Richard Koo Explains Why The Recovery Will Be So Difficult

Joe Weisenthal (0:11)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

Tracy, I know it's sort of gauche to brag or say anything too positive these days.

Tracy Alloway (0:26)

Isn't it gauche to use the word gauche?

Joe Weisenthal (0:29)

It's probably gauche to use the word gauche too. But I kind of want to brag about something just real quickly, or sort of pat ourselves on the shoulder for a second.

Tracy Alloway (0:38)

Okay, go on, what is it?

Joe Weisenthal (0:40)

Well, I'm happy about the fact that prior to this crisis, we had a lot of guests on the podcast whose expertise seems very relevant to the situation at hand now.

Tracy Alloway (0:55)

Yeah, I'd say that's right. I mean, I'm trying to think of some specific names, but the list is pretty long at this point.

Joe Weisenthal (1:02)

No, the list is pretty long. We don't have to go through specific names, but I feel like on some level, the fact that we've gone back in the last several weeks, we've done so many episodes with repeat guests, I think this is a sort of good thing about our episode selection leading up to this when we didn't know that there would be an imminent global economic and financial crisis.

Tracy Alloway (1:26)

Oh, absolutely. We have the right people on speed dial. I'd put it that way.

Joe Weisenthal (1:32)

All right, so we can end the bragging now, but obviously once again, we will be speaking with someone who we talked to previously.

Tracy Alloway (1:42)

Ah, so I know who it is this time. It's Richard Koo from Nomura of balance sheet recession fame. And the last time he came on, it was a really, really interesting discussion.

And I think it's gonna be absolutely fascinating to see how much of that balance sheet recession idea, if anything at all, actually applies to our current situation.

Joe Weisenthal (2:06)

Right, so a lot of people, myself included, really discovered Richard Koo's work during the last crisis. He wrote a fantastic book, The Holy Grail of Macroeconomics, Lessons from Japan's Great Recession. He's talked a lot about the need for fiscal policy as a tool to restore balance sheet health. And of course, in this crisis, there's been this widespread consensus that monetary policy alone is clearly insufficient to address the scale and scope of the downturn to replace all of the lost income from households and businesses.

And although we have seen a lot of fiscal action around the world, there continues to be a lot of debate about whether the tools are right and whether they're sufficient and what kind of recovery we have. So I'm looking forward to talking to Richard now. Richard Coo, thank you very much for joining us.

Richard Koo (3:04)

Oh, thank you for having me here again.

Joe Weisenthal (3:06)

So let's start a big picture or let's actually start in the US. We saw a fairly substantial fiscal action sort of passed at the end of March.

Today is April 23rd and we are expected to see another tranche of more grants being made available to businesses to keep workers on payroll plus a few other things expected to pass this week. In your view, how sufficient or insufficient have the policy measures that you've seen put in place in the US so far been to address the size and scope of this downturn?

Richard Koo (3:49)

Well, if we take a snapshot of GDP in all these countries, United States included, they are probably down quite substantially from what we consider normal levels.

But this is brought about by this external shock, which is this coronavirus. And so ordinary measures like fiscal and monetary policies won't be of much help because just because we had a loose monetary policy doesn't mean our supply chain problems or lockdown problems will go away. And so this time, I think policies will have to be very specific to help those people who are affected by this coronavirus, which is airlines and travel industries, restaurants, service sectors and so forth. And I think US has done a very good job in coming up with these big policies very quickly. I understand that large number of people already receiving payments from the government. And once you see your bank accounts filled with some money from the government, I think people will feel that, oh, the government is really worrying about myself and the economy.

And I think that has been very helpful in keeping people from becoming even more desperate or falling into despair. Because if you compare that with what's happening in Japan, where I'm usually am, they talked about a lot, but very little payments have been made yet. And when you listen to the people there, they say, well, the politicians are talking all these policies, but we haven't seen anything yet. So compared to that, I think United States, Germany are doing a much better job. But whether that's sufficient or not, I think we need to know how long this thing is going to go on, when the vaccines will be developed, or some other ways we can, we are able to contain this coronavirus. And that's a medical question, unfortunately, not an economic question. And so I think we have to be ready to put in more as it becomes necessary.