The Balance Sheet Recession
Recent data suggests that it’s not the lending that is the weak link in the chain of economic recovery, it’s the borrowing. According to the Fed, during the first quarter of 2009, private borrowing by households declined by 1.1 percent and by nonfinancial businesses by 0.3 percent. Net borrowing was down $151.8 billion for households and $28.3 billion for businesses. Dubbed the paradox of thrift, this otherwise responsible behavior is shrinking the economy.
Richard C. Koo, the chief economist of the Tokyo-based consulting firm Nomura Research Institute, in a new book, The Holy Grail of Macro-Economics: Lessons from Japan’s Great Recession argues that the Great Depression of the 1930s, proposes that Japan’s 15-year recession beginning in the 1990s, and our current downturn are examples of “balance-sheet recessions.”
During balance-sheet recessions, individuals don’t spend, and businesses are more worried about paying down their debts than maximizing their profits. So individuals save money and businesses stop borrowing it even when interest rates, which normally spur such activity, approach zero. And this is pretty much what happened in the 1930s and more recently in Japan, and what’s happening today.
