Pretty interesting comment here from Nomura’s Richard Koo from his latest note regarding the evolving understanding of the US economic situation:
US authorities understand risks of balance sheet recessions…
A Fed official told me that, with inflation now at acceptable levels, the Fed feels no need for additional easing measures.
However, he also added that the Fed would not hesitate to act if inflation resumed falling.
Fed officials are now fully aware of the risks posed by a balance sheet recession and actually used the term on several occasions during our talks.
This stands in sharp contrast to the situation in the eurozone where the officials are unaware of the concept and the risk of balance sheet recession. And to that extent I think the US economy is at less risk of a downturn than the eurozone.
For the past year and a half Fed Chairman Ben Bernanke has been arguing that now is not the time to engage in fiscal consolidation. That suggests he understands that taking away fiscal support at a time like this would have destructive consequences.
The White House officials I spoke with on this trip were also fully cognisant of the risks posed by balance sheet recessions and understood the need for fiscal stimulus at times like these.
A few points here.
One is that Bernanke has been displaying this level of understanding for a while, as he has clearly acknowledged the limits of monetary policy and the need for more fiscal action at a time like this.
Two, unfortunately, despite the White House “getting it” there’s not much reason for hope unless there’s a Congress that gets it too, and, well, that’s not happening. Too bad so few people seemed to grasp the unique nature of this recession early in the crisis when it might have made a bigger difference.