Richard Koo is the Nomura economist who is famous for his theory of the “balance sheet recession”, the idea that busts like ours or Japan’s are the result of the private sector deleveraging and need to be counteracted with aggressive fiscal policy.
In his latest note, he does a grand tour around the world, making observations in Germany, Japan, Spain, and the US.
The observation about the state of the banking/housing system in New York was fascinating.
In New York, I played the role of prospective homebuyer and visited a local bank to get a feel for the home lending market, much as I always do when visiting my home in San Francisco.
I was surprised to find that the bank, one of the largest US financial institutions, had dramatically changed its lending stance a short while ago and was now aggressively expanding its home mortgage business. While the bank continued to require substantial documentation, it was very willing to lend and offered a wide variety of incentives.
Among the incentives were an offer to make the first month’s payment (up to $2,500) on behalf of the borrower and the availability of 95% loan-to-value loans for a slightly higher interest rate (LTVs are normally capped at 80%).
The bank also offered a “fixed-rate” mortgage that would automatically reset to a new, lower rate without the need for any additional refinancing paperwork in the event that interest rates fell further.
I did not have the opportunity to visit other lenders as I was only in New York for a short time. But if the bank I visited was not an exception, this trend is something that should provide solid support for the US housing market. The change in banks’ lending stance was the first good economic news I had seen in a long time.
Gotta love that approach to economics well done.
A few other notes from Koo’s new note are interesting:
- He’s sceptical that QE3 will accomplish anything (he’s a big sceptic of monetary policy in a balance sheet recession).
- He says that in private, German leadership is realising that austerity is self-defeating.
- The China-Japan row could go on for a while and even get worse, with the leadership transition that’s going on.
- Spain is getting worse rapidly.
- Draghi’s scheme to buy bonds of peripheral countries is mostly good, but a little shakey. And if the ECB insists on imposing austerity on the countries it buys from, it will fail.
All very good stuff.
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