ABSTRACT
This is not an ordinary recession. The problems unleashed by the financial crisis are far more serious and intractable than that. The United States and the Eurozone countries are in the midst of a bal-
ance sheet recession. The concept is due to Richard Koo1 who used the term to summarise his diagnosis of Japan’s economic troubles in the wake of its 19921993 crisis. A balance sheet recession is fundamentally different from the garden variety and the usual countercyclical policies are not adequate to cope with it. The questions to be discussed below all pertain to the extraordinary nature of balance sheet recessions in general and, of course, the present one in particular: What makes them different from ordinary cyclical recessions? How do they come about? What makes them peculiarly intractable? What policies are effective or less effective in dealing with them? Apart from these substantive questions, there is one further question
worth considering: What kind of economic theory helps us understand these matters better and what kinds do not?
