Balance Sheet Recessions

Via, I learn of the concept of 'balance sheet recessions' at Vox. These, apparently, aren't like normal recessions. Oh no: in a normal, 'textbook', recession capital and labour gradually trickle our of unprofitable sectors of enterprise and reassemble in new areas of endeavour where profits can once again be made. Not so in a balance sheet recession:

The financial crisis has put much of the banking system on the edge – or beyond -- of insolvency. Large segments of the business sector are saddled with much short-term debt that is difficult or impossible to roll over in the current market....

The holes that have opened up in the balance sheets of the private sector are very large and still growing. A recent estimate by Jan Hatzius and Andrew Tilton of Goldman Sachs totes up capital losses of $2.1 trillion; Nouriel Roubini thinks the total is likely to be $3 trillion. About half of these losses belong to financial institutions which means that more banks are insolvent – or nearly so – than has been publicly recognised so far.

So the private sector as a whole is bent on reducing debt. Businesses will use depreciation charges and sell off inventories to do so. Households are trying once more to save. Less investment and more saving spell declining incomes. The cash flows supporting the servicing of debts are dwindling. This is a destabilising process but one that works relatively slowly. The efforts by financial firms to deleverage are the more dangerous because they can trigger a rapid avalanche of defaults...deficit spending will be absorbed into the financial sinkholes in private sector balance sheets and will not become effective until those holes have been filled. During the years that national income fails to respond, tax receipts will be lower so that the national debt is likely to end up larger than if the banking sector’s losses had been “nationalised” at the outset."

In other words, those people piously worrying about public sector economic stimuli 'crowding out' private sector investment are in cloud cookoo land. & even if he asks nicely Alistair Darling is unlikely to get the banks to move very much on lending to the 'real' economy: their first priority is to get back all the money they've lost and they'll do that by absorbing public spending onto their balance sheets until they're looking healthy again. Which took absolutely years in Japan.

This, I believe, is sometimes called rewarding successful risk management in line with market conditions. Me, I'm a simple minded soul, and I call it old fashioned class struggle. But with only one side fighting.