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Consumer debt and financial fragility

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  • Robert Guttmann
  • Dominique Plihon

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.

Suggested Citation

  • Robert Guttmann & Dominique Plihon, 2010. "Consumer debt and financial fragility," International Review of Applied Economics, Taylor & Francis Journals, vol. 24(3), pages 269-283.
  • Handle: RePEc:taf:irapec:v:24:y:2010:i:3:p:269-283
    DOI: 10.1080/02692171003701420
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    References listed on IDEAS

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    1. repec:fip:fedgsq:y:2005:i:mar10 is not listed on IDEAS
    2. Stephanie E. Curcuru & Tomas Dvorak & Francis E. Warnock, 2007. "The stability of large external imbalances: the role of returns differentials," International Finance Discussion Papers 894, Board of Governors of the Federal Reserve System (U.S.).
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    Citations

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    Cited by:

    1. Engelbert Stockhammer, 2012. "Financialization," Chapters,in: Handbook of Critical Issues in Finance, chapter 17, pages i-ii Edward Elgar Publishing.
    2. Paul Eckerstorfer & Johannes Halak & Jakob Kapeller & Bernhard Schütz & Florian Springholz & Rafael Wildauer, 2014. "Die Vermögensverteilung in Österreich und das Aufkommenspotenzial einer Vermögenssteuer," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 40(1), pages 63-81.
    3. repec:elg:ejeepi:v:14:y:2017:i:2:p131-172 is not listed on IDEAS
    4. Hein, Eckhard & Dodig, Nina & Budyldina, Natalia, 2014. "Financial, economic and social systems: French Regulation School, Social Structures of Accumulation and Post-Keynesian approaches compared," IPE Working Papers 34/2014, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    5. David Cayla, 2013. "European Debt Crisis: How a Public Debt Restructuring Can Solve a Private Debt Issue," Journal of Economic Issues, Taylor & Francis Journals, vol. 47(2), pages 427-436.
    6. 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.
    7. Hein, Eckhard & Dodig, Nina, 2014. "Financialisation, distribution, growth and crises: Long-run tendencies," IPE Working Papers 35/2014, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    8. Eckhard Hein, 2012. "The Macroeconomics of Finance-Dominated Capitalism – and its Crisis," Books, Edward Elgar Publishing, number 14931, April.
    9. Eckhard Hein, 2017. "Post-Keynesian macroeconomics since the mid 1990s: main developments," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 14(2), pages 131-172, September.
    10. repec:eee:finana:v:51:y:2017:i:c:p:113-123 is not listed on IDEAS
    11. 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.
    12. Hein, Eckhard, 2017. "Financialisation and tendencies towards stagnation: The role of macroeconomic regime changes in the course of and after the financial and economic crisis 2007-9," IPE Working Papers 90/2017, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    13. Timothy A. Wunder, 2016. "Setting a Principal to Interest Cap on the Issuance of Home Mortgages: a Proposed Change to Mortgage Underwriting Rules Designed to Control Housing Price Inflation," World Economic Review, World Economics Association, vol. 2016(6), pages 1-86, February.
    14. Engelbert Stockhammer, 2010. "Financialization and the Global Economy," Working Papers wp240, Political Economy Research Institute, University of Massachusetts at Amherst.
    15. Nina Dodig & Eckhard Hein & Daniel Detzer, 2016. "Financialisation and the financial and economic crises: theoretical framework and empirical analysis for 15 countries," Chapters,in: Financialisation and the Financial and Economic Crises, chapter 1, pages 1-41 Edward Elgar Publishing.
    16. Robert Guttmann, 2012. "Central Banking in a Systemic Crisis: The Federal Reserve’s ‘Credit Easing’," Chapters,in: Monetary Policy and Central Banking, chapter 8 Edward Elgar Publishing.
    17. Hein, Eckhard, 2018. "Inequality and growth: Marxian and post-Keynesian/Kaleckian perspectives on distribution and growth regimes before and after the Great Recession," IPE Working Papers 96/2018, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    18. repec:dau:papers:123456789/13729 is not listed on IDEAS
    19. Giuseppe Mastromatteo & Giuseppe Mastromatteo, 2016. "Minsky at Basel: A Global Cap to Build an Effective Postcrisis Banking Supervision Framework," Economics Working Paper Archive wp_875, Levy Economics Institute.
    20. Hein, Eckhard. & Mundt, Matthias., 2012. "Financialisation and the requirements and potentials for wage-led recovery : a review focussing on the G20," ILO Working Papers 994709323402676, International Labour Organization.

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