The Age of Balance Sheet Recessions

This afternoon I received a twitter asked us to check out the presentatdion by Nomura Chief Economist Richard Koo. He compared the situation USA is in now with the situation Japan has been through for the past twenty years. He concluded that USA is indeed in the same boat. This recession is a balance sheet recession instead of an inventory recession (We are all familiar with inventory recession, sort of, Karl Marx pointed out the inventory recession more than a hundred years ago). 

Richard Koo's presentation

New Economic Thinking

A balance sheet recession happened when the private sectors are paying down the debt even in a zero interest rate environment combined with saving/paying down debt by house hold. Zero interest rate won't have much affect when facing a balance sheet recession, i.e., monetary policy itself is not enough. We need fiscal policy, i.e., the government needs to come in and borrow money and stimulus the economy. So said Richard Koo. 

The recession cause Richcard Koo presented is very convincing. The zero interest policy was introduced more than 18 months ago, and $800B stimulus later (no doubt that Krugman argued many times in his NY Times Column that the stimulus is too small) the unemployment is still around 10 percent. It is maybe why in the second quarter earning reports season that Wall Street punished any company that dares to mention any expansion plan.

I am just not sure about the solution. Should the government borrow more and throw more money at random direction to hope some would stick? Or could the government just cut the tax -- both personal income tax and corporate tax -- so private sectors would have more money at hand and be able to pay down the debt quick and start to spend and expand out quickly. I remember I read somewhere someone mentioned the tax holiday. It is share the FinReg bill didn't mention anything like what Richard Koo presented.