“The [Japanese] central bank’s implementation of quantitative easing at a time of zero interest rates was similar to a shopkeeper who, unable to sell more than 100 apples a day at Y100 each, tries stocking his shelves with 1,000 apples, and when that has no effect, adds another 1,000. As long as the price remains the same, there is no reason consumer behaviour should change – sales will remain stuck about 100 even if the shopkeeper puts 3,000 apples on display. This is essentially the story of quantitative easing, which not only failed to bring about economic recovery, but also failed to stop asset prices from falling well into 2003.”
- Richard Koo, ‘The Holy Grail of Macro Economics: Lessons from Japan’s Great Recession’ (John Wiley 2008).
President Harry S Truman famously called for a one-handed economist, given the propensity of his economic advisors to blather “on the one hand.. and on the other..” Those who like their economics comparably definitive should warm to Richard Koo, Chief Economist of Nomura Research Institute, whose book on the Japanese recession amounts to one of the clearest explanations of the mess we’re now in. The Centre for Strategic & International Studies carries a presentation from Richard Koo which summarizes his book. Seekers after truth would be well advised to turn off Bubblevision and Pestovision and quietly contemplate Mr. Koo’s considered presentation for the hour or so that it lasts.
There is a particularly interesting anecdote about 31 minutes into the presentation. Mr. Koo refers to the Latin American debt crisis of the early 1980s – which at the time amounted to the worst banking crisis in US history. Nassim Taleb pointed out in ‘The Black Swan’ that
“In the summer of 1982, large
American banks lost close to all their past earnings (cumulatively), about
everything they ever made in the history of American banking – everything.”
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