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Financial engineering, consumer credit, and the stability of effective demand

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  • Christopher Brown

Abstract

This paper examines the macroeconomic implications of recent developments in financial engineering, with particular emphasis on the post-1987 growth of markets for securities backed by credit card, installment, student loan, and home equity receivables. Three linkages of financial engineering to effective demand are identified: (1) funding effects, (2) liquidity preference or speculative effects, and (3) balance sheet or Minsky effects. Data from the Survey of Consumer Finances are used to investigate the importance of asset-backed security-related funding and balance sheet (Minsky) effects in the United States. Evidence is shown that financial engineering has boosted borrowing power at all income levels. The liberal use of expanded borrowing opportunities has fueled the growth of consumption---especially since 1995. However, a secularly rising share of U.S. households have entered the categories of "speculative" or "Ponzi" finance units---a factor that raises doubts about the sustainability of the current spending boom.

Suggested Citation

  • Christopher Brown, 2007. "Financial engineering, consumer credit, and the stability of effective demand," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 29(3), pages 427-450.
    • Handle: RePEc:mes:postke:v:29:y:2007:i:3:p:427-450
    DOI: 10.2753/PKE0160-3477290304
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    Cited by:

    1. Gonzalo Paz Pardo & José Manuel Sánchez Santos, 2014. "Household Debt and Consumption Inequality: The Spanish Case," Economies, MDPI, vol. 2(3), pages 1-24, July.
    2. Luke Petach, 2020. "Local financialization, household debt, and the great recession," Papers in Regional Science, Wiley Blackwell, vol. 99(3), pages 807-839, June.
    3. Brochier, Lidia & Macedo e Silva, Antonio Carlos, 2017. "The Macroeconomic Implications of Consumption: State-of-Art and Prospects for the Heterodox Future Research," MPRA Paper 92672, University Library of Munich, Germany.
    4. Lídia Brochier & Antonio Carlos, 2019. "A supermultiplier Stock-Flow Consistent model: the “return” of the paradoxes of thrift and costs in the long run?," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 43(2), pages 413-442.
    5. Juan Luo & Bao-zhen Li, 2022. "Impact of Digital Financial Inclusion on Consumption Inequality in China," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 163(2), pages 529-553, September.

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