Consumption and Credit in Run-up to Crisis and in the Efforts to Overcome Recession

In the present paper I will present a complementary interpretation to the reasons of financial crisis of the recent years, namely indicating the role of excessive rise of indebtedness of households, on top of the normal life cycle of borrowing.  I will reflect on the role of different kinds of credits contracted by households (mortgage credit and consumer credit) for rapid growth of consumption, and also for its rapid decrease. I will assess the role of poverty and inequality in boosting household credits.

The research will be based on Eurostat and ECB data on different kinds of credit taken by households, the explanation of the rise of which will contain, on the side of demand for credit, poverty and inequality, and on the side of supply, availability of funds from financial markets. Additional information coming from specialized studies on household credits will be used also. The rise of indebtedness of households will be correlated with the dynamics of consumption.    

In the first phase I will illustrate this process on the extreme case of post-transition countries (new Member States of the European Union), where growing inequality and poverty together with welfare expectations, consumerism and aggressive lending strategies may be indicated as reasons of rapidly growing debt. Availability of foreign funds made this indebtedness possible. In the case of those countries consumer credit constituted  substantial part of indebtedness. Such a structure amplified the possibilities to consume, but, when easy credit disappeared, deepened recession.

I will further compare this dynamics with the one of the Western European countries. While starting from higher level of household debt, they developed mostly mortgage credits in run-up to crisis, with less direct, but visible impact on consumption. Countries with higher rise of indebtedness were also systematically subject to deeper fall of consumption after the crisis.  Thus sharply growing indebtedness of households could be considered an important reason of fast, but unsustainable rise of consumption, in Western European countries similarly to (but to a lesser degree) the case of Central and Eastern Europe. 

I will also reflect on the possible role of enabling recovery by household debt, requested now  by some who point at detrimental insufficiency of demand.  However, a repetition of the scenario of boosting consumption by irresponsible lending/borrowing from before the crisis does not seem neither possible nor advisable.