Policy for a Balance Sheet Recession

Luc Vallee's picture

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malek's picture

The article seems to imply we can stage a deleveraging (which is the ultimate goal) without a lot of pain involved.
I would file that under wishful thinking.

mind_imminst's picture

Deflation, bankruptcy, clear the debts. It has to be done. That is the only way out (or some miracle invention that makes energy costs go to near zero in short order).

dolly madison's picture

Sounds good, but they don't choose to do anything that sounds good.

sasebo's picture

Anybody ever heard of Peter Schiff & Austrian economics? They are the only branch of economics to accurately predict the cause of subprime bubble & crash.

suteibu's picture

Koizumi forced a zero interest rate policy and additional QE.  His 5 1/2 year term was noted for economic growth fueled by increasing debt and bridges to nowhere even as he cut welfare benefits and raised premiums.  He changed employment laws which allowed companies to turn full time employees into part time, no benefit employees, a segment that now comprises about 35% of the workforce.  It was, in effect, a bailout for the companies which shifted the burden of benefits from the companies balance sheets to the welfare system which is now 50% funded by the annual budget.

He sought to privatize the Post bank at the behest of his BFF Bush, something that Obama seeks to accomplish through the TPP free trade agreement...all of those trillions of yen of household savings just waiting for a little Wall Street magic, you know.

The idea that banks were forced to realize loans is somewhat of a misstatement as they continued to be capitalized through the BOJ.  (Even Bank of Tokyo-MUFJ, the one bank to survive the asset bubble burst relatively unscathed, paid income taxes this year for the first time since 2001, Koizumi's first year in office.)  He was Bush, Jr., spurring short term growth with debt while accomplishing little to reform Japan for the long term.

It's kind of hard to see why he is used as an example.  He didn't end the first lost decade, he began the second lost decade.

Ying-Yang's picture

Good article Luc... The moment Paulson spoke of TARP and how the sky would fall. I listened carefully past the possibilty of crashing markets and riots in the streets to how he would use TARP to address the MBS debacle.

The framework you illustrate above is roughly what I thought he would do with the money. TARP was approved against the wishes of the public yet there was little out cry when he used TARP to save the chosen few. This period of time sticks in my mind as a historic moment in American history.

TARP was a financial coup d'etat and an integral step towards globalization for elites.

Thanks for your information!

disabledvet's picture

this slowdown appears to be primarily price related. i'm not sure i blame the Fed either. it sure appears to me to be the spending spree that came on the back of the collapse which Tom Keene so ably pointed out at the time "didn't involve job creation." i think a calamity is clearly in the cards in the debt markets because without job creation and with higher food and energy prices across the board there doesn't appear to be "final demand" for paying for both the health plan and the stimulus. add in wars in Afghanistan and now Libya and it's really hard to see how this process gets reversed exactly. frankly i see neither another round of QE nor the Fed tightening. I see them bascially sitting on their hands while events play themselves out. critical for equities will obvioulsy be a continued push maximizing margins. any blow up in the debt market however can make a quality equity space rarified indeed. the power of global capital is so enormous we need the Federal Government to function as aggressively as possible to at a minimum miitgate its deleterious effects and at the maximum provide some type of meaningful safety net. We need both now more than ever. I can see how "USA inc" can be a constructive force--but i am unclear at this point how the Federal Government can help this along to "braoden the base" as they say. clearly "small is beautiful" in this environment since fear of large (debt) numbers now matter. the exception of course is treasuries...which represents a form of bad news not good since the fundamental tenet of the Fed policy was to get the money out of treasuries to get risk capital back and working.

Pay Day Today's picture

Worth checking out Steve Keen's debtdeflation website

http://www.debtdeflation.com/blogs/

Also what Koo had to say about a 'balance sheet recession'

http://www.youtube.com/watch?v=HaNxAzLKegU

mayhem_korner's picture

Monetarist policy derives from Milton Friedman’s observation that nominal income has historically correlated with the broad money supply; the approach is to offset a reduction in the velocity of money – which accompanies all recessions - with an increase of base money.

As I read this, it implies a mischaracterization.  It reads that Friedman would support money printing, which he absolutely would not (see: http://www.youtube.com/watch?v=qmndhS-Qf20).  Strict monetarists recognize interest rates as the lever to influence the money supply, and would not advocate direct intervention in the monetary base through printing.  

The ongoing "monetary stimulus" is in my view nothing more than an extension (i.e., financing) of the Keynesian spending spree.  The Federal government would seize up absent the Fed Reserve intervention to finance it and, moreover, to keep interest rates from shooting to the moon and imploding everything under the weight of the debt.

Predictably, though, it has failed and it is only a matter of time before gravity wins out...