Idea Transcript
Private Credit, Public Debt, and Financial Crises Prepared for FRBSF Seminar: Understanding the Slow Recovery April 10, 2013
Òscar Jordà Research Advisor Federal Reserve Bank of San Francisco Thanks to Early Elias for research assistance, and FRBSF Community Development, Economic Research for advice. Based on work with Moritz Schularick (U. of Bonn) and Alan M. Taylor (U. of Virginia).
140 years, 17 countries: Lessons 1. The long view and emerging trends 2. Credit and financial crises 3. Public debt and the recovery 4. Implications for policymakers 2
The long view and emerging trends
3
Financial crises return…Why? Financial Crises
Out of 17 9
Countries experiencing a crisis in a given year
8 7 6 5
Bretton Woods
4 3 2 1 0
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
4
Bretton Woods: what was different? • Capital controls
• Fixed exchange rates • Low leverage banking • Govt. securities a much higher proportion of bank assets (less portfolio risk) • Primitive finance did not hinder investment: Average growth = 3.8% in 1947-1970, 3.2% in 1971-2007 • BW eventually collapsed 5
Banking sector explodes since Bretton Woods Bank Lending, Bank Assets and Money As a percent of GDP, average across 17 countries
Percent 250
Bretton Woods ends
Bank assets
200
150
Bank loans 100
Money
50
0 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
6
Age of money ushers the age of credit Bank Aggregates Relative to Money Percent 150
Average across 17 countries
100
Bank assets 50
0
Bank loans
-50
-100
-150
-200 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
7
From nuts and bolts to bricks and mortar Ratio of US Real Estate Lending to US Total Lending
Ratio 0.8
Total real estate
0.7 0.6 0.5
0.4
Household 0.3
Commercial
0.2 0.1 0
1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
8
Total Liabilities then and now 1928
Percent
Bank liabilities Public debt
2007
600 500 400 300 200 100 0
Percent
600 500 400 300 200
100 0
9
Unprecedented reversal of reserves • Lesson of 1990s emerging markets (EM) crises: – Crisis more painful w/o foreign reserves
• Since: – Globalization = expansion of balance sheets – Private capital flows from DM to EM – Official capital flows from EM to DM
• Great Reserve Accumulation: $10T officially + $4T in sovereign wealth funds 10
Demographic trends reversing: Savings? Dependents as a Percentage of Working Age Working age = ages 20-64; dependents = ages 0-19 and 65+
Percent 85 80 75 70
More developed
65 60
World
55
Less developed
50 45
1970
1980
1990
2000
2010
Source: U.N. Population Statistics; see Pradhan and Taylor (2011)
2020
2030
2040
2050
11
Recent trends are game changers • Unprecedented expansion of credit: financial assets/GDP = 150% in 1975 → 350% in 2008. Bank loans/GDP doubled. • The banks’ asset mix: govt. securities 60-70% in 1950; 0% in the 2000s • Switch to wholesale funding (uninsured) from deposits (insured): Shadow banking • Public debt growing globally before the crisis 12
Credit and financial crises
13
Financial crises are different USA real GDP per capita Percentage points 15
Cumulative change from the start of the recession
10
Normal 5
0
Financial
-5
-10 0
1
2
3
Years
4
5 14
Financial crises: disinvestment and deflation USA Investment
Percentage points Cummulative change from the start of the recession
USA CPI Prices Cumulative change since the start of the recession
Percentage points
40
25
30
20 20
Normal
Normal 15
10 0
10
-10 5 -20 0
-30
Financial -40
Financial
-5
-50 -10 -60 -70 0
1
2
3
Years
4
5
-15 0
1
2
3
4
5
Years 15
Private credit predicts financial crises Predict financial crises with:
(1)
(2)
(3)
(4)
(5)
Change in private credit
-
-
Change in public debt
-
-
Level of credit/GDP
-
-
-
-
Level of debt/GDP
-
-
-
-
Both interacted
-
-
-
0.72
0.61
0.71
0.71
0.62
AUC
• Public debt does not work • External imbalances (not shown) do no work • Let’s not kid ourselves, financial crises are difficult to predict 16
Excess credit trumps debt accumulation The Recession and the Recovery Percent 6
Normal vs. financial as a function of credit and debt
4
Normal Low credit and low debt
Low credit and high debt
2
0
-2
High credit and high debt
High credit and low debt
-4
-6
-8 0
1
2
Years
3
4
5
17
Public debt and the recovery
18
Public debt growing again… Total Public Debt to GDP Ratio
Percent of GDP 140
120
100
Average (exclud. USA and Japan) 80
USA
60
40
20
0 1870
1890
1910
1930
1950
1970
1990
2010
19
Excess credit buildup hurts in the downturn Real GDP per capita
Percentage points 6
Cumulative change from the start of the recession
4
Normal
2
Norm. + excess credit
0
-2
Financial
-4 -6
Fin. + excess credit
-8 -10 0
1
2
Years
3
4
5
20
Excess credit buildup hurts in the downturn Lending
Public debt
Percentage points 30
Cumulative change from the start of the recession
Percentage points 14
Cumulative change from the start of the recession
12
25
Normal
Fin. + excess credit
20
10 8
15
Financial
Financial
6
10 4 5
2
0
0
Normal
-5
Fin. + excess credit
-2 -4
-10
0
1
2
Years
3
4
0
5
1
CPI Prices
2
Years
3
4
5
Percentage points 12
Cumulative change from the start of the recession
10
Normal
8 6 4
Financial 2 0
-2 -4 -6
Fin. + excess credit
-8 0
1
2
Years
3
4
5
21
The level of debt matters in the downturn Real GDP per capita
CPI Prices
Percentage points 6
Cumulative change from the start of the recession Normal
Percentage points 15
Cumulative change from the start of the recession
Normal
4
10
2 0
Financial Debt/GDP = 50
5
Financial Debt/GDP = 50
0
-2 -5 -4 -10
-6
Financial Debt/GDP = 100
-15
-8
Financial Debt/GDP = 100
-10
-20
-12 0
1
2
Years
3
4
Lending
5 Percentage points 30
Cumulative change from the start of the recession
-25
0
1
2
Public Debt
Years
3
5 Percentage points 10
Cumulative change from the start of the recession
Financial Debt/GDP = 50
25
Normal
4
20
5
Normal
0
15
Financial Debt/GDP = 50
-5
10 5
-10
Financial Debt/GDP = 100
0
-15 -5
Financial Debt/GDP = 100
-20
-10
0
1
2
Years
3
4
5
0
1
2
Years
3
4
5
22
US vs UK recovery (± shadow banking) USA real GDP per capita Cumulative change since the start of the 2007 recession
Percentage points 15
UK real GDP per capita Cumulative change since the start of the 2007 recession
Percentage points 15
10
10
Normal
Normal 5
5
0
0
Actual
Predicted -5
-5
Actual
Predicted -10 0
1
2
3
Years
4
-10 0
1
2
3
4
5
Years 23
Implications for policymakers
24
Maybe this time is different • Monitor credit and leverage. New age of credit: – Excess credit makes recessions worse, recoveries slower – Turns some into financial crises
• Excess public debt: – Not the same as credit – But high levels complicate recoveries from financial crises
• New EM and demographic trends 25
Further reading
26
Useful References • Jordà, Òscar. 2012. Credit: A Starring Role in the Downturn. FRBSF Economic Letter, 2012-12. • Jordà, Òscar, Moritz Schularick and Alan M. Taylor. 2011. Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons. IMF Economic Review, 59. •
Jordà, Òscar, Moritz Schularick and Alan M. Taylor. 2012. When Credit Bites Back: Leverage, Business Cycles, and Crises. FRBSF working paper.
• Reinhart, Carmen M. and Kenneth Rogoff. 2009. This Time Is Different: Eight Centuries of Financial Folly. Princeton University Press. • Schularick, Moritz and Alan M. Taylor. 2012. Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008. American Economic Review, 102(2). • Taylor, Alan M. 2012. The Great Leveraging. NBER working paper 18290 27