Blogging the ASSA conference. Consumer debt and the commons

Oh. To walk along the Charles river in the dark hour of early morning. It’s damp. Cold. A drizzle. Melting snow. Steam escapes from the chimneys of the Kendall cogeneration facility, which delivers heat to the city. And which is a fine example of De Stijl architecture. Oh…

Alas, we have to face the Econ again. What do they tell us about consumer debt? See below (there is an interesting  connection between the article of Davis Kaspar (not yet on the ASSA website) and the article of Knyazeva, Knyazeva and Stiglitz: when creditor rights are very strong, as in the case of payday lending, this will lead to usury and predatory lending).

 

Inadequate Household Deleveraging: Income, Debt and Social Provisioning
Steven Pressman (Monmouth University)
Robert H. Scott III (Monmouth University)

Deleveraging is an eventual consequence of a consumption binge fueled by loose lending and prolific borrowing but stagnant real incomes (Minsky 1986). The deleveraging process during the Great Recession was impeded by several institutional factors. First, personal bankruptcy laws in the United States have become more onerous and more expensive for households (Scott 2007). Second, 

stagnant incomes for most Americans (and falling incomes since 2007) means that households lack flexibility to direct more of their income to pay down debt balances. Third, many households have been saving less over the past two decades. Combined with stagnant income levels, this further reduces the ability of households to deleverage. Fourth, aggregate debt levels increased so much during the consumption binge that it became difficult (given stagnant incomes and less saving) to trim it down considerably. Fifth, many households lack the bargaining power, knowledge or credit score needed to renegotiate better terms on their outstanding debt. This is particularly true of younger people who are taking on greater debt (e.g., student loans), something that might have long-lasting effects on aggregate demand. Prior to the Great Recession, US households had record high debt levels and record low savings rates. Highly leveraged consumption boosted economic growth. However, large debt burdens have led many families to deleverage. Our study finds that deleveraging has been insufficient. Although debt payments have fallen relative to household income, this is mainly due to low interest rates. Debt levels, especially for home mortgages, remain high by historical standards and portend continued stagnation due to lower consumer spending.

Paying for Debt: The Labor Markets Implications for Growing Household Debt
Bert Azizoglu (New School)

In recent decades US households have increasingly complemented their labor income with credit to sustain their consumption, housing and education expenses. .. On a macro level, Campbell and Hercowitz find that household debt drives up total hours worked. Since unemployment remains high and labor market participation has been falling, focusing on total hours might be covering up asymmetric and potentially dramatic effects on certain households. I therefore investigate how household debt translates into changes in the labor market status using micro-level data in order to get a more accurate picture of the stated labor supply effect. In a second step, I shift the attention to the debt and labor income relationship among households with employed members and analyze whether individuals with higher household debt also face a more disadvantageous wage bargaining position vis-à-vis their employers which manifests itself in lower wages relative to comparable employees without debt.

Social Provisioning for Financial Inclusion: Extending an Institutional Approach
Sherry Davis Kasper (Maryville College)

Since the mid-1990s the number of Alternative Financial Services Providers (AFSPs), or fringe banks, grew 10% annually to a $100+ billion business, serving the financial needs of approximately 25% of the US population that is unbanked or underbanked. Currently the Consumer Financial Protection Bureau is investigating the best way to oversee this industry. This paper will explore how institutional economics could aid in developing these policies, updating John Commons’ concept of working rules, Allan Schmid’s “situation, structure, performance paradigm,” and an institutionalist reading the Capabilities Approach to financial inclusion.

Social Provisioning and Financial Regulation: An Institutionalist-Minskyian Agenda for Reform
Faruk Ulgen (University of Grenoble)

Contrary to neoclassical equilibrium and neoliberal efficient market models, it aims at developing an alternative institutionalist analysis in the line of Hyman Minsky’s endogenous financial instability assumption. Two arguments are then brought to the fore. First, the monetary/financial stability has a peculiar nature as a kind of specific/crucial public good, or in quite confused terms, as “the commons” as it concerns the whole society and its viability conditions; every member of a given economic society is a commoner even though she/he is not plainly involved in related economic relations. Directly or indirectly everyone uses it and is subjected to its systemic consequences. And second, the provision of “monetary/financial commons” is essentially a matter of public policy. It requires the intervention of public power that must play the role of referee and stand outside of the private and decentralized market relations in order to organize, supervise and regulate the production, the use and the evolution of the system of monetary/financial commons. Garrett Hardin’s social dilemma of the “Tragedy of the Commons” – where common goods availability plummets mainly because of the public management of such goods – finds here an opposite interpretation since the increasing financial instability comes from the lack of publicly organized and supervised regulation in a financialized economy of which the continuity is assumed to be guaranteed by private self-adjustment mechanisms.

Creditor Rights and Aggregate Factors in Loan Terms
Diana Knyazeva (U.S. Securities and Exchange Commission)
Anzhela Knyazeva (U.S. Securities and Exchange Commission)
Joseph E. Stiglitz (Columbia University)

It is well known that conflicts of interests between borrowers and creditors can raise the cost of external financing. In this paper we provide new evidence that borrower-creditor conflicts of interests also affect the sensitivity of debt financing to aggregate business conditions. In the presence of incomplete contracts, creditors cannot fully observe or verify diversion of free cash flow by borrowers. Whereas strong creditor rights impose a high cost on defaulting borrowers, weak creditor rights enable borrowers to divert cash flows and avoid repayment more easily. When creditors cannot enforce their rights and assure repayment regardless of the individual borrower’s underlying financial condition, creditors may choose to rely more on verifiable, aggregate information in their lending decisions, resulting in less discriminate loan pricing. Alternatively, creditors with few protections may resort to more borrower-specific information gathering in an effort to select the best borrowers and mitigate conflicts of interest. We test these contrasting predictions in a sample of international and domestic syndicated bank loans. Based on our analysis of international and domestic syndicated bank loans and country- and state-level variation in creditor rights, we find that industry factors have a larger impact on loan spreads and other terms when creditor protections are weak. The findings demonstrate a new channel for the effect of conflicts of interest on bank lending and yield important implications for lenders, borrowers, efficiency of capital allocation, and systemic risk.