Richard Koo: Trying to Warn Bernanke & Goolsbee


Richard Koo, Chief Economist at the Nomura Research Institute, was one of the headliners at a significant conference organized this past weekend by the Institute for New Economic Thinking.
I attended the meeting and am still trying to process all of the great material, debates and issues that emerged in the venue that served as the 1944 site for the establishment of what became known as the “Bretton Woods System.”
But this talk by Koo is hugely significant and goes into great detail about the common policy mistakes made by nations suffering from balance sheet recessions, as the United States is. During this talk he states that he has been meeting with Fed Governor Ben Bernanke and Council of Economic Advisors Chair Austan Goolsbee to warn them about the danger of slashing budgets and withdrawing stimulus from an economy while the private sector is still actively deleveraging itself.
I asked Richard Koo what he thought about President Obama’s agreement to slash nearly $40 billion in spending as a way to not shut down the government. Koo was not that depressed about the budget deal — and said that it could have been much worse.
Koo did agree with me, however, that setting railroad track now to broadly defined cuts which essentially were withdrawing stimulus from the economy at a fragile time could trigger what happened in 1937 America — a savage resuscitation of an economic downturn.
— Steve Clemons


20 comments on “Richard Koo: Trying to Warn Bernanke & Goolsbee

  1. questions says:

    A fascinating look at our domestic economic future:
    HEY KIDS, I’m movin’ in with you!!!!!!! Hey, how come you’re not celebrating? It’s me, your favorite parent!!!!!!!
    Or, on another note of similar theme:
    This kos piece is really something. Turns out that if you were an orphan, a widow, or some other creature without visible means of support, there was an auction for your care, and the lowest bidder would win!!!
    This, of course, is not far off from the early version of HMOs. Lowest capitation bids, poorest care, few specialists, no referrals, driving a hundred miles to a cheaper hospital and dying along the way, death and misery all around. But it saved money!
    This is the world of the Ryanization of America. We can no longer afford general social support that allows dignity, independence, decency, respect. Nope.
    We’re too busy off shoring profits, lowering taxes, and movin’ in with our kids.
    The next level of the lessening of life will be the auctioning of care contracts.
    We can warehouse the uncared for, feed them:
    “Lowest Prison Food Costs in the Nation
    Even now, former ODOC Director Cook praises Monem.


  2. Warren Metzler says:

    Carroll, thank you very much for the Rolling Stone link. It is truly amazing the level of moral depravity and criminal nonsense present in our government officials today.
    And POA, your illustration about the cloud rabbit was very funny and truly appropriate. How about one of those each time you get a urge to type out profanity while logged on to TRN?


  3. PissedOffAmerican says:

    Astounding. Obama gets up and mouths a bunch of platitudes, promises, and say nothings, and the media actually jumps upon his words as if they mean something. The right wing media jumps on it as if Obama, the consummate coward, will actually stand in opposition to the right’s agenda, and the left wing media jumps on it as if Obama suddenly intends to live up to the content of one of his well written and insincere teleprompted posturings.
    How much, really, have his words matched his deeds in the past? Do we have less war??? More accountability??? Improved governmental transparency??? Guantanamo closed??? The public option??
    So, what, suddenly the man has found honesty, conviction, or political courage, and his speeches actually mean something????? Only in the minds of idiots, blind partisans, and disingenuous media mouthpieces masquerading as members of the Fourth Estate, who are owned lock, stock, and barrel by the political machine.
    Discussing one of Obama’s speeches, ten minutes after he’s given it, is like seeing a cloud shaped like a rabbit on Tuesday, and trying to show it to your spouse on Wednesday.


  4. Carroll says:

    You know it really doesn’t matter what economic theory gets adopted or what prosperity plan or debt reduction plan is implemented….the kind of in your face stealing from the American people with complete political and legal impunity, as shown in the article below, will continue.
    No one has stopped them and no one will stop them.
    So roll out as much taxpayer and borrowed money as you want to ‘save’ the economy…it will go to the same people and places it went to before.
    And you will get poorer and poorer.
    And if you complain you will be given the standard reply of the protected criminal and political class..”move on” …water over the damn…and concentrate on the “new crisis at hand.”
    Which is the same as the old crisis but requires a round of “new’ money.
    How did this become a nation of such meek suckers?
    I don’t understand it.
    (This article appears in the April 28, 2011 issue of Rolling Stone. The issue
    will be available on newsstands and in the online archive April 15.)
    The Real Housewives of Wall Street
    Why is the Federal Reserve forking over $220 million in bailout money to the
    wives of two Morgan Stanley bigwigs?
    America has two national budgets, one official, one unofficial. The official
    budget is public record and hotly debated: Money comes in as taxes and goes
    out as jet fighters, DEA agents, wheat subsidies and Medicare, plus pensions
    and bennies for that great untamed socialist menace called a unionized
    public-sector workforce that Republicans are always complaining about.
    According to popular legend, we’re broke and in so much debt that 40 years
    from now our granddaughters will still be hooking on weekends to pay the
    medical bills of this year’s retirees from the IRS, the SEC and the
    Department of Energy.
    Why Isn’t Wall Street in Jail?
    Most Americans know about that budget. What they don’t know is that there is
    another budget of roughly equal heft, traditionally maintained in complete
    secrecy. After the financial crash of 2008, it grew to monstrous dimensions,
    as the government attempted to unfreeze the credit markets by handing out
    trillions to banks and hedge funds. And thanks to a whole galaxy of obscure,
    acronym-laden bailout programs, it eventually rivaled the “official” budget
    in size


  5. questions says:

    We need a better press corps, Reuters edition:
    “Evidence also suggests that taking more rigorous math earlier yields higher performance. Students who took algebra I before high school and started their secondary education with geometry scored 31 points higher on the math assessment than those who took algebra in their first year of high school.”,0,81692.story
    Ok, like seriously, like how do you, like, you know, take algebra before, like, ummm, high school?
    Well, ummm, you’re already good at math and you skip a year or more.
    The kids who take algebra in 3rd, 4th, or even 6th grade are WAY WAY WAY gonna do better in math than the kids who take algebra in 12th grade.
    So we should make all kids take algebra 1 in kindergarten!!!!!!!!!!!!
    8th grade algebra is a sign of decent math skills or pushy parents and a pushy district.
    Earlier algebra is a sign of better math skills. The earliest takers show signs of giftedness. Some of them will become mathematicians or economists or statisticians. Some will become drug addicts or discover poetry. You never know.
    None of this means that if you just dump all 8th graders into algebra, they will suddenly perform better.
    Being in the math class doesn’t cause anything at all. Rather, being in the math class early is the result of being more able at mathematical thinking.
    If teachers are taught to recognize the skills involved in being very good at math, and if the teachers are willing to promote those kids, then we’ll get a group of well educated math students who will score higher than average on math tests because they are further along in the math curriculum that is being tested. They will, in fact, top out of the test.
    But there’s no evidence that stuffing unmathy kids into higher math earlier helps much of anything at all. Indeed, it’s likely to cause a range of problems.
    Could we get the correlation/causation relation down? Please?


  6. LInda says:

    Both 2010 and 2011 do look a lot like 1937. Historians and economists are clear that we recovered from the mistakes of 1937 only by WWII–not exactly an option when we already are in three wars.
    Unfortunately since 9/11 it has become, for both Presidents Bush and Obama, politically incorrect to ask us to sacrifice anything for the common good and our future. That may win elections in the short run, but it doesn’t win the future.


  7. non-hater says:

    “During this talk he states that he has been meeting with Fed Governor Ben Bernanke and Council of Economic Advisors Chair Austan Goolsbee to warn them about the danger of slashing budgets and withdrawing stimulus from an economy while the private sector is still actively deleveraging itself.”
    Goolsbee has to be warned about premature cutting … repeatedly?
    You know, it would be nice if we could get someone who actually understands macroeconomics onto the economic team in the White House.


  8. questions says:

    A Shakespearean follow up on the Ferguson piece because there’s nothing like Shakespeare in the morning to get your anterior cingulate cortex moving!
    Prospero (The Tempest) gets a whole lot of power of the lives of his political enemies! And he does what people do when they get a whole lot of political power of their enemies — he torments them with images and music, aches and pains, experiences they simply will never recover from. Gosh this sounds familiar.
    Sadly, of course, it turns out that Prospero’s enemies are his enemies because he sucks as a ruler! He’s more interested in his arcane studies of magic than he is in presiding over a just state.
    But anyway, it isn’t until a non-human, Ariel, feels actual pain (or an approximation of pain) for one of Prospero’s friends, the good Gonzalo, that the fully human Prospero realizes he’s been a terrible horrible very bad non-righteous dude.
    Prospero throws away his magic books, his magic staff, and presumably the magic cloak too. And he returns to human life with less power and from now on “every third thought will be of [my] death.”
    So why is the relevant? Well, what makes people be good, non-harmful, kind to friends and enemies alike? Prospero does real harm, HAS to do real harm, before he can have his epiphany. Caliban has to do a bunch of really dumb stuff, too. Some of the characters will never reform, it would seem. After all is said and done, Antonio and Sebastian would seem ready still to sell Caliban for some money.
    Miranda is good, but too dumb to do anything. Ferdinand might be ok, but boy does he love himself some magic and a lot of sex.
    So there’s much of our humanity. We don’t learn til we suffer, and INFLICT suffering on our friends and siblings. We are ready to kill our sibs for power, send out kings and their children abroad aboard a leaky, moldy raft. We don’t learn until it’s too late.
    So when I read Ferguson, and other seeming moralists who don’t look at institutions as systems, I do indeed wonder about the various kinds of amygdalas out there.
    The simplification and demonization of an aspect of a system is deeply problematic for, ummm, problem solving.
    Corruption will always be part of human affairs. That’s pretty clear. So basically, what we should really be doing is mitigating the effects of the corruption we know to be there, and trying to set up a variety of countervailing forces to minimize the damage, provide some modicum of alternative behaviors, give some room for some moralists to float around and point out the problems (Wikileaks and Ferguson), and then we simply hope that we don’t blow ourselves up entirely on Dec. whatever 2012, or whenever it is that the world, once again, will end.
    We are always already living in end times, it would appear!
    When we try to get rid of one of our problems, say, a bunch of political enemies, we may well confuse friends and enemies (Plato), or we may simply harm one we term a friend, say, the good Gonzalo. We may, as well, be the cause of the situation for which we are punishing others.
    And what if it’s the case that the only path to righteous dudedom is through hell?
    Justice is a funky thing.


  9. Warren Metzler says:

    I object. And since he literally described the economy in disease terms, I have a wonderful analogy. Conventional medicine is based on the disease model: which assumes that all “real” illnesses begin with pathology (physical tissue that malfunctions), and so all its diagnostic efforts are put into finding pathology, and all its curative attempts are put into eliminating pathology; all ailments where no causative pathology can be found, being treated with palliation (feel better temporarily, but no cure).
    And what are the actual result of this. In over 70% of the people who visit a physician no pathology can be found (and that is ALL physicians, even super trained specialists), and so no curative, but only palliative, treatment can be given.
    In 6%, pathology is found, but it is an acute and most recover.
    In 24%, pathology is found, but it is a chronic, and although great success in eliminating or curing pathology occurs, the discomforting symptoms which sent the person to the physician in the first place continue; and increase in number and intensity over time; leading every physician of a person with a chronic disease to eventually tell that person “learn to live with that, because it will probably last for the rest of your life”.
    If authentic cure is defined as feel sick, get treatment, be restored to well-being (all is well, no major limitations remain), treatment is stopped and sickness doesn’t return; the cure rate is 0% for the no pathology group, 100% for the acutes, and 0% for the chronic with pathology group; an over all cure rate of 6%, an overall failure rate of 94%.
    All because of a false premise that pathology is the cause of illness.
    Koo has presented that health of an economy is GDP, without giving us any real evidence that is so. So his measurement of success by sustaining a certain GDP is invalid.
    Furthermore, in the US that vast majority of our deficit spending is giving people with lots of money more money. It is not at all funding infrastructure projects.
    So I protest this clever defense for deficit spending. Claiming once again that it is irrational to run government fiscal policy that is different from healthy individual and family fiscal policy.


  10. questions says:

    Yves Smith had this link up yesterday:
    It links to an INET paper about money in Congress, including pay-to-play schemes — you get a committee seat by donating to the party!
    The author, Tom Ferguson, is decidedly on the “money corrupts everything political, there’s money in politics and boy is it corrupt” side of things and he mocks derisively anyone who says otherwise.
    What I have a hard time understanding with regard to this paper is his shock and disgust with what seems actually like a brilliant party-building strategy to me. Pay-to-play for congressional committees is a great way to balance the game theory aspects of party vs. self in Congress.
    The party needs to live, but it is parasitic on individual members. Individual members need a party identity to run for re/election and so are parasitic on the party.
    No one rationally wants to be the one to support the party while others benefit from the brand but keep the money to themselves.
    The circle goes on and on without coordination and coercion.
    Pay-to-play is a perfect scheme for this problem. And my guess is that it both helps keep the parties going — so that there’s a congressional majority who can act in concert to enact a legislative program and thus can help the re-election of its members, and it helps get individual members re-elected so that the party lives another day.
    What’s not to love?!
    Ferguson is also profoundly concerned about ties between donations and legislation. I remain unconvinced about the direction of causality.
    I get the feeling that there’s still quite a bit of ideological commitment’s generating financial support.
    And as scholarship has noted, when there is money spent on all sides of issues, the money tends to cancel itself out.
    Ferguson’s paper is not nuanced enough to capture all of this.
    Still and all, the bias Congress has shown towards the billionaire boys’ club, towards high finance, towards the golden calf of the tax cut can make one wonder….
    But then, what are we wondering? Is it merely campaign donations that make people vote this way? Is there no social preference for voting for tax cuts, and indeed no one wants tax cuts and so politicians are beating down the doors to oppose tax cuts?
    Well, no. In fact, tax cutters get re-elected, tax raisers don’t. And this is more why we get tax cuts and not tax increases.
    I know that Ferguson points out that there is less polarization in the population than there seems to be in Congress, so therefore, he argues, Congress is corrupt.
    BUT, if the population says in surveys that it’s not polarized, but then votes like it is polarized, well…. The difference between what people say in surveys about their moderate social-democratic tax-loving ways doesn’t predict the Wisconsin supreme court vote, the election of Rick Scott, Kasich, Walker, and a bunch of other Tea Party ultra conservative amygdala-Americans.
    I hate to challenge an expert of a couple of decades on the issue of money in politics and the issue of polarization in American voting behavior, but it seems like maybe there are some arguments on the other side which he dismisses out of hand.
    The debate goes on…. There’s evidence for a lot of conclusions, the prescriptions for repair are unclear.
    Getting money out of politics is neither likely, nor possible, and it’s probably unconstitutional. Every dollar feels like an advantage over the competition, so every dollar will be fought for. Intensity counts for a lot in politics.
    If it were so worth it to be a no money candidate, if that were so crowd pleasing, probably we’d have more than a handful of such people. It doesn’t work very well though.
    Money raising helps build important governing coalitions, helps create a kind of stability in the institution, and helps tie the elected officials to the constituency who supports and votes. These are actually good things in politics. As with all good things, a good will is necessary to make them truly have moral content — so really, the good of our political system rests on the good will of the actors in it and not so much on their funding sources.
    The direction of change is not the one people typically call for. Banning money won’t drain the swamp.


  11. questions says:

    Wed. a.m. Japan update:
    Links and sources for everything.
    and this one is linked to in the comment section:
    The pattern is ever the same. Things look better and stabilizing for a bit, then some radiation-like information leaks out and is measured by the press and somehow doesn’t look quite so good anymore.
    The confusion on the ground, the lack of working instruments to measure, the worry about future financial and political issues, the general instinct to CYA, the absolute fear people feel, the desire to avoid an even bigger internally displaced persons problem, the fact that a really complete understanding of the issues seems to require a doctorate in nuclear engineering from MIT with subspecialty expertise in Mark I reactor design, Japanese topography and political culture, TEPCO internal structure, the effects of radiation on the human body and in the food chain, refugee issues, oceanic currents and air movements in the region, marine eco-systems… who could possibly get a handle on this mess in any comprehensive way?


  12. JohnH says:

    Richard Koo makes an impressive case. Realize, however, that Japan in 2000 had several advantages over the United States today:
    1- Japan had a major source of demand–exports.
    2- Japan undervalued its currency to maintain export demand.
    3- Remaining internal demand was protected by the undervalued currency, which made imports expensive, and other structural characteristics of the Japanese economy.
    The United States has none of the above. The US’ overvalued currency will lead it to continue to hemorrhage jobs. Demand will continue unabated for foreign sourced products. Simply put, there is no obvious source for increased demand.
    Worse yet, stimulus, if it were to materialize, would have to be carefully crafted so that the funds first pass through sectors protected from foreign competition–education, health care, infrastructure. Once the money ends up in the hands of consumers, much of it will flow abroad to purchase cheap imports (read Chinese). As a consequence, it is better to directly fund protected sectors, which means that it has a greater chance of staying at least temporarily inside the US economy. Inevitably the money will go to consumers, but the longer it stays in the hands of protected sectors, the better for the economy.
    Can the US political system pull off an intelligent stimulus? I’d say the odds are pretty bleak. (Like virtually nil?)
    Sadly, the indicators point in the direction of Depression-style deflation both in the US and in Europe, not a Japanese-style muddle-through, which maintained GDP and protected most jobs.


  13. questions says:

    Paul Ryan, Janesville, Beloit, poverty, homelessness, despair, challenger:
    From one of the block quotes:
    “Ryan is so far out there in Bizarro world that this could be his own Frankenstein experiment to prove that the working poor and unemployed need less money in their pockets in order to liberate themselves from poverty. The theory is once rock bottom is struck, the only way forward is up. At 50% poverty, Janesville is only halfway there.”


  14. DakotabornKansan says:

    Our Future as Gleaners


  15. questions says:

    A kos link on what’s what with the budget “cuts”.
    If they do the catfood commission in this spirit, I’d be happier.
    According to the kos piece:
    “Keep in mind that we’re talking about non-emergency discretionary funds here, comprising roughly 30% of the overall budget, and that taken as a whole, federal spending will actually increase in FY2011 relative to FY2010. However, within the non-emergency discretionary funds, there have been substantial cuts, particularly considering the cuts are really only for seven months of the fiscal year.
    House Republicans are boasting that they cut “nearly $40 billion” in spending, but based on the numbers they released the overall cut is actually $34.1 billion. Presumably, they are simply not counting the roughly $6 billion in spending increases going to defense and the Veterans Affairs/Military Construction budget. The only way that sort of accounting makes sense is if you’re more interested in cutting domestic priorities than in actually cutting overall spending, but then again, that pretty much describes the GOP, so their new math sort of makes sense, at least in a twisted kind of way.”


  16. questions says:

    Kwak on the Ryan voucher system:
    So imagine the massive disinvestment by the wealthy in the whole Medicare set up, and couple that with the complete disinvestment in SoSec that the Catfoodists are touting.
    Who will ever want to get old again? Only the few wealthy.
    And those of us in the non-wealthy category will be all the more selfish, all the more practicing disinvestment so that we can take care of ourselves.
    The sense that “we” cannot afford all those awful poor people will broaden, as indeed we actually will not be able to.
    What is really happening here is a slow dismantling of civil society and a replacement of same with a Hobbesian state of nature, a war of every man against every man, a restlesse search for power after power that ceaseth onely in death.
    Why would anyone be crazy enough to court such a future?
    What level of risk taking, selfishness, fearless assumption that you’ll come out on top regardless, what level of foolishness motivates a push for a Hobbesian state of nature?
    You know, Hobbes was pretty sure that people would never go against the government as the state of nature is an omnipotent threat.
    But now it’s the stuff of headlines.
    Could economists teach game theory, join up with those who think the government prevents the worst of the worst, convince us that if we all invest in one another, we are all invested in?
    Could anyone get through to these politicians who are more focused on the next election and so are escalating their rhetoric?
    Can Paul Ryan’s vision for the country be quashed?
    Could the, umm, democrats maybe stand for something other than the destruction of civil society?
    Could anyone tell the amygdala-Americans that what they should be terrified of is the many complex steps involved in the slow and steady devolution of this country into a Hobbesian nightmare?
    I suppose we’ll know a little more after the Wed pm speech, and a little more after the 2012 elections.
    But I would guess that until the Ryanvision is seen for what it is by enough motivated, intense people, we’re kind of sunk. Too many of us are taken by that vision.
    When Caliban calls out Freedom! High day! High day! Freedom! it’s not because he’s free. It’s because he has a new master.
    We should think about this issue of being “a thrice double ass” (quote from The Tempest) in that we are trading off what we think is deeply unjust for a much greater injustice that masquerades as a goodly master, but is really a drunken butler and a drunken clown.
    Is there a frippery to distract Ryan?


  17. questions says:

    The current line on the budget cuts is that many of them are accounting tricks rather than an actual taking of all that money directly out of the economy. There are articles all over the place on this point.
    The biggie is whether or not the catfood commission is going to be the guiding light of the move to the center, the pleasing of the independent-minded middle American who is pretty certain that not only can he not go some 14 trillion into debt, he’s pretty sure that the US gov’t also cannot do this.
    And since the family/state metaphor is a deeply held one (king is father, children are ruled, wife is child, household is governed, budgets are set and so on) this point is both emotionally hard to overcome and rationally hard to overcome.
    In order to think that the state differs from the family in budgeting matters, in power matters, in organization, you have to do a whole lot of work on people’s feelings of status and worth, on their commonsense feelings about resources and debt.
    And you have to do this while Fox is foxing.
    If economists want to “do” things, the first thing they should do is come up with emotionally appealing metaphors for why debt can sometimes be good, for why investing in the future even when you’re feeling broke is a good idea.
    People need metaphors, and right now, the dominant metaphors are pain, sacrifice, not being spoiled, nanny state, the need for economic liberty from the evil government, moral hazard, and a deep, profound, and really chilling racism that makes it very hard to argue that social well being is a good thing.
    Koo’s talk was really good. His book is in my shopping cart.


  18. DakotabornKansan says:

    Parallel Universes
    Politico reports that Obama plans to turn to his bipartisan deficit [catfood] commission


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