ConsumerDebtandFinancialFragility RobertGuttmann(HofstraUniversity,NewYork) &DominiquePlihon,(CEPN,UniversitéParis13) Duringthesummerof2007theUShousingcrisismorphedintoaglobalcreditcrunchdisrupting theworldeconomy.Wearenow(April2009)facingtheworstfinancialcrisissincetheGreat Depression,followedbypossiblyprolongedrecession.Thisdramaticturnhasputintoquestion thelong-termviabilityofaglobalgrowthpatternwhichforthelastcoupleofdecadeshas heavilyreliedonAmericaastheworld’s“buyerofthelastresort.”Inthispaperwewishto explorethiscentralpillaroftheglobaleconomyandwhyithascavedtosuchhorribleeffect. (1) 1.Debt-FuelledGrowth Debtaccumulationbytheeconomy’sprincipalactors–governments,corporations, households,andthefinancialinstitutionsthemselves-hasnowforquitesometime constitutedakeyelementinthegrowthdynamicofcapitalisteconomies.Thecompositionof debthasevolvedcontinuouslyaseachofthesekeysourcesofaggregatedemanduseddebt financingtoturnitselfintoauniqueengineofgrowth. 1.1.TheChangingCompositionofDebt: Propelledtoamuchgreaterroleintheeconomy bytheGreatDepressionofthe1930sandWorldWarII,counter-cyclicalgovernment spendinganchoreditselfatthecenterofoureconomicsystemasthe“WelfareState”cameto maintainminimumincomelevelsacrossallleversoftheeconomy(unemploymentbenefits, farmsubsidies,corporatetaxbreaks,lossguaranteesforbanks,etc.).Publicsectorspending cameunderincreasedupwardpressureduringthestagflationcrisisofthe1970s,matchedby inflation-inducedintensificationoftaxburdens.Thisconfluencesetthestageforthe conservativecounter-revolutionunderReaganandThatcher,laterextendedtocontinental Europe,whichaimedtolimittheroleofgovernmentandreduceitsdeficit-spending proclivities.Whilepublicdebtrosefrom20.5%ofGDPin1980to42%in1995inthemajor OECDcountries,itactuallyfellproportionatelyduringthesubsequentdecade(e.g.from50% to38%ofGDPintheUSA).Overall,governmenthasactuallyendedupabsorbinga 1 progressivelysmallershareofthetotalU.S.debt(i.e.from44%oftheaggregatein1958to just17%in2008). Thecorporateuseofdebtalsocametoplayanimportantroleinthepost-wargrowth dynamic,firsttofundmass-productiontechnologyandinternationalexpansionamongmulti- nationals,then(fromthemid-1980sonward)tolaunchaboominmergersandacquisitions. Underthenewdictumofshareholdervaluemaximizationfirmsextendedthisgrowing relianceonexternalgrowthto financialization ,thegrowingaccumulationoffinancialassets andliabilities.The1990ssawmassiveamountsof(debt-fuelled)capitaldirectedtowardthe “NewEconomy”bubbleuntilitsdemisein2000.AtthesametimeEuropeanandAmerican firmsmanagedintheearly1990sandearly2000stocomeoutofrelativelyshortdownturns byrestoringtheirprofitabilitytorespectablelevelswithoutboostinginvestmentspending proportionately.Thisdisconnectionboostedtheirself-financingcapacityandmadethemless dependentondebt-financingofproduction,withcorporateUSdebtdecliningfrom67%of GDPin1991to55%in1995andfrom69%ofGDPin2001to64%in2004. Followingderegulationofbankingactivities(EU’sSecondBankingDirective1989, FinancialServicesModernizationActof1999inUS),bankshadmuchgreaterscopefor innovationandsotransformedthecreditsystemawayfromloansandtowardsecurities.This alreadystartedintheUSwiththeemergenceofjunkbondsinthe1980s,butreachedawhole newdimensionwhenbanksbegantopooltogetherloansandturnthoseintosecurities.Such securitizationtransformedthetraditional“indirectfinance”modeloftakingdepositsand makingloansintoan“originate&distribute”model,whichenabledthebankstoearnhuge flowsoffeesandcommissionswhiledramaticallyboostingtheirfundingvolumes.Centered aroundanunregulatedandhighlyleveragedshadow-bankingnetwork,thebanksbuiltinthe processamulti-layeredsystemtyingloans,short-termmoney-marketinstruments,long-term securities,andvariousderivativestogether.Adollaroftraditionaldebtfundingproductive spendingthuscametobecarriedafloatbyfour,five,six,perhapsevenmoredollarsofpurely self-enclosedfinancialtransactions.Underlyingthisprofoundtransformationofourcredit systemwasahugeexpansionofthefinancialsector,especiallyintheUnitedStateswhere financialinstitutions’shareintotalU.S.profitsgrewfromastable16%shareinthe1973-85 periodtoarangeof21%to30%inthe1990sallthewaytoapeakshareof41%in2007. Evenmoreimpressively,financialsectordebtintheUnitedStatesgrewfrom25%ofGDPin 1982to49%in1991andanastoundinglyhigh121%in2008. 2 Muchofthefinancialsector’sextra-ordinaryexpansionoccurredfromthemid-1990sonward whenbanksextendedtheirnewsecuritization-basedfundingmachinetoconsumerdebt,in particularthefundingofhousingbymeansofmortgage-backedsecurities.Thisfuelledoneof history’sgreatboomperiods,butalsosetthestateforagreatcrisiswhenanexcessively speculation-pronefinancialsectorgotrendereddangerouslyfragilebytheoverextended Americanconsumer.Itisthisinteractionthatwewanttohighlightinourpapertogetabetter understandingofthesystemiccrisiswefacetoday. 1.2.ConsumerDebtandWageStagnation: Anyeconomy’sincreaseinproduction capacity,whichfirmscanfundbeyondearningsthroughbankloans,corporatebonds,and newequityshares,hastobeaccompaniedbyproportionateincreasesindemandontheother sideofthemarketequation.Whilethosecancomeaboutfrombusinessspendingitselfor governmentspending,wearemorelikely–especiallywhenlookingatthisintheaggregate– togetthesedemand-sideboostsfromhouseholdconsumption(whichinmosteconomies marksbyfarthelargestcomponentofdemand,astaggering72%oftotalGDPintheUnited States).Butduringthelastthreedecadeswehaveseenstubbornwagestagnationinthe industrialnations.Thattrendfirstappearedinthe1970swhenindustrialwagescouldnot keeppacewithacceleratinginflation,thenintensifiedduringtheextensivecorporate restructuringofthe1980s,andfinallyextendedevenfurtherwiththesuddenentryof3 billionnewhumansintotheworldeconomyfollowingthecollapseofcommunismin1991. AccordingtoIMF(2007),labor’sincomeshareintheadvancedcapitalistcountriesfellfrom 68%in1980to61.5%in2005.Thiserosionwasfurthercompoundedbywideninginequality betweenaminorityofglobalizationwinnersandmajorityofglobalizationlosers.Allthis threatensdomesticeconomicstabilitybyfosteringthepossibilityofoverproduction conditionsnecessitatingrecessionaryadjustments(torestorethebalancebetweensupplyand demand). Manycountries,especiallytheemerging-marketeconomiesandsuchtraditionalindustrial power-housesasJapanorSouthKorea,havebeenabletoescapesuchanimbalanceby launchingexport-ledgrowthstrategies,oftenfuelledbykeepingthedomesticcurrency undervaluedthroughactiveexchange-ratemanagement.Obviouslynoteveryonecanrun current-accountsurpluses.Somecountriesmustabsorballthoseproductsfromsurplus countriesbyrunningdeficitsintheirtradebalance.Consumersinthosecountriescan,of 3 course,contributetosuchabsorptioneveninthewakeofstagnantwageincomesbysaving lessand/orworkingmore(ashashappenedwiththeUnitedStatesespeciallyand,toalesser extent,alsoinEurope).Intheend,however,eitheroftheseresponseshasitsphysicallimits. Inthatcontextthefacilitationofadequatehouseholdspendinginthefaceofstagnantincome ismoreeffectivelyassuredbyaccesstoconsumerdebtwherebyhouseholdspendingcanbe decoupledwithinlimitsfromconsumerincome. Weseethistrendplayoutinallmajoradvancedcapitalisteconomies.Everywhereinthe industrializedworldweobserveoverthelastcoupleofdecadeacorrelationbetween stagnant,evenfallingwagesharesandrisinguseofconsumerdebt.Wesuspectthatthere mayevenbeasymbioticrelationshipbetweenthetwointhesensethattherebydebt-boosted consumptionlevelsstayedhighenoughandthushelpedboostgrowthofdomesticGDP sufficientlytosustaininturnthegrowinguseofdebtbyhouseholdsoveralongperiodof time.Table1showstheriseinconsumerdebtasapercentageofdisposableincomeinthe UnitedStatesandFrancebetween1975and2006–atrendconfirmedbyseveralrecent studies(e.g.ECB,2007b). Table1:Householddebtas%ofdisposableincome 1975 2006 UnitedStates 62 127 France 33 68 Source:OECD Theoveralltrendnotwithstanding,wehavetoaskourselveswhyAmericanfamilieshave takenonsomuchmoredebtthantheirEuropeancounterparts. Aconstellationof institutionalcomplementaritieshavetogethercreatedthatbiasinfavorofhigherlevelsof indebtednessamongAmericans.Forone,thereisanationalconsensus,rapidlyadoptedeven bythemostrecentimmigrantwishingtointegrate,ofpursuingtheAmericanDreamwhich, forallpracticalpurposes,translatesintoenjoyinghomeownershipandarisingcapacityto spend.Apowerfullyentrenchedget-rich-quickmentality,barelyrestrainedbyorganized religionand/oranti-capitalisttraditionsfoundelsewhere,allowstherichtosetthesocial normsofconsumptionfortherestofAmerica.Ideologicalpreferencesinfavorofsmall governmenthavealsoledAmericanstoentrustcertainnecessities,whichintherestofthe worldareprovidedaspublicgoodsbythegovernmentitself,tomarketregulationandhence 4 enduppayingalotforthose-education,health,transportation,etcetera.Muchofthisis financedbydebt,suchasstudentloansorcarloans.Thesewidelyavailablechannelsof specializedloansareoneexpressionofahighlydevelopedsystemofconsumerdebt.This popularsegmentoftheU.S.creditsystem,pushedaggressivelybycommercialbanksand morespecializedlenders(e.g.creditunions,financecompanies)inaverycompetitive environment,hasbeensupportedformanydecadesnowbytheU.S.governmentwitha combinationoftaxbreaks,regulatoryrelief,andgovernment-sponsoredconcessionary lendersassignedtopromotetheirsegmentofconsumerdebt(e.g.FannieMaeandFreddie Macformortgages,SallyMaeforstudentloans).IntheendtheU.S.hasbuiltawhole economyaroundconsumerdebt,includingcreditbureausevaluatingthecreditworthinessof everyAmericanhousehold,debtcounselors,collectionagencies,andfinancialadvisors. Americanshaveincreasinglymatchedtheirproclivityfordebtwithalowregardforsaving, theexactoppositepreferenceprofilefromthatofmostEuropeansandEastAsians. 2.FinancialInnovationsandtheU.S.HousingBubble Thetrendtowardshigherlevelsofdebtisfuelledbylendersfindingnewwaystoentice