A look at US deleveraging, Part 2 – the bridge

Many are probably of the view that, in June 2016, the headwinds from US deleveraging have died down to the point where they no longer trouble the expansion. For example, Lawrence H. Summers (2016) describes deleveraging as “(a) good story for 2011; not a very good story eight years after the crisis when financial conditions seem very much to have normalized”. We generally endorse much of Summers’ characterization of current conditions, but, like many economists, Summers shies away from a full examination of the guts of the monetary policy transmission mechanism. Although the drag from limits on credit availability and diminished risk tolerance has lessened, the legacy of the 2007–2009 crisis is still very much with us. We wish to parse out the credit drag more fully in a separate post, but will make a few quick observations here. Six years after its passage, Dodd-Frank is not yet fully implemented, so banks have not yet reached a steady state in their post-panic restructuring. As another example, household mortgage debt outstanding as of Q1 2016 has expanded by only 1.5 percent since bottoming out (source: Federal Reserve Statistical Release Z.1, Financial Accounts of the US, Table D.3, release of June 9, 2016) despite ongoing reports of increases in home prices nationally. The concern is that the mortgage market is still unfriendly to new entrants, as it has been for years, although some concession has to be made for the burden of student loans. And it is quite possible, perhaps even likely, that some degree of hoarding still obtains seven years after the end of panic, and the more interest rates sag, the greater the risk of further hoarding.

It is fairly clear that whatever legacy of the crisis remains, it is draped over deep grooves in the economic fabric that are common to many post-industrial nations, grooves that are recognized but yet unfamiliar: low population growth; downward pressure on some, but not all, prices and real incomes; ultra-low or negative interest rates, with a bias downward, and; the assessment of productivity in the context of other well-known and established, nevertheless slippery, forces — i.a., expansion of services, application of technologies, and relocation of production. As time has revealed the contours of our era, GDP potential has been steadily revised downward, shown in Summers (2016).

The way slow growth and its confederates are perceived is influenced, no doubt, by the signs of social disrepair and disquiet seen in the US, from gun violence in troubled city neighborhoods like the south and west sides of Chicago, to the show of support for illiberal immigration law, to increased death rates for poorly educated middle-aged whites, and so on. While slow growth may be an indelible feature of the landscape for the near-/medium-term, slow growth stings when it is believed more can be done to improve the wealth of our nation.

The table below shows chained-dollar GDP growth rates since 2002, on a total and per capita basis, and the contribution to GDP growth from residential investment. Recall that 2010 was the year seeing the most benefit from the 2009 ARRA stimulus package.

Sources: US Department of Commerce, Bureau of Economic Analysis, http://bea.gov/national/index.htm#gdp; Bureau of the Census, http://www.census.gov/topics/population.html
Sources: US Department of Commerce, Bureau of Economic Analysis, http://bea.gov/national/index.htm#gdp; Bureau of the Census, http://www.census.gov/topics/population.html

And still, we believe a look at the leverage record turns up sources of slack in the US economy, and that slack exists because of policy choices. It is hard to imagine that standards will not be loosened eventually, perhaps in response to a downturn. And in any event, new markets, intermediaries and instruments will likely develop. However, the speed and success of new market and instrument development will depend, among other things, on the institutional setting and risk attitudes.

References

Summers, Lawrence H. 2016. Secular stagnation and monetary policy. Federal Reserve Bank of St. Louis Review, Second Quarter, 93-110. http://dx.doi.org/10.20955/r.2016.93-110