Did Consumers Want Less Debt? Consumer Credit Demand versus Supply in the Wake of the 2008-2009 Financial Crisis

SAFE Working Paper No. 42

48 Pages Posted: 27 Feb 2014

See all articles by Reint Gropp

Reint Gropp

Halle Institute for Economic Research

John Krainer

Federal Reserve Bank of San Francisco

Elizabeth Laderman

Federal Reserve Bank of San Francisco

Date Written: January 31, 2014

Abstract

We explore the sources of household balance sheet adjustment following the collapse of the housing market in 2006. First, we use microdata from the Federal Reserve Board’s Senior Loan Officer Opinion Survey to document that banks cumulatively tightened consumer lending standards more in counties that experienced a house price boom in the mid-2000s than in non-boom counties. We then use the idea that renters, unlike homeowners, did not experience an adverse wealth shock when the housing market collapsed to examine the relative importance of two explanations for the observed deleveraging and the sluggish pickup in consumption after 2008. First, households may have optimally adjusted to lower wealth by reducing their demand for debt and implicitly, their demand for consumption. Alternatively, banks may have been more reluctant to lend in areas with pronounced real estate declines. Our evidence is consistent with the second explanation. Renters with low risk scores, compared to homeowners in the same markets, reduced their levels of nonmortgage debt and credit card debt more in counties where house prices fell more. The contrast suggests that the observed reductions in aggregate borrowing were more driven by cutbacks in the provision of credit than by a demand-based response to lower housing wealth.

Keywords: credit supply, deleveraging, households, financial crisis

JEL Classification: E21, G21

Suggested Citation

Gropp, Reint and Krainer, John and Laderman, Elizabeth S., Did Consumers Want Less Debt? Consumer Credit Demand versus Supply in the Wake of the 2008-2009 Financial Crisis (January 31, 2014). SAFE Working Paper No. 42. Available at SSRN: https://ssrn.com/abstract=2402086 or http://dx.doi.org/10.2139/ssrn.2402086

Reint Gropp (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

John Krainer

Federal Reserve Bank of San Francisco ( email )

101 Market Street
Economic Research Department
San Francisco, CA 94105
United States

Elizabeth S. Laderman

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
150
rank
192,179
Abstract Views
1,351
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information