Rising Household Debt Research Articles

Abstracts - 2010 Meetings

Abstracts - 2010 Meetings

The geographies of austerity

As late as mid-2007, to most observers, the global economic scene looked rosy. It seemed as though the laws of economics had changed: the advanced economies had rid themselves of inflation, the business cycle had been expunged and stable growth firmly established. Such was the conviction that a new economic era had arrived that in 2003 the Governor of the Bank of England described the previous decade as being NICE—a period of ‘non-inflationary consistent expansion’ (King, 2003). And in March 2007, Gordon Brown, the UK’s Chancellor of the Exchequer confidently announced that ‘‘my report to the country is of rising employment and rising investment, continuing low inflation, and low interest and mortgage rates . built on the foundation of the longest period of economic stability and sustained growth in our country’s history’’ (Brown, 2007). There was an optimistic assessment that the new economic order was being driven by new technology and new ‘creative classes’, supported by policies of financial prudence by states. Certainly, in terms of steadily rising levels of gross domestic product (GDP), especially in the USA and UK (see Figure 1), there appeared to be strong grounds for such optimism. What we now know, of course, is that this ‘long boom’ or ‘great moderation’ (Stock and Watson, 2002) was built in large part on an unsustainable growth model. Underpinning much of that growth was a dramatic rise in household debt, in the case of the USA and UK to over 100% of GDP (Figure 2). The increase in household debt was driven by a perfect storm: asset price inflation in housing and stock markets; cheap goods from China and elsewhere in the Far East; a glut of savings, in China, Japan and the oil exporters; a global financial system, which unleashed from regulation, was developing ever more ‘creative’ ways of making money (partly by funding and fuelling the rising tide of household mortgage debt); and the optimism of the ‘long boom’ itself. The simple process was that consumers in many advanced economies could borrow cheaply to spend, and the resultant increase in consumer demand stimulated economic growth. Both the USA and UK in particular experienced rapid growth from the early-1990s onwards, much of it driven by consumption. In previous periods, such a process was kept in check by the ‘balance of payments constraint’—whereby the growth of consumption would increase imports leading to a balance of payments deficit, which in turn would

University Students’ Financial Literacy Levels: Obstacles and Aids

AbstractIn the last decade, the increased complexity of, and levels of access to, financial products and services, together with rising household debt and the funding of an ageing population, have prompted the State to place increased focus on financial education, with the dual objectives of regulating to enhance market efficiency and mitigating social welfare issues attributed to poor financial decisions. Financial literacy is crucial for young adults as they embark on life events involving major expenditure and debt, particularly for university students who have already accrued a debt based on Higher Education contribution scheme liability and who are making labour market decisions. This paper investigates the determining factors of personal financial literacy levels among a sample of university students at different stages of study and across diverse study areas including business, education, arts, humanities and the sciences; with some interesting findings for policy makers. It also provides indicative evidence of students’ preferred method of learning more about personal finance to facilitate the effective design of personal financial literacy programs.

Sweden: Financial Sector Assessment Program Update: Technical Note on Household Indebtedness: Implications for Financial Stability

As in other advanced economies, there has been a significant run-up of household debt in Sweden during the last two decades accompanied by rising housing prices, prompting concerns about sustainability and the implications for financial stability. The rise in household debt and the banking system’s increased exposure to mortgage debt resulted with the changes in the macroeconomic environment. The note explores implications for financial stability of household indebtedness as well as Sweden's specific institutional features to ensure resilience of the financial system.

Book Review

Book Review

Financial Deregulation and Household Debt: The Australian Experience

Financial Deregulation and Household Debt: The Australian Experience

Household Debt: The Final Stage in an Artificially Extended Ponzi Bubble

Household Debt: The Final Stage in an Artificially Extended Ponzi Bubble

Household debt repayment behaviour: what role do institutions play?

Despite the lively policy debate on rising household debt, arrears and personal bankruptcy filings, there is relatively little empirical evidence on the determinants of households’ debt repayment behaviour, or on the incidence of arrears. Even less is known about how arrears compare between countries, although debt levels are known to vary widely. Using data from the European Community Household Panel, we first show that arrears are frequently associated with subsequent adverse consequences, such as future unemployment or bad health. Second, we find that arrears are often precipitated by an adverse shock to the household's income or health, but that there are large differences between countries in how households react to these events. Finally, we show that these differences can be partly explained by local financial and judicial institutions, as captured by contract enforcement and information sharing indicators. In other words, we show that while adverse shocks are highly important, the extent to which they affect repayment behaviour depends crucially on the penalty for defaulting. This finding suggests that although repayment problems often arise from a genuine inability to repay, some households seem to behave strategically. — Burcu Duygan-Bump and Charles Grant

Rising household debt: Its causes and macroeconomic implications--a long-period analysis

The article analyses the rise in household indebtedness from the point of view of its causes and long-run macroeconomic implications. The analysis is focussed on the US case. Differently from life-cycle interpretations of the phenomenon, and from interpretations in terms of erratic deviations of current income flows from their long-run trend, the rising household debt is viewed as the outcome of persistent changes in income distribution and growing income inequalities. Through household debt, low wages appear to have been brought to coexist with relatively high levels of aggregate demand, thus providing the solution to the contradiction between the necessity of high and rising consumption levels, for the growth of the system's actual output, and a framework of antagonistic conditions of distribution which keeps within limits the real income of the vast majority of society. The question of the long-run sustainability of this substitution of loans for wages is finally discussed. Copyright The Author 2008. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved., Oxford University Press.

Household Debt Repayment Behaviour: What Role Do Institutions Play?

Household debt repayment behavior has been understudied, especially empirically, despite the heightened debate on rising household debt, personal bankruptcy filings, and arrears. In this paper, we use data from the European Community Household Panel to analyze the determinants of household debt arrears. The paper's primary aim is to understand the role of institutions in household arrears by exploiting cross-country differences and the panel nature of the data set. We start our analysis by showing that falling into arrears has important long-term consequences for employment, self-employment, home-ownership, and health. Next, we show how arrears themselves are the result of adverse events that affect a household, such as bad health or unemployment. Finally, we show that there are important cross-country differences in how households react to these adverse events. These differences can be partly explained by local financial and judicial institutions. Indicators covering contract enforcement and the degree of credit information sharing are used to capture the costs associated with default. In particular, we show that while adverse shocks are highly important, the extent to which they affect household debt repayment depends crucially on the penalty for defaulting.

Contradictions of Economic Growth in the Neoliberal Era: Accumulation and Crisis in the Contemporary U.S. Economy

In the neoliberal form of capitalism, economic expansion tends to be accompanied by rising profits and stagnant wages, creating a potential problem of overproduction. This obstacle to expansion has been overcome in the U.S. economy in the neoliberal era through rising household debt and the emergence of asset bubbles. However, certain trends in the U.S. economy suggest that the past methods of promoting expansion and averting severe crises in the neoliberal era may be becoming nonviable. JEL classification: E32, N12, E11

Has Growing Inequality Contributed to Rising Household Economic Distress?

The personal bankruptcy rate increased more than fourfold in the last quarter century. Other measures of economic distress, particularly foreclosure and credit default rates, also increased sharply. A possible explanation for this is greater household indebtedness. Household debt relative to income, however, did not even double over the same period, suggesting that the aggregate increase in household economic distress was disproportionate to the rise in household debt. We consider if the simultaneous increase in income inequality has contributed to the rise in household economic distress, Specifically, we hypothesize that greater inequality led to a larger expansion of credit, especially in the form of credit card debt, among low and moderate income households than among higher income ones. This expansion of disproportionately more expensive credit may have contributed to the growth in household economic distress. Based on data from 1980 to 2004, we find robust evidence for a link between inequality and credit card debt and between credit card debt and economic distress.

Macroeconomic Implications of Rising Household Debt

Household borrowing has grown considerably in many countries over the past two decades, both in absolute terms and relative to household incomes. Much of the increase can be viewed as a rational response by households to the effects of easing liquidity constraints on households, and lower inflation and borrowing rates. Regardless of whether the increase in debt is sustainable, it has important macroeconomic implications. The household sector will be more sensitive to shocks to interest rates and household incomes, and consumption spending will be more sensitive to changes in expectations of future income. The increased sensitivity will depend crucially on the distribution of debt across the household sector.

ESTIMATES OF HOUSEHOLD SECTOR WEALTH FOR SOUTH AFRICA, 1970-2003

Market values of components of household sector wealth are important explanatory variables for aggregate consumer expenditure and household debt in macro-econometric models. We construct the first coherent set of the main elements of household-sector balance sheet estimates at market value for South Africa. Our quarterly estimates derive from published data on financial flows, and other capital market data, often at book value. Our methods rely, where relevant, on accumulating flow of funds data using appropriate benchmarks, and, where necessary, converting book to market values using appropriate asset price indices. Relating asset to income ratios for various asset classes to asset price movements and other features of the economic environment, throws light on the changing composition of household sector wealth. Most striking are the relative rise in the value of pension wealth and the trend decline of directly held securities, the decline and recent recovery of housing wealth, and the rise in household debt and concomitant decline of liquid assets from the early 1980s to the late 1990s.