Inequality, Consumer Credit and the Saving Puzzle

Inequality, Consumer Credit and the Saving Puzzle

New Directions in Modern Economics series

Christopher Brown

Providing much needed context for current events like the sub-prime mortgage crisis, this timely book presents a vision of an economy evolved to greater dependence on consumer credit and analyzes the trade-offs and risks associated with it. While synthesizing the Keynesian theory of consumption with the Institutional theory of habit selection (brought up to date with new knowledge from evolutionary biology and neuroscience), this book represents an in-depth treatment of the macroeconomic dimensions of consumer credit and implications of recent financial innovations from a non-traditional economic approach.

Chapter 6: Balance Sheet (Minsky) Effects: An Empirical Analysis

Christopher Brown

Subjects: economics and finance, institutional economics, post-keynesian economics


6. Balance sheet (Minsky) effects: an empirical analysis The previous chapters have attempted to explain how the emergence of social habit structures amenable to the use of credit to buy things such as consumer electronics, clothing, travel, food and entertainment has, in conjunction with financial innovations such as the asset-backed security (ABS), pushed consumer spending to unexpected levels in the past two decades – or more precisely, to levels that would not have been anticipated based on the contemporaneous performance of fundamental factors such as income and employment. We argued that a key implication of consumer credit is that it tends to diminish the structural dependence of consumption on current income and thus makes it reasonable to think in terms of an animal-spirited consumption function. As credit extended its range of importance, the prevailing mood of the household sector assumed greater power to disturb aggregate spending. A funk that envelops a substantial share of households can, in the context of the credit-dependent economy, have devastating consequences. Resistance to taking on new debt obligations is a predictable reaction among those suffering heightened distress about economic security. The parameters of the consumption function cannot remain unaffected if a great number of households are determined to shift from deficit finance to a pay-as-you-go regime (or in Minskian terms, a shift from speculative and Ponzi positions to hedge positions). The situation is made worse if individuals on average earmark an increased share of income for servicing of previously incurred debt obligations....

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