Changing Household Financial Opportunities and Economic Security

Abstract

Households have experienced an expansion of financial opportunities over the past several decades. Expanded financial opportunities, such as the democratization of credit and new lending approaches, can yield benefits in terms of household economic security. However, the financial crisis that began in 2007 has powerfully illustrated that expanded financial opportunities can also pose dangers for households. By increasing the scope for investment in risky assets, people may end up with larger swings in wealth than they had anticipated. Households may borrow too much and then face obligations that are unsustainable given their resources. To explore these issues, I examine household data on wealth, assets, and liabilities going back 25 years and, in some cases, 45 years. I argue that changes in household finances in the decades leading up to the mid-1990s—including the gradual rise in indebtedness—likely increased household well-being, on balance, and contributed to a decline in aggregate economic volatility. However, changes in finances since the mid-1990s—in particular, a much sharper rate of increase in household debt—appear to have been destabilizing for many individual households and ultimately for the economy as a whole. I consider how the lessons learned in the current crisis might change household financial opportunities and choices going forward.