Cris Heaton submits:

In this crisis, as in Japan’s long recession, the problem is not that banks won’t lend, but that companies won’t borrow. So what to do? Cris Heaton reports.

What is a balance-sheet recession?

In a healthy economy, businesses borrow to invest in new capacity, households save, and the government alternates between borrowing and saving, depending on the point in the cycle. But if firms are no longer borrowing, a gap emerges in the economy. The money they would have borrowed piles up unused in the banks. The effect of this money falling out of circulation creates severe deflation – less money chasing the same quantity of goods means lower prices. This is well-established – for example, the Great Depression saw a 47% collapse in bank lending between 1929 and 1933. The usual explanation is that banks were refusing to lend, but Nomura economist Richard Koo argues in his new book, The Holy Grail of Macroeconomics, that the real problem was that businesses were unwilling to borrow. He calls this a ‘balance-sheet recession’. That may sound like a technicality, but it has huge implications for trying to avoid a depression.

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