Report

Household Debt at the Tipping Point: When and Why Does Household Borrowing Hurt the Economy?

Abstract: While household credit booms and busts are not new phenomena, the financial crisis in 2008 and its devastating effects have spurred a deeper examination of the mechanics underlying these episodes. We review this growing literature and attempt to answer four primary questions: What drove the recent (and previous) household credit booms? What factors precipitated the tipping point in household borrowing in the economy? How did the following deleveraging efforts affect the economy? Can the literature guide us on how to avoid these destructive cycles or mitigate the damage in the future? Looking at the origins of the recent episode we find more evidence supporting the "irrational exuberance" demand-side view espoused by Robert Shiller than an exclusive supply-side explanation that stresses loosening mortgage credit standards as argued by Atif Mian and Amir Sufi. However, both perspectives likely are important and researchers remain far from reaching a consensus on the origins or implications and any of the other key aspects of the recent episode. The double leverage cycle and its violent unwinding triggered by "scary bad news" put forth by John Geanakoplos is the most compelling model of a tipping point. Whether deleveraging per se was responsible for the slow recovery remains uncertain as important structural factors such as demographic, technological or political changes were also at play during this time, confounding identification. Given the uncertainty surrounding the recent episode, few prescriptions are available for policymakers.

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Community Development Publications and Reports

Publication Date: 2017-06-22

Pages: 22 pages

Note: The St. Louis Fed Center for Household Financial Stability and the Private Debt Project hosted three "Tipping Points" Household Debt Research Symposia, 2016-2018. All three sessions were centered on the question of "tipping points" in regard to debt: How and when does household debt move from being wealth-building and productive for households and the economy to being wealth-depleting and destructive for both?

Note: Conference Materials: https://fraser.stlouisfed.org/title/tipping-points-ii-mapping-understanding-impact-debt-economic-growth-9373/session-list-685749

Note: Conference Executive Summary: https://fraser.stlouisfed.org/title/tipping-points-ii-mapping-understanding-impact-debt-economic-growth-9373/executive-summary-685748

Note: Tipping Points Conference Series: https://fraser.stlouisfed.org/series/tipping-points-conference-series-9375