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csis/media/csis/events/081029_japan_koo.pdf

http://www.csis.org/media/csis/events/081029_japan_koo.pdf. Central Points. The economy works differently in balance sheet recessions. The private sector shifts away from investment and consumption and starts saving/paying down debt.

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csis/media/csis/events/081029_japan_koo.pdf

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  1. http://www.csis.org/media/csis/events/081029_japan_koo.pdf

  2. Central Points • The economy works differently in balance sheet recessions. • The private sector shifts away from investment and consumption and starts saving/paying down debt. • Monetary policy is ineffective because the private sector is not interested in borrowing (even at 0 interest rate).

  3. Koo’s Most Basic Points Cont.. • Fiscal Policy needs to replace the sudden contraction in private sector demand. • Without a big fiscal expansion Japanese GDP would have fallen tremendously. The Gov got no credit for this. (Heroes save people from burning buildings, they don’t expensively replace the faulty electrical wiring.)

  4. Koo on M policy • Koo takes a very extreme position on credit markets and monetary policy. • He seems to take the reduction in private sector demand for credit as uniform and absolute. • So there is really NO demand for borrowing and bank lending is irrelevant. • Hence Monetary Policy is not of great interest to him. • Indeed monetary policy and money becomes an epiphenomenon of fiscal policy!

  5. Koo on Money • Banks were awash with excess reserves. • The marginal money multiplier was small or even negative. • Since there was no demand

  6. Kashyap The supply side of the credit market (in particular banks) did matter quite a lot.

  7. "Zombie Lending and Depressed Restructuring in Japan" (with Ricardo J. Caballero and Takeo Hoshi), January 2008. American Economic Review, forthcoming. • This may be the explanation for lower long run productivity in Japan after 1991. It has something to do with how the financial catastrophe affected industrial dynamism.

  8. The Zombies: • “This paper explores the role that misdirected bank lending played in prolonging the Japanese macroeconomic stagnation that began in the early 1990s. The investigation focuses on the widespread practice of Japanese banks of continuing to lend to otherwise insolvent firms.” (p.1) • These are the “Zombies”.

  9. A bank would lend to a Zombie • because 1) it may have deep ties with the firm 2) the government encouraged lending to offset a “credit crunch” 3) the alternative to new lending was often to declare old loans un-payable.

  10. Asset Weighted Zombie Firms in Japan Increase Dramatically after 1991

  11. Sectors dominated by Zombie firms fire less than normal sectors

  12. Sectors dominated by Zombie firms hire less than normal sectors

  13. Kashyap, Caballero and Hoshi: Zombies cause low TFP growth

  14. "Will the U.S. Bank Recapitaliztion Succeed? Lessons from Japan" (with Takeo Hoshi), National Bureau of Economic Research, NBER Working Paper # 14401, December 2008.

  15. Japan vacillated between Toxic asset clean up and Capital Injections, did too little of either. When substantial sums were committed they got results. • Background 15 years of falling land prices.

  16. Bank problems delayed till 1997!

  17. Initial Bank tightening After bubble bursts 1997Q4-1999Q2 Large Japan Premium Corresponds to tight lending conditions

  18. Significant capital injection only 13 years after the bubble bursts. • 1997 10 T Yen bank bill, mark to market weakened. • 1998 30 T Yen package with only 1.8 T Yen injected into Banks • 2002 Authors calculate that J banks still have 0 capital, up to then gov. had injected equivalent of approx 1% of bank assets. • 2004 40 T Yen injected

  19. Complicated! • "Leveraged Losses: Lessons from the Mortgage Market Meltdown (Final Report)" with David Greenlaw (Morgan Stanley), Jan Hatzius (Goldman Sachs), Anil Kashyap (Chicago GSB) and Hyun Shin (Princeton), US Monetary Policy Forum Report No. 2, 2008. • http://faculty.chicagobooth.edu/anil.kashyap/research/MPFReport-final.pdf

  20. Fixing Balance Sheets Matters • US banks will absorb around 350B$ losses from mortgages • 500B$ losses on mortgages, 945B$ loss on mortgages and consumer credit. • Will cause 1T$ fall in credit supplied by banks and near banks. • Will cause GDP down by 1.5% • This is in addition to direct impact on GDP of residential investment down and wealth effect on consumption.

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