarantee bank liabilities and capital injections

ost decade

!ore "sc stim# !onetar$ easing for less "sc stim#

 %rial and error – no historical info e&cep great depression

It is di'erent recession

(rd recession – o)erproduction* in)entor$ buildup* in+ationar$ pressure* no

tightening of monetar$ polic$

 ,apan – no ma& pro"ts* but minimising debts

Zero IR – companies pa$ing do-n debts. /h$# Because managers -ere

incompetent# 0o better opportunities# Gi)e back to shareholders and ha)e them

redirect funds

1223 – 45 IR6 corp debt repa$ment continued to 74436 highest net debtrepa$tment -as at 85 G9:6 -h$# Faced a balance sheet problem6 during bubble

period mone$ in)ested into )arious assets6 asset price collapse -ith remaining

liabilities ;<=> hence bankrupt

Bankruptc$ 1? -ith @F ;e&ecs ha)e to use @F to pa$ do-n debt as shareholders

told that shares are -orthless6 bankers ha)e nonAperforming loans* emplo$ees

dont -ant to be left jobless>6 7? -ithout @F ;-hite+ag>6 asset prices ne)er

negati)e – pa$ do-n debts to sta$ )iable – micro le)el

/hen e)er$one pa$s do-n debt same time6 macro le)el – someone sa)es

mone$* someone else has to be spending it to keep econom$ rolling

If someone sa)es A C to "nancial sector6 "nd borro-ers -ho can be producti)e6

spend mone$ against original income6 too man$ borro-ers – raise IR6 too fe- –

reduce IR6 -hen IR at Dero and no borro-ers – companies in a tough position6

mone$ sa)ed is stuck in "nancial sector6 econom$ shrinks based on dead-eight

of sa)ed funds – -hat happened to 1272A126 monetar$ polic$ is useless

here – de+ationar$ spiral6 go)t is po-erless to enforce rules in pri)ate sector6

hence go) is to do opposite – borro-s C144 and spends it