Debt and inequality by Adair Turner
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This is the presentation by Lord Turner at the Resolution Foundation event, Dealing with debt, in which Lord Turner, economist and former chairman of the Financial Services Authority, set out his own analysis of the household debt problem and gave his assessment of the Resolution Foundation’s work. This event was held on 3 June 2014
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Debt and inequality by Adair Turner
- 1. Debt and inequality Adair Turner Senior Fellow, INET Resolution Foundation 3 June, 2014 www.ineteconomics.org 300 Park Avenue South | New York, NY 10010 22 Park Street | London W1k 2JB
- 2. Private domestic credit as a % of GDP: Advanced economies 1950 – 2011 2 Source: Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten, C. Reinhart & K. Rogoff, 2013
- 3. Dynamics of real GDP and credit (Year on year % change) Source: Monthly Bulletin, European Central Bank, January 2014 Real GDP Real credit to households Real credit to NFCs United States United Kingdom 3
- 4. The Dilemma We seem to need credit growth faster than GDP growth to achieve an optimally growing economy, but that leads inevitably to crisis and post-crisis recession. 4
- 5. Debt contracts: The finance theory perspective Non-state contingent contracts overcome “costly state verification” advantages over equity contracts in business finance Essential to mobilisation of capital Empirical evidence of benefits of financial deepening, i.e. bank credit ÷ GDP 5
- 6. Three conceptually distinct functions of lending Finance of new capital investment • Enabling inter-temporal shift of consumption within life time income Finance of purchase of existing assets Finance of increased consumption • Non-real estate • Commercial real estate • Residential real estate • Human capital • Real estate • Collectibles • Existing business assets – e.g. Leveraged Buy Outs 6
- 7. Categories of bank lending: UK, 2009 7 227 1235 243 232 Primarily productive investment Some productive investment and some leveraged asset play Mainly purchase of existing assets Pure life-cycle consumption smoothing Other corporate Commercial real estate Residential mortgage (including securitizations and loan transfers) Unsecured personal £bn But also achieves life-cycle consumption smoothing
- 8. Share of real estate lending in total bank lending Source: The Great Mortgaging, Professor Alan Taylor, University of California, Davis 8
- 9. Credit and asset price cycles: upswing 9 Expectation of future asset price increases Increased credit extended Low credit losses: high bank profits • Confidence reinforced • Increased capital base Increased asset prices Increased lender supply of credit Favourable assessments of credit risk Increased borrower demand for credit
- 10. Credit extension and house prices House prices 2000 – 2007 Household debt as a % of GDP 2000 – 2007 Source: BEA; ONS; ECB 0 20 40 60 80 100 120 Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007%GDP US UK Spain Ireland 0 50 100 150 200 250 Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Index:2000=100 Spain US UK Ireland Source: Ministry of Housing (Spain), S&P (US), DCLG 10
- 11. 11 Shifting leverage: Private and public debt-to-GDP
- 12. Real yields to maturity on UK indexed linked gilts Source: Bank of England Statistics, Zero coupon real yields -2 -1 0 1 2 3 4 5 01-Mar-85 01-Mar-86 01-Mar-87 01-Mar-88 01-Mar-89 01-Mar-90 01-Mar-91 01-Mar-92 01-Mar-93 01-Mar-94 01-Mar-95 01-Mar-96 01-Mar-97 01-Mar-98 01-Mar-99 01-Mar-00 01-Mar-01 01-Mar-02 01-Mar-03 01-Mar-04 01-Mar-05 01-Mar-06 01-Mar-07 01-Mar-08 01-Mar-09 01-Mar-10 01-Mar-11 01-Mar-12 01-Mar-13 10-year Yield 20-year Yield 12 Percent
- 13. Shifting leverage: back to private again Source: OBR Economic and Fiscal Outlook, March 2014 13 Public net debt as % of GDP: 2009 - 2019 40 45 50 55 60 65 70 75 80 85 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 %Percent 140 145 150 155 160 165 170 2009Q1 2009Q4 2010Q3 2011Q2 2012Q1 2012Q4 2013Q3 2014Q2 2015Q1 2015Q4 2016Q3 2017Q2 2018Q1 2018Q4 Household gross debt as % of income: 2009 - 2019 %Percent
- 14. Average income increases US (1980=100) 0 50 100 150 200 250 300 350 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 bottom 20% top 5% top 1% S Source: US Census Bureau; World Top Incomes Database 14
- 15. Inequality, demand and credit 15 Rich have higher marginal propensity to save than poor Rising inequality Deflationary impetus – growth of NGDP falls Rich lend to poor Deflationary impetus offset: • NGDP growth maintained • Growth in credit intensity Savings not matched by investment +
- 16. Changes in housing wealth: UK 2003 – 2013 Households with no mortgage debt Buy-to-let landlords Households with mortgages £bn 556 434 -59 Source: Savills, Private landlords gain the most from rising property market, Financial Times, 18 January 2014 16