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Richard Koo: American Politicians Know Nothing About Balance Sheet Recessions…

In his latest note, Richard Koo of Nomura shreds US politicians for their lack of understanding regarding the current macroeconomic situation. In a few paragraphs he says Krugman, Summers, Obama and the entire Republican party have misunderstood the crisis and its necessary fix.  Of course, Koo is best known for the idea of the Balance Sheet Recession.  Here’s where he say virtually no one has understood the macroeconomic landscape and grades President Obama as a solid D for understanding:

Summers also unable to break out of “yang” mindset

Like Princeton Professor Paul Krugman, Mr. Summers had high expectations for the Fed’s monetary easing measures. But monetary accommodation has had a limited impact because the US economy is in a balance sheet recession, and the Fed has been unable to spark the kind of recovery they envisioned. That, in turn, led to more disappointments.

Although both Summers and Krugman have argued strongly for the need for fiscal stimulus, their inability to give up on
monetary accommodation suggests an inability to break away from the orthodox mindset that private-sector agents always seek to maximize profit.

All in all, I would rate the Obama administration a 6 (out of 10) on its understanding of balance sheet recessions today, compared with a 2 when Mr. Obama took office in 2009.

Republicans have zero understanding of balance sheet recessions

That said, the Obama administration has provided as much fiscal stimulus as it could and has kept the US economy out of a deflationary spiral.

The Romney camp, in contrast, appears to have almost no understanding of balance sheet recessions. The team’s policy prescriptions are based on the orthodox view that smaller government will spur private economic activity.

Paul Ryan, Mr. Romney’s running mate and a strong believer in fiscal consolidation and small government, is expected to have a large say on economic policy in the event the pair win the election. His statements are closely watched because Mr. Romney’s views seem to change so frequently, making it difficult to determine what he really believes, whereas Mr. Ryan has an extensive congressional record and his statements are consistent.

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