Christian Weller Guest Blogs on Credit Slips

Why has household debt grown so much? One rather convincing argument, prominently developed by Elizaeth Warren, is that income growth has not kept pace with the cost of basic consumption. To maintain consumption, many families ultimately relied more and more on consumer debt. This argument, though, only explains why the demand for credit has increased.

For the supply side of the market, the opposite should have been true. The same income trends that translated into more demand for credit should have resulted in less supply. Greater income inequality and slower income growth meant less collateral for banks. Also, slower income growth and rising inequality occurred at a time of financial deregulation, which has a priori an ambiguous effect on the supply of credit. There may be more banks entering the market, which could raise the credit supply, but there is also more consolidation in the industry, which could reduce the credit supply, at least for low-income and moderate-income borrowers.

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