The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession

Rate this book

Clear rating

1 of 5 stars 2 of 5 stars 3 of 5 stars 4 of 5 stars 5 of 5 stars

The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession

4.05 of 5 stars 4.05 · rating details · 80 ratings · 10 reviews

Japan's "Great Recession" lasted from approximately 1992 - 2007 and finally provided the economics profession with the necessary background to understand what actually happened during the US recession of the 1930s. The discoveries made, however, are so far-reaching that a large portion of economics literature will have to be modified to accommodate another half to the macr...more

Hardcover, 296 pages

Published August 1st 2008 by John Wiley & Sons (first published July 15th 2008)

more details... edit details

Get a copy:

More…

Friend Reviews

To see what your friends thought of this book, please sign up.

Lists with This Book

This book is not yet featured on Listopia. Add this book to your favorite list »

Community Reviews

(showing 1-30 of 188)

filter | sort: default (?) | rating details

Oct 17, 2009 AC rated it 4 of 5 stars

Shelves: markets, japan

(I have upgrade my review -- not because the book, as such, has improved -- it is basically an article masquerading as a book -- but only because the thesis has become a part of my mental furniture)

Good thesis -- mediocre book. Took an hour to browse it. Basically...

Unlike typical recessions, which (like 1990/91) are due to credit crunches, and which can be 'solved' by forcing liquidity into the banking system; the Japanese recession of 1990-2005, like the Great Depression of 1929-1932 are "bala...more (I have upgrade my review -- not because the book, as such, has improved -- it is basically an article masquerading as a book -- but only because the thesis has become a part of my mental furniture)

Good thesis -- mediocre book. Took an hour to browse it. Basically...

Unlike typical recessions, which (like 1990/91) are due to credit crunches, and which can be 'solved' by forcing liquidity into the banking system; the Japanese recession of 1990-2005, like the Great Depression of 1929-1932 are "balance-sheet recessions" -- meaning that a collapse in asset prices (when the bubble bursts) punches a big hole in the balance sheet (these assets are sitting on the asset side of the b.s., were bought with leverage, and used as collateral for further leveraging) -- which can only be 'solved' by deleveraging, that is, by paying down debt. And that takes years... and sometimes decades.

This is what we've got now.

The problem, then, is not liquidity -- or "getting credit flowing again!" -- as Obama and Summers think; the problem is simply solvency... financial institutions, households, govts world-wide... are all effectively bankrupt (that is, their assets are overwhelmed by debts, obligations, liabilities). In this circumstance, pumping in liquidity is useless -- since no one has the capacity to borrow -- there is no lack of supply (money), but rather a lack of demand (appetite). The only thing that will solve this is debt minimization. In Japan, it's taken 27 years (and counting)...

What the Fed is doing will simply stoke inflation.

This means, one needs to sell bonds, and trade dollars out at every opportunity for gold, silver, oil, agricultural commodities, and asia. The U.S. stock market will either fall for the next 10 years or, more likely, trade in a range between 7000 and 12000 while losing value continuously in real (inflation-adjusted) terms as the dollar falls. In the case of extreme inflation (100-200% per annum), the stock market could soar to 30,000 or more -- and STILL lose value in real terms.

There will be inflation and stagnant growth in the West for years to come. Whether it will be an inflationary stagnation or inflationary depression remains to be seen and will depend on many factors.(less)

2 likes · like · see review

Aug 15, 2012 Bryan rated it 2 of 5 stars

If you're into this kind of stuff, this book is a good read. If not, it would be as dry as a mouthful of crunchy October leaves from your backyard. Not dry like humor can be dry, because there is no humor involved (of course, why would there be?), but again, dry like a mouthful of crunchy October leaves.

I'm into this kind of stuff, and yet I give it only 2 stars--the "it was OK" rating, for which I have plenty of reasons, in addition to it's lack of flavor, style, or the presence of a creative e...more If you're into this kind of stuff, this book is a good read. If not, it would be as dry as a mouthful of crunchy October leaves from your backyard. Not dry like humor can be dry, because there is no humor involved (of course, why would there be?), but again, dry like a mouthful of crunchy October leaves.

I'm into this kind of stuff, and yet I give it only 2 stars--the "it was OK" rating, for which I have plenty of reasons, in addition to it's lack of flavor, style, or the presence of a creative editor. The reasons are listed below, but I still say it is a good read for me because I like disputing claims while reading them. But before I get into the reasons, let me first add the disclaimer that I'm a lightweight in these subjects compared to Koo, so I'm sure my arguments he could easily combat even if the book itself does not.

First reason, the book lacks the scope necessary to be considered an important contribution to the field of economics. The scope is limited because of a fixation on the term "balance sheet recession," but never is mentioned exactly how macro asset prices have fallen, how a state should prevent these prices from falling, if a state should prevent it, whether the problem is the climb of asset prices instead of the fall of asset prices, whether the problem is with accounting of asset values, whether asset prices should be rebooked to reflect current values following a bubble burst (suggesting the recessions are not caused by falling prices but by firms limiting capital transactions by holding onto their assets and thereby restricting the velocity of money). Further, the scope of the book is limited by the repeated idea that firms change behavior from profit maximizing to debt-minimizing, but this is the same thing entirely since debt cannot be minimized without earning the owners equity to pay it down which comes from maximizing profit, so behavior cannot be changed nearly as much as he claims it changes (and he doesn't offer any specifics about how corporate behavior changes exactly, other than the propensity to allocate more money to debt repayment instead of reinvestment or share distribution, therefore the standard theories of assuming corporations are profit maximizing which the book discards cannot be discarded or discounted whimsically). Especially missing from this book is a clear and detailed policy recommendation for the so-called balance sheet recessions. You must pay very close attention or you will miss the recommendation, which is either heavy fiscal stimulus or nationalization. Most of the book focuses on criticisms of monetary efforts, but at least one chapter focused on detailed policy recommendation would have gone a long way to improving the book. I could go on, but let's call that sufficient. The scope of the book is limited.

Second, the book undermines experts on the subject instead of consulting them. Speaking of policy recommendations, the book criticizes the very people who are making the same policy recommendations that this book makes, except those experts who are making those recommendations are doing it so much more clearly. It seems the author of this book has a personal vendetta against Krugman for Krugman's highly-published criticisms of the Japanese handling of the recession, and it comes out clearer than every in the final page of this book. It appears the author of this book fails to see Krugman for what he is, a political pundit who writes opinion articles in the NYT. Sometimes Krugman says things that are interesting and fun to read, and that is the reason he is writing in the NYT and not the Journal of Economics. Sure, Krugman has won the Nobel Prize for Economics, but that doesn't mean every thing he says is biblical. Therefore, a look at a book such as his most recent one will show that Krugman makes a strong case for fiscal stimulus spending in areas like local governments and government works projects--mirroring what Koo recomends. The only difference is, you need to read carefully to find the 2 or 3 mentions by Koo for his recommendations, Krugman bases his entire book on the argument. Another expert on the subject is Stiglitz, who also wrote multiple books on the subject and is a strong advocate and a voice of reason on the Japanese and 1997 and IMF debacle, yet Koo picks out some comments made here and there which he doesn't agree with, and hence throws out the entire expert and the overall views of that expert. Yet Stiglitz offers detailed recommendations for the path forward, detailed mistakes from history, both of which match Koo's but are presented in such a better way. Stiglitz, who is the second Nobel-laureate criticized by Koo, was not the last expert receiving fire from this book. Fed Chairman Bernanke, labeled "Helicopter Ben" in the final pages of this book, is repeatedly criticized for his words on using monetary policy to curb recessions. Koo makes a mistake by doing this, because Bernanke, as chairman of the Fed, has monetary policy as his only tool to help. Koo says monetary policy through quantitative easing could only remedy about 15% of the cause of the recession in Japan, and therefore isn't good enough. In another comment, Koo criticizes Henry Paulson for bailing out corporations on a "case-by-case basis" instead of saying the government will do all that it can do. Well, my response to Koo is that 15% help is part of the "all that it can do" and when you are chairman of the Fed, the ONLY thing you can do is affect the money supply. Fiscal stimulus is not an option for Bernanke, so Bernanke will simply do all he can do, and will have to rely on the political branches of the government to do the rest. Therefore, a good 200 pages of this book about monetary policy is an interesting read, if you like arguing with you books. And to address the money from the sky claim, Koo thinks all businesses would close shop as soon as money started falling from Bernanke's helicopter, because he knows they SHOULD because of the ultimate effect on prices. Well, I think Koo has seriously misguided understanding of people's behavior, because the shops would close, but only long enough for the shop owners to go out and collect their own portion of money falling from the sky. Shop owners don't take a wet-thumb check on how the money supply is flowing as a determinant for their pricing, the couldn't care less about all the things presented in this book, so yes, theoretically, a limited influx of money supply will increase money velocity and demand. And the theory of it is where Koo really misses the boat. Academics use the analogy to teach the theory of money supply. They don't actually suggest that the chairmen rent a helicopter and drop money on NYC, academics use images to teach their college students the effects of money supply changes. Basically, Koo takes on the big-hitters in economics all by himself, at one time suggesting a warning label on purchases rated by currency rating agencies which would resemble the Surgeons General's warning label on cigarettes, and includes an image of it in his book. If you want to take on the big hitters, get a better editor, because this is not how economists battle out their ideas. Better yet, get some peer-reviewed studies out there which establish your own weakly defended point instead of 300 pages of out-of-context attacks on the experts. It is fair to say the author has a very low opinion of academic economists, and all people who were critical of some of Japan's actions during the recession there. About the only people he likes is the former chairman Volcker, Greenspan's and Bernanke's predecessor, and a Japanese prime minister who seems to give audience to the author's ideas. At one point, when discussing Volcker, he mentions his wondering where Volcker is, and that he should reemerge as the adult supervisor over these young guns who have no experience with banking crisis. Ouch. As if Volcker would save the day...that is about as offensive as can be. And yet, Obama brought in Volcker the Democrat to help deal with the crisis in 2009 until 2011. Back to the book, when you're on an island of ideas, a book of this caliber will never get you onto the mainland, so consulting other experts may be a good focus for his next book, and those experts may very well be Bernanke and Greenspan, who have inflation control as their highest priority (and have been extremely successful in that area). In fact, a solid academic perspective would be interesting for this subject. One could study the incentives of corporate leaders once asset prices fall, and develop the next Nash theory to go with it. One could study the effects of the velocity of money as debt repayments increase proportional to other transactions, and develop the another next Nash theory to go with it. One could develop an economic theory on the incentives of said shop keepers once the money starts falling from Bernanke's helicopter. Once could develop a theory to chart the estimated effects of monetary policy vs. fiscal policy during a bubble-burst recession (or a balance sheet recession, as it's called in this book). All of these things could be done, peer reviewed, and published, adding to the body of knowledge. But the island this book sits on is too isolated to make a difference. Finally, one more thing about this subject: the book begins with Bernanke being quoted as saying the true overall discovery of macroeconomic drivers and gears is elusive and difficult, and always has been, and finding the answers is as unlikely as finding the Holy Grail. Well, Koo wastes no time in naming his book after the quote, pretentiously claiming his "balance sheet recession" idea is, in fact, that very holy idea. As if. I think I just threw up in my mouth. More vomit flows with the realization that the whole cause the these recessions are attributed to these balance sheet problems, yet the cause of the balance sheet problems are finally mentioned ONCE, briefly, in this entire book! At the end. When he talks about the Greenspan-era response to the tech bubble burst recession, which response was to use a monetary influx, which overheated the economy through too-available credit, which inflated asset prices. So behold: monetary policy is indeed one of the crucial players in solving the so-called balance sheet recessions! Therefore, those first 200 pages can be skipped. Start with Koo's dealings on trade balances and exchange rates.

Third, the book--for all it's graphs and charts--lacks the scientific presence necessary when presenting the science of macroeconomics. To be the holy grail of anything, it needs to convince silly people like me, and everyone up the totem pole. No studies were conducted. Causal relationships were assumed when reality was likely only a correlated relationship (for example, the book's major thesis of balance sheet problems as the cause of the Great Depression, US, and Japanese recessions, yet no causal relationship should be inferred from the data presented. It is more likely that recession holy grails are found long before they become balance sheet problems). Sometimes it seemed like a data dump. And I'm not convinced the data told the story on their own, simply because of all the workings within the current global economy. To be discussing such an enigma as macroeconomics, one needs to be scientific at least. And that usually involves (gasp!) academic influence.

Fourth, the book (almost) has an agenda which I don't agree with. I say almost because in the final chapter, which I believe was added after the original publication following the US bubble burst, he spends a page or two talking about how stimulus spending on financial institutions was not entirely productive. This was a wise save, even though brief, because earlier in the book, government-funded capitalization for financial institutions was advocated. The book, in this earlier section, mentions how it would be difficult to pass stimulus for the capitalizing of banks due to the bad reputation of the fat cats, greed, and excess on Wall Street. I believe fat cats was even put in quotation marks, as well as a few other derogatory statements, apparently quoting the general public. It is clear the author doesn't agree with this evaluation by the general public, sides with the bankers (or the builders of our current "fianancial capitalism"), and believes the bankers are the backbone of the economy. I disagree because, although bankers are critical to our economy, they are highly overvalued. Koo mentions in this final chapter that it is "remarkable" that the TARP plan came from a Republican administration. Why is that remarkable? The only thing remarkable about it was how publically bold the GOP was in verifying how big business is permanently welded to the party. No, this was not a surprise at all, unless you know very little about the GOP. Like the results of the Iraq war, if there is an excuse to divert tax revenues back to huge business, the GOP leaders will stand in line all night to make sure they get the chance. Other than these few references, however, the author keeps out of politics and tries to stay the academic course...well, no, he doesn't try to be academic either since he has such a low regard for academic economist. But he stays true to himself, at least.

Fifth, and I've already mentioned this, the book is dry. Reading it is like reading a math textbook which has all the math wrong, leaving you with long and oft-repeated justifications for ignoring the importance of monetary policy.

I will begin to be fair to this book, in conclusion. I agree that large fiscal spending, even if it means large deficits, on very specific types of projects, is the best path for recovery from severe recessions (recessions which cannot be solved alone through a low or zero target interest rate, or monetary policy). This book doesn't offer these types of specifics, but Stiglitz does in "Freefall." Still the book comes to this conclusion, although vaguely, and I agree with that conclusion. Also, I like the discussion. Although the material was minor leagues compared to the major leagues in academic economics, the discussion is important so we can more closely arrive at the correct decision for policy. Koo is certainly knowledgeable and experienced on the subjects he presents, and I couldn't find exactly any ulterior motives.
(less)

like · see review

Apr 25, 2013 Chris rated it 5 of 5 stars · review of another edition

Shelves: nonfiction-economics

A fascinating book that seeks to explain how and why certain types of recessions--those caused by a massive asset bubble bursts, which result in "debt overhang"--are so much more damaging than the ordinary recessions of the business cycle.

Koo's thesis is interesting, and if borne out, provides a possible micro-foundation for macroeconomics: That after a massive asset-price bubble (in housing, corporate debt, or whatever) bursts, a large number of private firms and households shift from a pure pr...more A fascinating book that seeks to explain how and why certain types of recessions--those caused by a massive asset bubble bursts, which result in "debt overhang"--are so much more damaging than the ordinary recessions of the business cycle.

Koo's thesis is interesting, and if borne out, provides a possible micro-foundation for macroeconomics: That after a massive asset-price bubble (in housing, corporate debt, or whatever) bursts, a large number of private firms and households shift from a pure profit-maximization motive toward debt-minimization. The argument is that in these specific circumstances--what Koo terms "balance sheet recessions"--the underlying central assumption of microeconomics, profit-maximization, is no longer entirely applicable. Instead, firms are seeking to deleverage in an effort to restore their balance sheets after an large bubble destroys asset prices.

Koo's argument is that firms' and/or households' make the individually rational decision to engage in a massive, multi-year (or multi-decade) bout of deleveraging, which only further depresses asset prices as the formerly highly-priced assets are dumped on the market. That, in turn, weakens demand for loanable funds, rendering traditional monetary policy (reducing interest rates) a largely useless effort equivalent to "pushing on a string." From a macro perspective, as firms and households shift toward directing their income toward paying down debt (or saving), consumption and investment decline precipitously--thereby explaining the weakness in aggregate demand associated with massive recessions, or depressions.

Koo takes pains to state that he's "not a Keynesian," but at times that seems to be mere posturing. His theory can be made consistent with basic New Keynesian theory, and he argues for many of the same conclusions as Keynesian economics--namely, that debt-financed government stimulus will both prop up aggregate demand and make use of excess savings that otherwise would just be sitting unused in banks accounts will stimulate the economy and accelerate the recovery. The main difference seems to me that (1) Koo has the same destination but takes a different route (balance sheet liabilities as a drag, rather than Keynes's reduced marginal efficiency of capital) to get there, and (2) Koo argues that fiscal stimulus is only needed in these particularly rare balance sheet recessions and that ordinary monetary policy works just fine during an "ordinary" business cycle recession.

The argument needs refinement, of course. But as a book with a "big idea," I'm impressed. In any case, I'm eager to see empirical evidence supporting the Balance Sheet Recession concept. Only time and further study will tell if Koo's argument is valid in whole or in part.

Finally, I should note the first chapter, on Japan's 1990-2005 recession, should be required reading for any American unfamiliar with how fiscal stimulus works. As in Japan, the 2009 American Recovery and Reinvestment Act ("the stimulus bill") saved us from unimaginably worse conditions. Of course, I suppose it's human nature nobody ever gets credit for saving us from doom; no, heroes seem to be recognized only after the doom arrives and someone come along to save us... only after much suffering. The authors of Japan's decade of stimulus--which allowed that country to avoid an outright depression--and the architects of America's 2009 Recovery Act--can no doubt attest to that reality.(less)

like · see review

Dec 12, 2010 Minger is currently reading it

Richard Koo is a mysterious fellow. He has a Chinese name, works for a Japanese bank and has worked for the Fed. Koo's gift to us is his ability to bridge different cultures with his economic insight. The French didn't accept hamburgers until their own chefs brought it back with them from the States. Will we accept Koo's diagnosis of our current malaise as a balance sheet recession similar to Japan's? The book is so lucid and compelling -- in economic, illustration and language -- that acceptanc...more

like · see review

May 22, 2009 Matthew rated it 4 of 5 stars

Shelves: economics

Long review follows -- its really a blog post of what I think would be Koo's implicit analysis of the GFC'08. One-word review of book -- excellent. Clearly written and argued, provocatively synthesizes the debate between fiscal and monetary policy, and throws in some tangential but provocative economic ideas to boot. My only complaint is he gives too little weight to the influence of Japan's zombie banks in the Jap recession -- he argues, implicitly, that zombie banks didn't matter, and I'd like...more

like · see review

Jun 22, 2010 David Robertus rated it 5 of 5 stars

Two chapters into it I had fundamentally changed my understanding of macro-economics plugging a myriad of gaps. I predict Koo will win the Nobel Prize

1 like · like · see review

Mar 06, 2013 Vincent Tan rated it 4 of 5 stars · review of another edition

One of the best analyses of the Great Depression and the Japanese lost decade. A bit wonkish but brilliant nonetheless.

like · see review

Mar 16, 2013 Daniel Babiak rated it 5 of 5 stars

Shelves: macro

Very, very useful. How to understand what happened in Japan in the 90s, and what's been happening in the US post-2008

like · see review

Apr 07, 2013 Jeff Seymour rated it 5 of 5 stars

A must read for investors. The originator of the phrase "Balance Sheet Recession".

like · see review

Mar 10, 2012 Squawk rated it 5 of 5 stars

Amazing book!! It offers a completely new, relevant view on Macroeconomics.

It would not be surprising to see this cause a paradigm shift, not seen since Friedman or Keynes.

like · see review

Jun 15, 2013 Tsong Hwang is currently reading it

Jun 10, 2013 Joe marked it as to-read

Shelves: history, economics-development

Jun 04, 2013 Jason marked it as to-read

Jun 04, 2013 George rated it 4 of 5 stars

Jun 04, 2013 Ashutosh Goel added it

Jun 01, 2013 Andrew marked it as to-read

Jun 01, 2013 Roberto marked it as to-read

May 31, 2013 Edmund rated it 5 of 5 stars

May 29, 2013 Bev rated it 5 of 5 stars

May 24, 2013 Nr rated it 4 of 5 stars

May 23, 2013 Nikita Smirnov marked it as to-read

May 22, 2013 Oliilo marked it as to-read

May 21, 2013 Nataliya Pshenychna marked it as to-read

May 09, 2013 Philip Leclerc is currently reading it

May 05, 2013 Luigi Simoncini is currently reading it

Apr 27, 2013 Lakshmikanth Reddy rated it 5 of 5 stars

Shelves: investing-economics

Apr 24, 2013 Cathy Dao marked it as to-read

Apr 09, 2013 Drez marked it as to-read

Apr 07, 2013 Avin rated it 3 of 5 stars

Shelves: economics-read

Apr 06, 2013 Aurelija marked it as to-read

« previous 1 2 3 4 5 6 7 next »

new topic
Discuss This Book

There are no discussion topics on this book yet. Be the first to start one »

Recommend it | Stats | Recent status updates

combine
Other Editions (1)

Genres

Economics

16 users

Non Fiction

6 users

Cultural > Japan

4 users

History

3 users

See top shelves...

About Richard C. Koo

Richard Koo (born 1954) is Taiwanese American economist. He is chief economist at the Nomura Research Institute in Japan.

He studied at the University of California, Berkeley and Johns Hopkins University, where he got his PhD.

More about Richard C. Koo...

Books by Richard C. Koo

Balance Sheet Recession: Japan's Struggle with Uncharted Economics and Its Global Implications

More…

Share This Book

Facebook Twitter Your website

Trivia About The Holy Grail of...

No trivia or quizzes yet. Add some now »

title link	preview: The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession
avg rating	preview: The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession Goodreads rating: 4.05 (80 ratings)
small image	preview: click here [close]
med image	preview: click here [close]
BBCode	[url=http://www.goodreads.com/book/show/3689019-the-holy-grail-of-macroeconomics?utm_medium=api&utm_source=blog_book][img]http://d.gr-assets.com/books/1348068992l/3689019.jpg[/img][/url] [url=http://www.goodreads.com/book/show/3689019-the-holy-grail-of-macroeconomics?utm_medium=api&utm_source=blog_book]The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession by Richard C. Koo[/url]

The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession

Friend Reviews

Lists with This Book

Community Reviews

new topicDiscuss This Book

combineOther Editions (1)

Genres

About Richard C. Koo

Books by Richard C. Koo

Share This Book

Share This Book on Your Website

Trivia About The Holy Grail of...

new topic
Discuss This Book

combine
Other Editions (1)