Transcript Escaping the Debt Addiction - Center for Financial Studies

ESCAPING THE DEBT ADDICTION:
Monetary and macro-prudential policy in the
post-crisis world
Center for Financial Studies
Frankfurt, 10 February 2014
Adair Turner
Senior Fellow,
Institute of New Economic Thinking
Center for Financial Studies
www.ineteconomics.org | www.facebook.com/ineteconomics
300 Park Avenue South - 5th Floor
New York, NY 10010
Banks create credit, money and purchasing power
Bank
Loan to
entrepreneur
100
100
Credit to
entrepreneurs
deposit account
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Dynamics of real GDP and credit
(Year on year % change)
Real GDP
Real credit to households
Real credit to NFCs
United States
United Kingdom
Source: Monthly Bulletin, European Central Bank, January 2014
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Household deposits and loans:
UK 1964 – 2009
100%
90%
Securitisations and loan transfers
80%
Deposits
Loans
% of GDP
70%
60%
50%
40%
30%
20%
10%
0%
1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
Source: Bank of England, Tables A4.3, A4.1
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Private and public leverage cycles: US
Public and
Private debt as a % of NGDP
250
150
Financial Repression
Housing bursts
WWII ends
200
100
50
0
1915
1925
1935
1945
1955
1965
1975
1985
1995
2005
Source: McCulley and Pozsar
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Private domestic credit as a % of GDP:
1950 – 2011
Advanced
Emerging
Source: Financial and Sovereign Debt Crises: Some Lessons Learned and Those
Forgotten, C. Reinhart & K. Rogoff, 2013
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China: total social finance to GDP
220
% of GDP
200
180
160
140
120
100
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
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Non-financial private sector* credit
outstanding: % of GDP
Brazil
China
India
Hungary
Indonesia
Korea
Mexico
2002
Russia
2007
South Africa
2012
Turkey
0
50
100
Source: BIS, Citi Research
*Households + corporates
150
200
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Real annual credit and GDP growth in
emerging markets: 1996-2011
16%
13.9%
14%
1996-2003
2004-2011
12%
10%
8%
6%
6.5%
7.1%
4.9%
4%
2%
0%
Real GDP Growth
Real Domestic Private
Credit Growth
Source: IMF, Haver Analytics, Citi Research
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2010-Q3
2009-Q4
2009-Q1
2008-Q2
2007-Q3
2006-Q4
2006-Q1
2005-Q2
2004-Q3
2003-Q4
2003-Q1
2002-Q2
2001-Q3
2000-Q4
2000-Q1
1999-Q2
1998-Q3
1997-Q4
1997-Q1
1996-Q2
1995-Q3
1994-Q4
1994-Q1
1993-Q2
1992-Q3
1991-Q4
1991-Q1
Total German private sector leverage:
1991 - 2010
160
140
120
100
80
60
40
20
0
Private sector debt as % of GDP
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Private credit to GDP and growth
Source:"Reassessing the impact of finance and growth“, S. Cecchetti and E.
Kharroubi, BIS Working Paper No. 381
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Credit and asset price cycles
Increased
credit extended
Increased lender
supply of credit
Increased
borrower
demand for
credit
Increased
asset prices
Expectation of
future asset price
increases
Favourable
assessments of
credit risk
Low credit losses: high
bank profits
• Confidence reinforced
• Increased capital base
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The Dilemma
Pre-crisis path of nominal GDP
growth
Pre-crisis path of credit
growth
͠
4% - 5%
͠
2% real growth
͠
͠ 2% inflation
10% - 15%
If central banks had raised interest rates to slow credit growth
…. this would presumably mean slower nominal GDP growth?
We seem to need Ċ ˃ NGḊP to ensure adequate NGḊP
… but this produces financial instability and post-crisis recession
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Categories of debt: UK, 2009
£bn
Other corporate
232
Commercial real estate
243
Residential mortgage
(including securitizations
and loan transfers)
1235
Unsecured personal
227
Primarily productive investment
Some productive investment and some
leveraged asset play
Mainly purchase of existing assets
Pure life-cycle consumption smoothing
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Corporate loans by broad sector:
1987 – 2008
35%
30%
% of GDP
25%
20%
15%
10%
5%
0%
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Non-commmercial real estate PNFC lending
Commercial real estate lending
Note: Part of the increase in real estate lending may be due to re-categorisation of corporate lending following sale and lease-back of
properties and PFI (public finance initiative) lending, but we do not think these elements are large enough to change the overall picture.
Break in series from Q1 2008 due to inclusion of building society data. Sterling borrowing only.
Source: ONS, Finstats
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The dominance of real estate in bank lending
*
(*Bank and nonbank combined)
Total bank credit
to domestic
private sector
Mortgage
credit
Mortgage credit
as % of total
129%
74%
57%
206%
131%
64%
155%
78%
50%
175%
101%
57%
122%
78%
64%
130%
91%
70%
+ Commercial
real estate at
typically
around 20% 25% of total
lending
Source: Jordá, Schularick and Taylor, “Betting the Home”, forthcoming 2014
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Three conceptually distinct functions of lending
Finance of increased
consumption
• Enabling inter-temporal shift of
consumption within life time income
Finance of new capital
investment
•
•
•
•
Finance of purchase of
existing assets
• Real estate
• Collectibles
• Existing business assets – e.g. Leveraged Buy Outs
Non-real estate
Commercial real estate
Residential real estate
Human capital
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National non-financial assets as a % of GDP
Source: Blue Book 2013
Source: Vermoegensbilanzen 1991-2012 Destatis
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UK household net worth £trillion: 2012
3.2
4.5
Houses, other
buildings and
land
1.5
Loans
1.3
Deposits &
currency
0.1
7.6
4.3
Real estate +
net monetary
assets
Source: ONS National Banking Sheets
Other
financial
assets –
claims against
business debt
and equity
Other TOTAL
mainly cars
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Variation in land value per hectare:
UK 1983 – 2010
£ million
UK
10
9
8
7
6
5
4
3
2
1
Source: Blue Book 2013
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Credit extension and house prices
Household debt as a % of GDP 2000 – 2007
House prices 2000 – 2007
250
120
100
80
150
% GDP
Index: 2000 = 100
200
60
100
40
50
20
0
0
Q1 2000
Spain
Q1 2001
Q1 2002
US
Q1 2003
Q1 2004
Q1 2005
Q1 2006
UK
Source: Ministry of Housing (Spain), S&P (US), DCLG
Q1 2007
Ireland
Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007
US
UK
Spain
Ireland
Source: BEA; ONS; ECB
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Interactions between credit categories and
effects
Increased
apparent
wealth
Increased
price of
existing real
estate
Increasing
credit supply
/ demand
Increased
prices for
new real
estate
Reduced
saving:
increased
consumption
Boom in new
real estate
construction
Borrower and lender
net worth, confidence
and expectational
effects
Equity
withdrawal
mortgage
supply &
demand
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Inequality, demand and credit
Rich have
higher
marginal
propensity to
have than poor
+
Savings
not matched
by
______
investment
Rising
inequality
Deflationary
impetus –
growth on
NGDP falls
•Rich lend to
poor
•Central banks
facilitates
Deflationary
impetus offset:
• NGDP growth
maintained
• Growth in credit
intensity
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Changes in housing wealth:
UK 2003 – 2013
£bn
Households with
no mortgage debt
556
Buy-to-let
landlords
Households with
mortgages
434
-59
Source: Savills, Private landlords gain the most from rising property market, Financial Times, 18 January 2014
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Global current account balances as a %
of world GDP
1
0.5
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-0.5
-1
-1.5
-2
United States
OPEC
Germany+Japan
Developing Rest
Developed Rest
China
Source: IMF BOPS
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Eurozone current account deficits:
2000 – 2008
0
GDP– 2008
% of
% of GDP
2000
-2
%
-4
-6
Greee
Greece
-8
Ireland
Ireland
Portugal
Portugal
-10
Spain
Spain
-12
-14
-16
2000
2001
2002
2003
2004
Year
2005
2006
2007
2008
Source: International Monetary Fund, World Economic Outlook Database, October 2012
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Decomposition of cumulative capital
inflows: Spain (% of 2007 GDP)
60%
50%
40%
30%
20%
10%
Jan-02
Jun-02
Nov-02
Apr-03
Sep-03
Feb-04
Jul-04
Dec-04
May-05
Oct-05
Mar-06
Aug-06
Jan-07
Jun-07
Nov-07
Apr-08
Sep-08
Feb-09
Jul-09
Dec-09
May-10
Oct-10
Mar-11
Aug-11
Jan-12
Jun-12
0%
PRIVATE INFLOWS
TARGET
TARGET Liab.
2
Liabilities to
ESCB
TOTAL INFLOWS
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Sectoral financial surpluses/deficits as % of
GDP: Japan 1990 – 2012
10
5
0
%
-5
-10
-15
PNFCs
Government
Source: IMF, Bank of Japan Flow of Funds Accounts
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Japanese government and corporate debt:
1990 – 2010
250
% GDP
200
150
100
50
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008 20010
0
Bank lending to non-financial corporates
General Government debt
Source: BoJ Flow of Funds Accounts, IMF WEO database (April 2011), FSA calculations
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Shifting leverage: private and public
debt-to-GDP
%GDP
125
%GDP
120
110
110
95
100
US
90
80
80
65
70
50
60
35
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Household
PNFCs
Public
50
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: OECD National Accounts
220
Household
Spain
PNFCs
Source: OECD National Accounts
195
% GDP
170
145
120
95
70
45
20
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Household
PNFCs
Public
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Policies required to achieve more
stable growth
Reduction in inequality or at least reduced pace of increase in
inequality
Reduction in global current imbalances between surplus and
deficit nations
 Remove biases to credit creation in deficit countries
 Remove biases to excessive savings in surplus countries
Integrated set of monetary, macro-prudential and fiscal policies to
lean against ‘too much of the wrong sort of debt’.
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Monetary, macro-prudential and fiscal policies
to combat excessive debt creation
Level as well as rate of growth of leverage a
key indicator
But no precise threshold for ‘too high’
leverage can be defined
Preemptive interest rate rises to lean
against credit/asset price cycles
But insufficient due to heterogeneous
interest rate elasticity of credit demand
Tax on credit intermediation – or at least
removal of tax biases in favour of debt
• Recognises the adverse externality of debt
creation
• Major political difficulties given winners and
losers
• Dangers of arbitrage via shadow banking
Encourage equity and hybrid contracts
Unlikely to occur spontaneously without
government support
Much higher bank capital ratios
Would require parallel action to prevent
shadow bank based arbitrage
Manage the mix of credit by category
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Managing the mix of credit by category:
possible policies
Increase capital risk weights for real estate
finance above those indicated by private
assessment of risk
Addresses the externality of lending
against real estate
Loan-to-value or loan-to-income limits on
real estate lending
Borrower constraint since lender
constraints imperfect
Underwriting mortgage standards to
prevent reliance on price rise assumptions
Introduced by UK FCA
Constraints on high interest consumer
lending
• Danger of illegal alternatives
• Constraints on marketing preferable to
prohibition
Banks with dedicated focus on non-real
estate business finance
To avoid crowding out of investment or
trade finance
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1-Mar-85
1-Mar-86
1-Mar-87
1-Mar-88
1-Mar-89
1-Mar-90
1-Mar-91
1-Mar-92
1-Mar-93
1-Mar-94
1-Mar-95
1-Mar-96
1-Mar-97
1-Mar-98
1-Mar-99
1-Mar-00
1-Mar-01
1-Mar-02
1-Mar-03
1-Mar-04
1-Mar-05
1-Mar-06
1-Mar-07
1-Mar-08
1-Mar-09
1-Mar-10
1-Mar-11
1-Mar-12
1-Mar-13
Real yields to maturity on UK indexed
linked gilts
5
4
3
2
1
0
-1
-2
10-year Yield
20-year Yield
Source: Bank of England Statistics, Zero coupon real yields
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UK (M2)
Japan (M2)
Japan (M4)
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UK (M4)
Source: BoE, BoJ, Datastream
|34
Q4 2010
Q2 2009
Q4 2007
Q2 2006
Q4 2004
Q2 2003
Q4 2001
Q2 2000
Q4 1998
Q2 1997
Q4 1995
Q2 1994
Q4 1992
0.0
Q2 1991
0.5
Q4 1989
1.0
Q2 1988
Velocity of Money
(Nominal GDP/M2)
Q4 1986
1.5
Q2 1985
2.0
Q4 1983
2.5
Q2 1982
3.0
Q4 1980
Q4 2010
Q2 2009
Q4 2007
Q2 2006
Q4 2004
Q2 2003
Q4 2001
Q2 2000
Q4 1998
Q2 1997
Q4 1995
Q2 1994
Q4 1992
Q2 1991
Q4 1989
Q2 1988
Q4 1986
Q2 1985
Q4 1983
Q2 1982
Q4 1980
Velocity of money circulation
Velocity of Money
(Nominal GDP/M4)
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0