a nice talk by Richard Koo, but....

http://www.youtube.com/ineteconomics#p/c/2132823B19D1EB46/0/HaNxAzLKegU

google will show you the way to his recent talk at the "Instituted for New Economic Thinking", Soros's talkshop.

Koo makes an interesting point, that with a balance sheet recession, because collateral is so far underwater (Japan and the US now after the bursting of their property bubbles) the private sector will reduce their spending in order to deleverage. But akin to the paradox of thrift, that "saving" (paying down debt) reduces the aggregate net demand/income, which leads to more "saving". He highlights what an enormous drag this could be on the economy by pointint out that Japan could have shrunk by 10% a year because of this were it not for fiscal stimulus.

He runs aground in our mind when he says that there is a lesson for Spain in this example. If there was an excess of saving taking place in the economy surely long term interest rates would be much lower? For a country like Ireland to keep a fiscal stimulus it would be needing to generate 15% returns annually on its "investment". As has been said before, at this point the plight of the piigs has a greater parrallel with countries trapped on the gold standard.

Unless there are going to be fiscal transfers, then default really is the only option, other than a great depression without an end in sight. The single biggest problem with fiscal transfers is moral hazard and the political implications for any leader signing that cheque.