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Consumer debt and financial fragility

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  • Robert Guttmann
  • Dominique Plihon
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    Abstract

    This article sheds light on a crucial aspect of the global crisis of 2007-2009: the steady increase of US consumer debt to precipitous levels over a quarter of century. That trend, fed by a combination of macro-economic, demographic, and political factors, intensified greatly in the 2000s when a series of financial innovations allowed American households to draw equity out of their homes while at the same time feeding an unprecedented housing boom. Those same new mechanisms of 'structured' and 'synthetic' finance mobilized a significant and steadily growing proportion of global savings and directed them into this super-bubble as the world's surplus countries came to fund America's debt-financed excess spending for perpetual reproduction of their surpluses. Anachronistic policy preferences among both surplus countries and the US prevented the proper functioning of various adjustment mechanisms before the inevitable financial-fragility dynamic took hold to burst the bubble and throw the global economy into a steep downturn. The persistence of these global imbalances bodes ill for the medium-term stability of the world economy and its recovery potential.

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal International Review of Applied Economics.

    Volume (Year): 24 (2010)
    Issue (Month): 3 ()
    Pages: 269-283

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    Handle: RePEc:taf:irapec:v:24:y:2010:i:3:p:269-283

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    Keywords: consumer debt; financial innovation; securitization; US housing boom; US current account deficit; credit crunch;

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    Cited by:
    1. Paul Eckerstorfer & Johannes Halak & Jakob Kapeller & Bernhard Schütz & Florian Springholz & Rafael Wildauer, 2014. "Correcting wealth survey data for the missing rich: The case of Austria," Economics working papers 2014-01, Department of Economics, Johannes Kepler University Linz, Austria.
    2. Eckhard Hein, 2012. "Finance-dominated capitalism, re-distribution, household debt and financial fragility in a Kaleckian distribution and growth model," PSL Quarterly Review, Economia civile, vol. 65(260), pages 11-51.
    3. Engelbert Stockhammer, 2010. "Financialization and the Global Economy," Working Papers wp240, Political Economy Research Institute, University of Massachusetts at Amherst.
    4. David Cayla, 2013. "European Debt Crisis: How a Public debt Restructuring Can Solve a Private Debt issue," Post-Print halshs-00845503, HAL.
    5. Eckhard Hein & Nina Dodig, 2014. "Financialisation, distribution, growth and crises – long-run tendencies," Working papers wpaper23, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    6. Eckhard Hein & Nina Dodig & Natalia Budyldina, 2014. "Financial, economic and social systems: French Regulation School, Social Structures of Accumulation and Post-Keynesian approaches compared," Working papers wpaper22, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.

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