By Paul Jackson
‘Because we have such difficult economic circumstances not just in Japan but in the so-called Western world, I think we have to make the assumption of fiscal stimulus at least for the time being.’
Complicating matters, though, is the fact that the focus of the balance sheet problem now is outside Japan.
‘That makes it difficult to say OK at this point we stop doing this, because something is happening outside the country not inside the country. So I’d like to see the DPJ come up with some sort of grand domestic demand expansion program of sorts.’
Either way, Koo suggests that the DPJ needs to learn the key lessons from Japan’s recent economic past and to come up with a clearly defined exit strategy.
As for the extent to which the BOJ will be forced to take a mutually compatible stance with government policy in the meantime, Koo is sure that when it comes to matters of substance, BOJ Gov. Masaaki Shirakawa will stand his ground.
‘Deep inside that guy is hard as a rock,’ Koo says.‘On the outside he may appear soft and nice, but he knows what he's doing, and he's not going to be thrown around by people who don’t know anything about monetary policy.’
Koo says the Bank of Japan is relatively independent under Shirakawa, although he qualifies the remark by saying in the case of the BOJ it depends a lot on who the head of the bank is.
When asked to put some kind of figure on the level of independence he says the BOJ would be close to 90 on a scale with a base score of 100 for the old Bundesbank, Koo’s model of an independent central bank.
‘There are varying degrees of so-called independence. The Deutsche Bundesbank, when those guys were around, they were really independent, they listened to nobody and they just kept on doing what they thought was the right thing to do. Compared to that, both the Federal Reserve and the Bank of Japan today are more concerned about the political scene and the possible backlash—congressmen talking about the independence of the central bank and things like that. But the Bundesbank in those days didn't give a damn about politicians whatsoever.’
Fear at theFed
Indeed, speaking of the Fed, Koo says it has fallen well below 90 on this kind of scale. While coy about putting a figure on it, he agreed it would probably be somewhere between 50 and 90. What he sees as the Fed’s disastrous handling of its duties means the extent of its freedom to operate is now very much in question.
‘The pressure the Fed feels for allowing the bubble to reach that crazy state and not going after any of those banks with their regulatory tools, I mean they really dropped the ball. And dropped it very, very badly. Allowing Lehman Brothers to collapse when there's a systemic banking crisis right in front of us? I mean that’s stupidity to the extreme in all three areas—not sufficiently tight on monetary policy, not using bank regulators to contain the bubble and allowing Lehman to collapse. They have a very serious credibility problem.’
Reddit
Digg
StumbleUpon
Delicious
Technorati
Yahoo
Google
Plurk
Paul
Great topic and article. But money does work – suppose the BOJ “fixed” the yen at 150/$ and promised to buy all the dollars you presented at that rate. My guess is Japan would see a real burst in inflation + some decent growth for a while due to exports and import substitution. I doubt that changes much in the medium term, but money can work to generate inflation undoubtedly….
john
The entire problem with the western banking system is that the bank owns the government! It doesn’t matter who sits in the presidents seat if the central bank controls the money because if they really want to the central bank can collapse the economy and the politicians don’t get reelected! Politicians in theory at least have some responsibility to the people but not the fed or other central banks in the western banking system. It’s time the governments took back the power to issue money for the people and out of the hands of the banksters!
Dana Surmane
Watching Japan for thirty years has been troubling. I think one of the reasons that the U.S. is in so much trouble is that the stimulus money was essentially stolen — not used to get people working at all. The same sort of thing seems to always happen in democracies. As we all seem to be clumping us against the same fence, you begin to wonder what the next step really is. Anyway, thank you for giving Richard Koo a chance to air his intriguing views. Still, I think that the critical problem that he and most of the theorists have is in not being able to come to terms with the reality that no present government is capable of committing itself to an honestly administrated long-term stimulus or fiscal policy. With that much cash and/or tax benefit largesse available to politicians, it just serves to corrupt them faster. Sometimes we all seem to be heading toward the North Korean form of government and finance.
σ1
This is a great article and I will be sure to read the book. It tackles both of the great misconceptions about Japan – the relative efficacy of fiscal v monetary policy, and the “out of control” public debt.
I do have to say though that in the long run surely there is something to be said about the “quality” of fiscal policy. I understand that some “shovel ready” spending is necessary to ensure any given crisis does not spin out of control, but in spending public money the government should always be very mindful of where the long term efficiencies comes from – I think this has been the big failure of the LDP, and now the DPJ. The LDP was much more interested in the political implications of the use of public money and indulged in pork barrel politics – public benefit be damned. The DPJ does not seem so beholden – but I am not seeing any long-term, daring or coherent fiscal spending/innovation agenda just yet.
Kevin Cousins
Richard Koo’s book “The Holy Grail of Macroeconomics” is I believe the key to understanding the current environment. Read it together with McKinsey’s “Debt and deleveraging: The global credit bubble and its economic consequences” and you have an excellent framework for macro trading over the next few years.
Despite being easy to read, it may also be an important step forward in economic theory.
Agata
Thanks a lot for the advice. I will gladly read also the second book. Japan is good example that a new approach is essential. So time to get some knowledge on those new ideas which can become even more important in the future. Regards.
Agata
Very good article and really interesting point of view – nice to read something different. Now I really want to read Mr Koo’s book.
Barry Ritholtz
Fascinating article — thanks for the interview with Koo