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Credit Growth and the Financial Crisis: A New Narrative

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  • Stefania Albanesi

Abstract

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.

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  • Stefania Albanesi, 2017. "Credit Growth and the Financial Crisis: A New Narrative," Working Paper 6174, Department of Economics, University of Pittsburgh.
  • Handle: RePEc:pit:wpaper:6174
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    Cited by:

    1. Saleem Bahaj & Angus Foulis & Gabor Pinter, 2020. "Home Values and Firm Behavior," American Economic Review, American Economic Association, vol. 110(7), pages 2225-2270, July.
    2. Zhenyu Gao & Michael Sockin & Wei Xiong, 2019. "Economic Consequences of Housing Speculation," NBER Working Papers 26457, National Bureau of Economic Research, Inc.
    3. Susan M. Wachter, 2018. "Credit risk transfer, informed markets, and securitization," Economic Policy Review, Federal Reserve Bank of New York, issue 24-3, pages 117-137.
    4. Braggion, Fabio & Manconi, Alberto & Zhu, Haikun, 2018. "Can Technology Undermine Macroprudential Regulation? Evidence from Peer-to-Peer Credit in China," CEPR Discussion Papers 12668, C.E.P.R. Discussion Papers.
    5. Stephen D. Oliner & Morris A. Davis & Will Larson, 2019. "Mortgage risk since 1990," AEI Economics Working Papers 1001502, American Enterprise Institute.
    6. Alejandro Justiniano & Giorgio E. Primiceri & Andrea Tambalotti, 2016. "A Simple Model of Subprime Borrowers and Credit Growth," American Economic Review, American Economic Association, vol. 106(5), pages 543-547, May.
    7. Christopher L. Foote & Lara Loewenstein & Paul S. Willen, 2016. "Cross-Sectional Patterns of Mortgage Debt during the Housing Boom: Evidence and Implications," NBER Working Papers 22985, National Bureau of Economic Research, Inc.
    8. Carlos Garriga & Aaron Hedlund, 2019. "Crises in the Housing Market: Causes, Consequences, and Policy Lessons," Working Papers 2019-33, Federal Reserve Bank of St. Louis.
    9. Saleem Bahaj & Angus Foulis & Gabor Pinter, 2020. "Home Values and Firm Behavior," American Economic Review, American Economic Association, vol. 110(7), pages 2225-2270, July.
    10. Christopher L. Foote & Paul S. Willen, 2018. "Mortgage-Default Research and the Recent Foreclosure Crisis," Annual Review of Financial Economics, Annual Reviews, vol. 10(1), pages 59-100, November.
    11. Kaplan, Greg & Mitman, Kurt & Violante, Giovanni L., 2017. "The Housing Boom and Bust: Model Meets Evidence," CEPR Discussion Papers 12215, C.E.P.R. Discussion Papers.
    12. Zhenyu Gao & Michael Sockin & Wei Xiong, 2020. "Learning about the Neighborhood," NBER Working Papers 26907, National Bureau of Economic Research, Inc.
    13. Carlos Garriga & Lowell R. Ricketts & Don E. Schlagenhauf, 2017. "The Homeownership Experience of Minorities During the Great Recession," Review, Federal Reserve Bank of St. Louis, vol. 99(1), pages 139-167.
    14. Nelson Lind, 2017. "Credit Regimes and the Seeds of Crisis," 2017 Meeting Papers 1474, Society for Economic Dynamics.
    15. Grandi, Pietro, 2019. "Sovereign stress and heterogeneous monetary transmission to bank lending in the euro area," European Economic Review, Elsevier, vol. 119(C), pages 251-273.
    16. Carlos Garriga & Aaron Hedlund, 2018. "Housing Finance, Boom-Bust Episodes, and Macroeconomic Fragility," 2018 Meeting Papers 354, Society for Economic Dynamics.
    17. Alina K. Bartscher & Moritz Kuhn & Moritz Schularick & Ulrike I. Steins, 2020. "Modigliani Meets Minsky: Inequality, Debt, and Financial Fragility in America, 1950-2016," Staff Reports 924, Federal Reserve Bank of New York.
    18. Nadav Ben Zeev, 2019. "Adjustable-Rate Mortgages, Systematic Monetary Policy, And The Root Cause Of The Financial Crisis," Working Papers 1908, Ben-Gurion University of the Negev, Department of Economics.
    19. James Conklin & W. Scott Frame & Kristopher S. Gerardi & Haoyang Liu, 2018. "Villains or Scapegoats? The Role of Subprime Borrowers in Driving the U.S. Housing Boom," FRB Atlanta Working Paper 2018-10, Federal Reserve Bank of Atlanta.
    20. Adelino, Manuel & Schoar, Antoinette S & Severino, Felipe, 2018. "Perception of House Price Risk and Homeownership," CEPR Discussion Papers 13195, C.E.P.R. Discussion Papers.
    21. Alina K. Bartscher & Moritz Kuhn & Moritz Schularick & Ulrike I. Steins, 2020. "Modigliani Meets Minsky: Inequality, Debt, and Financial Fragility in America, 1950-2016," CESifo Working Paper Series 8273, CESifo.
    22. Gete, Pedro & reher, Michael, 2017. "Mortgage Supply and Housing Rents," MPRA Paper 82856, University Library of Munich, Germany.
    23. Zhu, Haikun, 2018. "Essays on political economy of finance and fintech," Other publications TiSEM 93f94423-e671-4041-bb24-8, Tilburg University, School of Economics and Management.
    24. Chwieroth, Jeffrey M. & Walter, Andrew, 2019. "The financialization of mass wealth, banking crises and politics over the long run," LSE Research Online Documents on Economics 100765, London School of Economics and Political Science, LSE Library.
    25. Manuel Adelino & Antoinette Schoar & Felipe Severino, 2018. "Perception of House Price Risk and Homeownership," NBER Working Papers 25090, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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