Stimulating Household Borrowing During the Great Recession

A growing literature points to the drop in household borrowing as a proximate cause of the Great Recession, but less is known about the causes of the drop in borrowing. We study the role played by credit supply using a panel dataset with 160 million credit card accounts and hundreds of credit limit regression discontinuities. Using this quasi-exogenous variation in the supply of credit, we find that consumers become increasingly supply-constrained during the Great Recession, with the effect on spending of a $1,000 larger credit limit growing from $82 in 2008 to a maximum of $516 in 2011, and with similar effects on borrowing volumes. We use the panel nature of our data to track the profitability these accounts and find that marginal lending was unprofitable throughout 2008 to 2012, with particularly large losses in the years when consumers had the highest marginal propensity to spend. These results are consistent with the 'no good risks' explanation for limited credit supply and push against the argument that financial frictions prevented banks from exploiting otherwise profitable lending opportunities.