Credit Growth and the Financial Crisis: A New Narrative

A broadly accepted view contends that the 2007-09 fi nancial crisis in the U.S. wascaused by an expansion in the supply of credit to subprime borrowers during the 2001-2006 credit boom, leading to the spike in defaults and foreclosures that sparked thecrisis. We use a large administrative panel of credit fi le data to examine the evolutionof household debt and defaults between 1999 and 2013. Our fi ndings suggest an alternative narrative that challenges the large role of subprime credit in the crisis. We showthat credit growth between 2001 and 2007 was concentrated in the prime segment,and debt to high risk borrowers was virtually constant for all debt categories duringthis period. The rise in mortgage defaults during the crisis was concentrated in themiddle of the credit score distribution, and mostly attributable to real estate investors.We argue that previous analyses confounded life cycle debt demand of borrowers whowere young at the start of the boom with an expansion in credit supply over that period. Moreover, a positive correlation between the concentration of subprime borrowersand the severity of the 2007-09 recession found in previous research may be driven byhigh prevalence of young, low education, minority individuals in zip codes with largesubprime population.