Chapter 5: Finance-dominated Capitalism, Consumption, Household Debt and Instability
5. Finance-dominated capitalism, consumption, household debt and instability1 5.1 INTRODUCTION In the previous chapters we analysed the effects of finance-dominated capitalism on income distribution, investment in capital stock and on productivity growth. Discussing the potential macroeconomic regimes in Chapters 3 and 4 we also included potential effects on consumption, but we have not dealt with household debt yet. This will be the focus in the present chapter. We start from the observation that finance-dominated capitalism has generated increasing potential for wealth-based and debtfinanced consumption. Stock market and housing price booms have each increased notional wealth against which households were willing to borrow. Changing financial norms, new financial instruments (credit card debt, home equity loans) and deterioration of creditworthiness standards, triggered by securitization of mortgage debt and ‘originate and distribute’ strategies of commercial banks, made increasing credit available to low income, low wealth households, in particular. This allowed consumption norms to rise faster than median income, driven by habit persistence, social visibility of consumption (‘keeping up with the Joneses’), and a kind of ‘consumer arms race’ (Cynamon/Fazzari 2008).2 Econometric studies have shown that (financial and housing) wealth is a statistically significant determinant of consumption – not only in the US. For the US, Ludvigson/Steindel (1999) and Mehra (2001) have estimated marginal propensities to consume out of wealth between 3 per cent and 7 per cent, applying time series econometrics to different periods. Onaran et al. (2011), carefully distinguishing between propensities to consume out of wages, non-rentier profits, rentier profits, financial wealth...
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