I quoted Ron Robins a year or so ago:
What must be noted is that for the thirty years prior to the late 1970s the credit-to-GDP ratio held steady around 1:1.4.
I just finessed that a little, and changed the 1.4 to 1.35. The following graph compares GDP and non-financial debt for the years through 1980:
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| Graph #1 |
Graph #2 shows the same picture, but it doesn't stop at 1980:
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| Graph #2 |
Assume for now that when we add Financial debt to the picture, even the similarity before 1980 is disturbed.
The EU Commission has come up with an "Economic Scoreboard" that's supposed to help warn of developing macroeconomic imbalances. Interestingly , they've chosen a threshold of 160% debt/gdp for nonfinancial private debt :
ReplyDeletehttp://www.europarl.europa.eu/registre/docs_autres_institutions/commission_europeenne/sec/2011/1361/COM_SEC(2011)1361_EN.pdf
I think this will turn out to be too high , since it's based on calculations derived from the period from 1994-2007 , i.e. , the boom years.
Still , it looks like they're moving in the right direction. I'd look to base the metrics more on the pre-financialization era , and maybe add modest increments to allow for the possibility that some financial deepening beyond those levels "might" have a benefit.
Art,
ReplyDeleteif you plot the curves on a log scale you will get your answers. The first deviation took place starting ~ 1981 and the second deviation took place starting 2000.
The causes were the two real estate bubbles caused by Congressional deregulation of the banking industry First deregulation was the two acts - the Depository Institutions Deregulation and Monetary Control Act of 1980 and the Garn–St. Germain Depository Institutions Act of 1982 -- these two acts led directly to the first real estate bubble of the 1980's culminating in the Savings & Loan Crisis of the Late 80's and early 90's caused by Mortgage Fraud. Further deregulation took place late in Clinton's second term, the repeal of the Glass Steagall Act by virtue of the passage of the Gramm–Leach–Bliley Act (GLB), also known as the Financial Services Modernization Act of 1999, and that led directly to the Latest Real Estate Bubble, again caused by Banker Fraud, and resulting in the current crisis.
As you can well realize, both these episodes led to an explosion of new mortgage debt, as the real estate bubbles proceeded apace.
Clonal: The causes were the two real estate bubbles caused by Congressional deregulation of the banking industry
ReplyDeleteOkay, good. Clonal, you know far more about specific policies than I do. Write up a "Guest Post" and I'll put it up.
Meanwhile, the question is: What was Congress trying to achieve by the deregulation? What did they SAY they were trying to achieve? The same, I think, as politicians say today: The goal is to improve economic growth.
That's my bet: They said these policies would be good for the economy and good for growth.
MY underlying assumption is that everybody else's underlying assumption is that we need credit for growth, and more credit for more growth. Which is the reason policymakers keep doing things that cause the expansion of credit and the accumulation of debt.
I think their assumptions are wrong.