Richard Koo: It’s the Balance Sheet, Stupid

Richard Koo of Nomura Securities talking in a new interview about what it takes for people to grok the current economic malady, and the role of quantitative easing therein:

[Quantitative easing is] useless until private sector deleveraging is over. When private sector is deleveraging, money multiplier is negative at margin. No monetary stimulus will work in such an environment where people are trying to reduce debt, even with zero interest rates, in order to repair their damaged balance sheets.

Until people realize that they have contracted a completely different disease called balance sheet recession where the private sector is minimizing debt instead of maximizing profits, a constructive policy dialogue is not likely to be possible. Once the exact nature of the disease is understood, the remedy (sufficient and sustained fiscal stimulus until private sector balance sheets are repaired) will become obvious to everyone.

More here.