Writing recently for Project Syndicate, Lord Adair Turner, Senior Fellow at the Institute for New Economic Thinking, discusses the “great credit mistake” and warns that policy-makers who focus on credit supply constraints ignore the main impediment to growth.
Instead, Lord Turner makes the case that “once the immediate crisis was over, lack of demand for credit played a far larger role than restricted supply in impeding economic growth.” He notes that this argument is made persuasively in an important new book titled House of Debt by Atif Mian and Amir Sufi.
Through analysing US data on a county-by-county basis, Mian and Sufi show that the recession was caused by a collapse of household consumption, and that consumption fell most in those counties where pre-crisis borrowing and post-crisis real-estate prices left households facing the largest relative losses in net wealth.
Furthermore, Lord Turner points out that it was in those US counties, and similarly so in the UK, “that local businesses cut employment most aggressively. For SMEs, a shortage of customers, not a shortage of credit, constrained borrowing, employment, and output.”
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