Monday, November 3, 2008

Financial crisis flowchart: Do not advance to go

(FT Alphaville) Below is a flow chart of a “Balance Sheet Recession”. It comes from a presentation by Nomura’s chief economist Richard Koo given in Tokyo earlier this month.

The presentation contains a wealth of interesting graphs which tease out comparisons between the current financial crisis and Japan’s “lost decade” over the 1990s - which was seen as a balance sheet recession. The one thing that is repeatedly clear is that in balance sheet recessions, monetary policy is rendered largely useless.

Koo1

Indeed, the only point, it seems, of government intervention is to avert utter catastrophe and keep deleveraging banks solvent.

Anyway, the flow chart illustrates it all quite nicely:

Balance sheet recession

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