Escape from the balance sheet recession and the QE trap: an interview with Richard Koo

Mike Riddell interviews Richard Koo, author of 'The Escape from the Balance Sheet Recession and the QE trap'.

The term ‘balance sheet recession’ is generally attributed to Richard Koo, and is used to describe type of economic recession that occurs when high levels of private sector debt cause individuals to focus on paying down debt rather than spending or investing. Japan in the 1990s is held up as an obvious example of this phenomenon.

Paying down debt is the sensible option for individuals in the aftermath of a burst economic bubble, but when this is undertaken wholesale, there is no means for the money being saved to be pumped back into the economy. In the event of the private sector aggressively deleveraging, Koo argues, the only option is for the government to step in and fill the gap.

US policymakers were astute in the aftermath of the 2007 Lehman Brothers collapse and managed to avoid – albeit narrowly – falling off the so-called ‘fiscal cliff’. Europe, by contrast, is still very much in the throes of a balance sheet recession, and its decision to begin Quantitative Easing is symptomatic of this.