Who’s Borrowing? Credit Encouragement vs. Credit Mitigation in National Financial Systems

Abstract

Households and banks have increasingly displaced non-financial businesses and governments as the primary debtors in modern capitalist economies, resulting in more severe economic cycles, increased inequality, and external macroeconomic imbalances. Yet while the trend is nearly universal among developed economies, its intensity varies a great deal from country to country. This article highlights (1) the common international causes behind the global expansion of household and financial sector debt; (2) the divergent national approaches to household credit that cause household and financial sector indebtedness to vary from country to country; and (3) the likely causes of these disparate approaches. National approaches to interest rate restrictions, property transfer taxation, high loan-to-value (LTV) mortgages, mortgage interest taxation, and secondary markets for consumer debt can either encourage or mitigate household and financial sector borrowing. Whether a country encourages or mitigates such credit is determined by an idiosyncratic mix of institutional, political, and ideational factors. Especially important are the size of domestic pension funds, banks' preferred business models, the political power of financial firms, and whether policymakers are more sensitive to the gains promised by a credit-fueled expansion or to the risks posed by an overleveraged collapse.

Varieties of indebtedness: Financialization and mortgage market institutions in Europe

“…Recent research has begun to examine the connection between mortgage debt, housing markets, and the institutional heterogeneity of political economies (Schelkle, 2012b;Trumbull, 2012;Schwartz and Seabrooke, 2009;Prasad, 2013;Fuller, 2015Fuller, , 2016. For example, Prasad (2013) argues that "mortgage Keynesianism" is a core feature of the U.S. political economy, which sustains consumption by broad credit access rather than welfare provision.…”

“…High debt levels in Scandinavia, the Netherlands and Iberian Europe undermine the "American exceptionalism" implicit in accounts which treat the U.S. mortgage market as unique (Prasad, 2013;Schwartz, 2009). Moreover, recent institutional shifts challenge accounts that rest on static institutional indicators and data from the 1990s or early 2000s (Fuller, 2015;Schwartz and Seabrooke, 2009;Andrews et al, 2011;International Monetary Fund, 2008). While illuminating in many respects, these static comparisons deemphasize recent processes of liberalization and financialization, and therefore cannot account for increasing debt of households in many European countries, nor the uniquely declining German debt.…”

“…National institutional frameworks defined by public policy, historical legacies and industry norms shape households' financial options by influencing the characteristics of available mortgage contracts (Prasad, 2013;Schelkle, 2012b;Schwartz and Seabrooke, 2009;Fuller, 2015;International Monetary Fund, 2008). In this section, we give a first-cut account of this cross-national variation (abstracting from recent changes discussed in the next section) in order to extend previous work by developing competing hypotheses derived from financial inclusion and intensity models.…”

“…1). This cross-national variation in household debt poses a puzzle for the emergent literature on the impact of "financialization" processes on households (van der Zwan, 2014;Fligstein and Goldstein, 2015;Davis, 2009;Krippner, 2011) and the economic sociology (and political economy) of credit and debt (Prasad, 2013;Carruthers and Ariovich, 2010;Schelkle, 2012a;Fuller, 2016;Schwartz and Seabrooke, 2009). While this body of work sheds important light on the institutional determinants of household debt levels, recent institutional changes in European mortgage markets and household financial behavior have not been adequately studied.…”

One-size-fits-some! Capitalist diversity, sectoral interests and monetary policy in the euro area

“…Second, Germany had more restrictive retail banking regulations, which depressed the growth in household debt between 2000 and 2008 (Mertens, 2017). Fuller (2015) recently showed that there is considerable variation in the degree to which CMEs encourage or mitigate household borrowing, either through interest rate restrictions, 400 property transfer taxation, loan-to-value regulations, mortgage interest taxation or supporting/curtailing secondary markets for consumer debt (see also Barnes 2016…”