Excessive Reliance on Credit

Between 1960 and 2008, government's share of the total annual interest costs in our economy fell from more than 20% to less than 10%. In other words, total interest costs grew more than twice as fast as government interest costs.

Another look: The government share fell from almost 21% to a little more than 7% of total interest costs. In other words, total interest costs grew something less than three times as fast as government interest costs.

People already know that government interest costs are high. And total interest costs in our economy grew between two and three times faster.

That's excessive reliance on credit.

The Reliance on Credit

Where are we?

Following the Secret Economist's Altig link brought me to this:

Scratch any gathering of macroeconomists these days and out will bleed a steady stream directed at incorporating credit and financial market activity into thinking about the aggregate economy. The necessity of proceeding with that work was emphasized by no less an authority than Don Kohn, vice chairman of the Federal Reserve Board of Governors, speaking at just such a gathering of macroeconomists last week:

"It is fair to say, however, that the core macroeconomic modeling framework used at the Federal Reserve and other central banks around the world has included, at best, only a limited role for the balance sheets of households and firms, credit provision, and financial intermediation. The features suggested by the literature on the role of credit in the transmission of policy have not yet become prominent ingredients in models used at central banks or in much academic research."

I will admit that economists were not exactly ahead of the curve with this agenda, but prior to 2007 it was not at all clear that detailed descriptions of how funds moved from lenders to borrowers or how short-term interest rates are transmitted to longer-term interest rates and capital accumulation decisions were crucial to getting monetary policy right.

All In Fun

It's all fun and games until somebody gets hurt.

From Krugman of 15 October 09:

...one thing that’s hard to convey is how boring business seemed in the 1960s and 1970s. (”I’ve got just one word for you: plastics.”)

But even a decade later, it was the guys who went off to investment banks who were buying the third homes.... And it wasn’t just the money: business stopped being so boring, and was even getting to be fun for some people.

I thought that was an interesting observation. What else was happening at that time?