Will Consumer Debt in Will Consumer Debt in Developed Countries lead to Developed Countries lead to

a Crisis?a Crisis?

ByBySony KapoorSony Kapoor

New Economics FoundationNew Economics Foundationforfor

HM Treasury International HM Treasury International Economics Seminar at London Economics Seminar at London

Business SchoolBusiness School

3030thth January 2004 January 2004

(Graphs Sourced from The Economist)(Graphs Sourced from The Economist)

Where are we?Where are we?

Unprecedented levels of consumer Unprecedented levels of consumer debtdebt

Unprecedented levels of mortgagesUnprecedented levels of mortgages Credit/Housing bubbleCredit/Housing bubble Fragile developed economiesFragile developed economies Interest rates historically lowInterest rates historically low Consumer demand driving growthConsumer demand driving growth Other sectors weak or constrainedOther sectors weak or constrained Possibility of debt overhangPossibility of debt overhang

Source: The EconomistSource: The Economist

How did we get here?How did we get here?

Financial LiberalizationFinancial Liberalization Deregulation of credit creationDeregulation of credit creation Obsession with inflation targetsObsession with inflation targets Short term perspective Short term perspective Corporate/Individual/Bank greedCorporate/Individual/Bank greed Procyclical rules and regulationsProcyclical rules and regulations Ignoring the lessons of historyIgnoring the lessons of history

Stocks of 'real' wealth and financial assets in G7 countries (excl Japan and UK), 1979 - 2000

-

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

Year

Val

ue

($m

)

Stock of 'real' wealth

Stock of financial assets

How would it happen?How would it happen?

Interest rate rise?Interest rate rise? House price fall?House price fall? Debt-deflation trap?Debt-deflation trap? Recession as consumer spending Recession as consumer spending

fallsfalls Perhaps the US will lead the charge Perhaps the US will lead the charge

again?again? Or perhaps even political instabilityOr perhaps even political instability

Can we stop it?Can we stop it?

Re-regulation of creditRe-regulation of credit Higher capital and provisioning Higher capital and provisioning Better supervision of financial Better supervision of financial

institutionsinstitutions Improved understanding of riskImproved understanding of risk Change of monetary policy focusChange of monetary policy focus Anti cyclical measures (Systemic risk)Anti cyclical measures (Systemic risk) A bold new international architectureA bold new international architecture