The One "Must Read" Inteview With Nomura's Richard Koo

Tyler Durden's picture

One of the most insightful interviews with Nomura's Richard Koo. Controversial, with a penchant for government spending, reception to Koo's ideas will be polarized with statements such as this:

You’re walking into a political hornets’ nest in this country. The GOP would love nothing better than to paint the Obama team as profligate spenders destroying our children’s future with deficit spending.

"Yes, that is going to be an enormous political challenge and I don’t underestimate the danger or the difficulties involved because I went through the same process in Japan for a full 15 years; trying to explain to people that if you don’t do it, the situation will be far worse. And the more successful you are in preventing the crisis, the less appreciative the people will be of your efforts. As a general in Japan’s selfdefense force taught me, if you continually prevent crises, you will never become a hero. Look what just happened to the LDP. I think that’s true in the U.S. as well. Obama’s $787 billion rescue package seems to be working; the economy seems to be recovering. The temptation for the blue dog Democrats and for the Republicans to cut the budget deficit, now that the stimulus seems to be doing its job, will be tremendous. It will be very difficult for a Larry Summers or a Tim Geithner to come out and say, “No, we cannot cut the budget deficit now because the private sector is paying down debt.”

Yet regardless whether one agrees or disagrees with Koo's work, his ideas, unlike those of that other Nobel prize winning profilgate spending advocate, merit consideration. Koo realizes the only fundamental necessity of a flawed Keynesian system: if it is broken, there is no way to fix it without reseting the system. The best one can hope for is to throttle it to where yet another episode of proximity between the broken economy and reality is pushed further back into the future.

Full interview


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Internet Tough Guy's picture

He learned nothing from Japan, and wants to do the same here. 20 years and still the light didn't come on. He's hopeless.

Daedal's picture

And the more successful you are in preventing the crisis, the less appreciative the people will be of your efforts.



Who gets adulation when there's no terrorist attack? If Bernanke prevented the bubble, would people write about the bubble that he prevented, or would it be business as usual? How about a Nobel Peace prize for the inventor of the airbag and anti-lock brakes. I hear all the time about the alleged 'jobs saved', but no mention the expense of the jobs lost as a result of those same measures. If our dreams of Cramer being kicked off the air come true, will our chronic aggrevation go away, or will he simply be replaced with Kevin Kneale?

Like a Bikini, what we see is very suggestive, but what is concealed is crucial.

WaterWings's picture

The juicy stuff is always out of view from the kids.

Anonymous's picture

That is what exactly happened to me.

I work as a Software Engineer in telecom firm.

I write software that is mostly Bug free and have no problems.
Also any new comer can come and easily understand it because
I like to keep things to be simple. Because of this precise reason there was no need for the firm for anyone to work in this area and I was moved to another area, even though I did not want to.

Whereas I have seen people who write bad software create Bugs and they are always indispensable because no one can understand their thought process from the code.

IKEA Is Swedish's picture

Weekend crapper reading. Merci!

Anonymous's picture

Well according to Leo Kavaslavapalavalapis, the U.S. will soon become a job creating dynamo! This will solve all our woes. God Bless America!!!

pooplagrande's picture

Do big banks ever come out with anything meaningful or trustworthy?

Anonymous's picture

"that is going to be an enormous political challenge ...trying to explain to people that if you don’t do it, the situation will be far worse."

Ah, therein lies the rub. Trying to explain to people that their lifesavings, the engine that drove all their work and plans and sweat and dreams, must be rendered worthless in order to stem the destruction wrought by those who over borrowed and over lent. Explaining to people that being frugal, despite what their parents may have taught, is not only not the best policy, it's downright stupid. Teaching them to stiff their creditors as a matter of everyday policy, to live beyond their means, to gouge their neighbors and their fellow citizen taxpayers at every opportunity.

It's all quite a challenge, but our leaders seem up to the task and anyone who expects to live more than about 10 years will get a full sampling of the results of their success. I hope Mr. Koo does too.

Anonymous's picture

You're blaming Dr. Koo for mortgage broker mass-dishonesty, for Goldman-Sachs collusion/fraud with AIG London, for everything Hank Paulson and Larry Summers perpetrate ??? How is that ?

Anonymous's picture

I blame Koo for espousing the same philosophy that caused or enabled the problems we face today; easy money, fiscal profligacy, government interference with resultant moral hazard. His solution is more of the same and it's not a solution at all. It's a recipe for a high speed train wreck but he doesn't care as long as the oncoming train is just around the next bend.

Jim in MN's picture

What I find distasteful and perhaps suspicious in this is the complete absence of a big picture view on why the insane leveraging and bubbles occurred in the first place.  It seems like a prescription to painfully heal the wounds for 30 years....then do it again.

What the fuck good is that?

Interest rate policy, this is the nitroglycerin in the system.  Central banks should not be allowed to create these disasters by lowering rates in arbitrary fits of meglomania.  If that is what they predictably do they should be terminated as institutions.

So far, it is what they predictably do.  Koo has nothing to say about this.  Perhaps his intimate relations with the Fed have something to do with it.


Anonymous's picture

WTF good is that? It is a continuous transfer of wealth from the many to the few.

Absolutely, Koo's Fed relation puts a certain gloss on prescriptions for "our" economy. He certainly thought the Latin American loan crisis was no biggie, whereas I bet many workers and businesses down there smaller than Enron would not agree.

I do agree on his point, though, that small businesses are not facing a lending crisis. I don't need a loan. I need customers. The same government that offers stimulus packages, doesn't want to restore the customer's balance sheet, saying derisively, "they'd just save it." What if they do? Wouldn't that mean they put themselves into position to be active in the economy again sooner?

And what of those who didn't buy a house, didn't take out credit, but saved? As the crisis becomes a way of life so that no bank, pension fund or hedge takes a hit, the saver is stuck in a confiscation scheme and is unable to play the traditional role in recovery.

I've thought since December of 2007, when the downturn began for me, that the best thing government could have done is really cut payroll taxes, permanently. Sure, some of the money would have been saved and paid off debt. But whatever got spent would have done so with an efficiency all the federal stimulus plans could only dream of.

During the 80s the Fed made the mistake of tightening too soon, and while that is a real problem, the government still needs to, at the same time, address spending programs that are growing to the moon. I'd say, identify a series of non-productive expenditures, i.e., one of the 800 military bases around the world or an extra war, and use that to offset the tax cuts.

Anonymous's picture

Dr. Koo does macroeconomics -- addressing the savings-investment-job_creation cycle. His analysis starts at the points where the bubbles burst.

However, he does comment on the proximate causes for each of the bubbles 1929, 1992, 2008.

Read the revised version of his "Holy Grail" book. I've had to re-read about 1,000 pages of other economists work to get clear what-all he is saying.

BTW: the one factor he does miss is the element of "fear" or "panic" that attends bubble bursts. Paying off debt is one part of it -- but fear of failure also inhibits new investment, as otherwise we would see new businesses forming apace to meet production and new innovation needs.

Japan had a wonderful economy in 1992. Didn't save them from the balance sheet strangulation.

Miles Kendig's picture

Richard Koo's analysis hinges upon one crucial detail.  Namely that it is far better to inflict the pain of reality upon the future than to feel it now since pain now hurts now.  In this instance, serious pain.  The simple fact is that the longer the policies of pain avoidance are pursued the worse that eventual pain suffered by all will be.  In his rush to alleviate pain Koo suggests causing more.  After all, which situation would have served the long term interests of Japan best, a rapid deflation of debts and assets with the convalescence that goes with it or the purgatory that has been for more than two decades with Japan now saddled with an insurmountable debt load with no hope of either true stability or convalescence?  The answer of course can be found by looking at what a serious debt & asset deflation in Japan would have meant to others.  Now, as 10 or 20 years ago the folks who hold the purse strings will sacrifice anything to keep from hurting themselves.  In this Koo's thesis rests upon the notion that it is better to keep his fellow citizens in a never ending bondage to satisfy those who trade national & regional stability for fun & profit.    

Anonymous's picture

Agreed. Sadly the US is largely a nation of whimps and has zero tolerance for real pain or sacrifice or dealing with reality (marking assets to real market prices). We could not even contemplate delayed gratification the past 20+ years. We had to consume much more than our income (forget savings).

Accordingly, we elect those to office who are all too happy to push pain into the future as best they can. Eventually it all catches up and the box they have put us in with government debt has no real way to get out. Which is why they like printing money -- the least politically painful way to pretend and extend.

Miles Kendig's picture

And the associated decision tree continues to live a full and complete life cycle complete with its intellectual underpinnings as so aptly demonstrated by this article from Richard Koo.

suteibu's picture

It's an additude of global CYA.  It seems he and others who influence policy want to be thanked for making things "not as bad" while each  succeeding generation bears more of a burden.  Untimately someone has to take the fall, at which point guy like Koo will say, "Hey, we held it up.  You guys are the ones who let it fall."  Meanwhile, it is doubtful that these folks, or their families, will feel much of a bump.  If they are going to rape us, they should at least have the decency not to ask us to thank them for it.

Miles Kendig's picture

For those who choose to live by the motto that it is better to demand respect rather than command it decency, or even a rudimentary sense of propriety has nothing to do with the matter.  What is clear for all to see is that after being brutally sexually assaulted our financial & political leaders their considered action is to turn to us and say; "You're a lousy lay" while many just wonder where the $300.00 dollars that was in their wallets went....

suteibu's picture

And the lure of the current political environment ensures that changing the faces of those in power is merely an exercise in futility.  Only when we change the nature of these "servants of the people" to actually serve the people rather than themselves will anything change.  But any chance of that is lost.  We've come to far, the corruption is too firmly established. 

Daedal's picture

I recall an interesting psychological study on human behavior and IQ conducted on kids. The child would be placed in a room and in front of him would be a plate with a marshmellow. The child is then told that he can eat it now, or wait, and receive 2 peices instead. Those that waited, instead of instantly gratifying themselves were found to have a higher IQ.

I must, however, point out another interpretation. First, what if the child didn't want 2 peices? Cross-applied, what if all administrations want to extend and pretend now and reap the rewards, and have the problems fall on someone else. From that perspective, the solution is wrong (for us), but understandable why it is made (politically safer, or so it is thought).

Also, what if the cost of waiting an unknown amount of time for the second peice cost more in emotions than the reward a subsequent marshmellow has to offer? And I think this reasoning gives way to why extend and pretend is a solution. Taking the pain now will make people think of you as causing the problem, and providing the solution. (Misdiagnosing symptoms as causes). People deal with problems better than when they 'have no other choice'. If they can avoid dealing with problems, they likely will. I'll go on a diet after this donut.

suteibu's picture

In our case, the administrators urged us to save it for later and then ate all of the marshmallows on the plates and the rest of them in the bag.  Now, they just don't have the balls to admit all the marshmallows are gone and what happened to them.

sgt_doom's picture we end up with a lot of high-IQ fat kids who die early due to morbid obesity?

Not sure about whoever designs these tests.

Solution in USA:  take back all those stolen billions from those debt-financed billionaires and millionaires who caused these problems by creating and selling this snake oil (CDS, CDO, CBO, CLO, .....).


Miles Kendig's picture

Doom, those billions are simply expressions of nothing. The tangibles are a different matter entirely.

Anonymous's picture

Go grab a ticket on EL AL Airlines. You should be able to find 95% of the stolen booty in a week's time.

Miles Kendig's picture

I didn't know El Al flew to Aspen. remember, fool, the quest for money knows no bounds.

Thisson's picture

Agreed - this is akin to the patient saying: "Don't amputate my gangrenous toe now!  It will hurt too much!" and not realizing that it will hurt more later when the infection spreads and it becomes necessary to amputate the entire leg.

Miles Kendig's picture

Sadly, it appears as though we all have a potentially fatal case of blood poisoning.  We can all chase the dragon if we want too, but I would challenge anyone who thinks we should to please look at what that pastime did for China.

Anonymous's picture

If I was an airplane captain and my choice was throwing the passengers out the door in an effort to stay in the air a little longer vs. crashing into the sea, I would agree with Koo's analysis, but I'm not and I wouldn't. Better to beach this bitch, find a squirrel for dinner and get on with rebuilding.

Assetman's picture

It's interesting that this article is over 4 months old...

That being said, turning on the government spigots for the whole duration of a balance sheet recession has its own unintended consequences.  For the U.S., you're looking at even more ridiculous deficit spedning than has already occured and you risk sovereign debt issues.  In addition, the big hidden assumtption is that the government speding over that period of time will be efficient.  It seldom is... and usually does more harm than good.

Japan entered its balance sheet recession in an environment where individal saving rates were high, global trade was off the charts (helping Japan's export economy trendously, with the weak yen and all)-- and financing costs were extremely low.  The U.S. doesn't have all of those tailwinds.   One thing we do have is the ability to print money... until we don't. 

It makes one wonder how Mr. Koo would handle Greece...

My other impression is that Richard Koo is an attention whore.  But that's just me.

MachoMan's picture


The glaring omission of Mr. Koo is to address the aggregate levels of sovereign debt generated by stimulus efforts.  This is the achilles heel of keynesians.  He's absolutely right that, to a certain extent, with an injection of enough fiat, you can shock paddle the patient back to life.  However, like all Konvenient Keynesians, he conveniently forgets the whole "run surpluses during good times to use as fresh powder during the bad" part of the equation and, instead, hops balls deep onto full throttle printing.

I think most of us would agree with the vast majority of the article and his observations.  However, he's failed to reconcile these with the sheer magnitude of the outstanding debt.  Further, in a paragraph he dismisses the entire concept of austrian theory and taking our medicine because the great depression ensued (while admitting much of the data of the era is not available/was not recorded as is currently done).  Unfortunately, this dismissal rests upon the presumption that there was a viable alternative.

The whole thing seems to boil down to, "we didn't really get to try this shit at the right time during the depression, so let her rip and cross your fingers."  I have significant apprehension about anyone who can talk about the conclusion of his proposed measures with any conviction when he, admittedly, doesn't have all the same information about the era as is available for today's transgressions and, admittedly, his approach was not tried and, therefore, no perfectly representative model exists, but yet has been tried with a current economy to no avail.

sgt_doom's picture

I would think that the glaring omissions are the stimulus efforts benefitting China more than the US (with so many of those funds, and jobs, going there), and that the primary causes for both the debt and deficit spending stem from all those trillions of $$ in Treasuries (created at the Treasury) which Bernanke has traded for those toxic assets (i.e., worthless credit derivatives) and all that war spending --- say, whatever happened to that Osama bin Laden character, anyway?

Anonymous's picture

I was looking for the question all through the interview - What would happen when Japanese rates start to rise, as the demographics would suggest.

The judgment day is not too far away for Japan though.

Anonymous's picture

No clue whatsoever.

Austrian Economists like Ludwig von Mises or Friedrich von Hayek would wipe the floor with this Keynesian.

Anonymous's picture

Wasn't this a Barron's article from months ago?

Sure, if your goal is to have an economy like Japan's, massive deflation, and a stock market that is 67% lower than where it was in the late 80's, then by all means, do what the Japanese monetary authorities have done.

That'll be about Dow 4,750, in about 2020. Seems about right.

Anonymous's picture

"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."

- Ludwig von Mises

WaterWings's picture

To all Keynesians:


Anonymous's picture

This doesn't make sense for me....he fails to answer two key questions adequately:

1) Why did Japan never get a self-sustaining recovery after balance sheets were repaired
2) What do you do with an overleveraged sovereign with a bad balance sheet. When they hike taxes how will that hamper growth. Should you just QE away the debt?

I will stay in the liquidationists camp, that the only way to a sustainable recovery is the most pain today, insolvent companies disappear and new companies are born with fresh balance sheets. Debts are repudiated and those who lent them money lose. Yes it will be painful, but at some point new companies and consumers will emerge with fresh balance sheets.

Anonymous's picture

After reading this piece of uber-post-keynesianism I'll sum it up for everyone via metaphor:

Currently, the way we deal with our heroin and crack addict(U.S. economy) is give him just enough dope to get "healthy"(1933-1936) but unfortunately that wears off(1937) so what we really need to do is keep shooting him up(public debt) until he has enough time to kick his addiction to the crack(private debt). Once he gets off the crack we then worry about getting him off the heroine. And the addiction specialists - because they are omniscient and listen to an economist who made his living working for the fed and a multi-national bank - will know just the right doses, and the right times, to administer, then remove, all this dope.

And all this will happen without the patient ODing or relapsing...

Anonymous's picture

The real truth is that regardless of economic type.....prices will rise and fall....

Price margin distribution is never even to all participants....

the real qustion is to how to adapt an economic distribution process whereby the free market can live....and move forward with innovation....

An adoption of a simple consumption tax system that is not allowed to exceed what the revenues other words debt allowed of any kind....

The open and free market needs to have the best distribution system which is soley supported by fact based public information,,,,and very efficient transfer costs....
Within this cost scheme there can be no government govt. simply an add on cost....

People should pay tax based on what they consume....There is no fairer case than this....

Banks should be replaced by digital cash transfer means....

This would eliminate crime...and would reward real performance....This could eliminate the drug trade and all other money laundering or tax issues....

There would be no central banks....There would just be a single digitized currency....

This eliminates all govt. debt....and allows for money to be maximized in innovation and technology....and allows for better wealth distribution....

Anonymous's picture

Debt is poison.

David449420's picture

I'm disappointed. I thought after not seeing you junivile submissions for 3 or 4 posts that you had finally bee kicked off of here.

Go away.


FLETCH's picture

these guys are all over the place, watch out.

here's one pontificating on the latest failed prescriptions:


true money printing world improver, this guy

let him know how you feel

Anonymous's picture

Balance sheet repair is good; do it!

Koo's last question......who will borrow?. Just for once, why not invest one's own capital for a change?

Why must it always be borrow? Is real capital scarce?

Oh, perhaps the real capital is long gone, hidden away in dark places by dark somebodies?

As the trees are shaken and the deeds are done, two scenarios are in play:

1. The "masses" awaken and, like truffle-sniffing pigs, follow the scent of hidden treasure to the lairs of the evil-doers; whereby they are separated from their illgotten gains and dealt with in a most just manner. A new spring!


2. As the last leaves caress the ground in twilight, and all actions needed are done; the dark denizens rise into the sunrise with a new dawning of the old ways.

40muleteam borax

exportbank's picture

Forget us, if we want any type of decent life for the generations behind us, we have to start living within current cash-flow.
It seems the biggest enemies of this are politicians buying our votes in order to get re-elected and us (suckers) chasing the BIG return.

The funniest and tragic result is that people that worked hard, didn't foolishly toss money at the Wall Street Casino, saved and paid their debts have been made the idiots in this shoot-out..

IBelieveInMagic's picture

I find his argument fairly convincing. Ultimately, our elected leaders have to ensure growth in the economy (flat is also unacceptable). Administering pain for the sake of principles is all very fine but when they are faced with the choice of shrinking economy vs. a flat economy they will settle for flat -- look how quickly moral hazard was dispensed when they were faced with hard choices about a financial collapse.

It stinks but this may be the realistic choice...

Anonymous's picture

The realistic choice for those who can't lead, have no guts and no morals. Extend and pretend is a prescription for impoverishing generation X, Y and the new millenniums. All so the depression/WWII and boomer generations don't have to suffer the consequences of their actions. What kind of society have we become? The greatest generation has to be wondering how their kids could screw things up so badly.

Double down's picture

Gawed damnit!!!  Making me think on a Friday.  I hate having my certainties trashed like this. 

So, it is the good companies that are causing the problem, jerks.

All of this will stop if they do not repair their balance sheets.

The bad companies keep the good ones alive, there goes my moralising!


The USD will go up as GDPs get revised down.


So we are back to China buying TB from the US because domestic savings sit in cars and empty real estate.  Access to these "savings" requires liquidation.

Hello crash?