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September 10, 2012 3:23 AM   Subscribe

The National Bureau of Economic Research has published a new paper analyzing 138 years of economic history in 14 advanced economies, which proves that high levels of private debt cause severe recessions. (Via) Bonus SLYT: Money As Debt (1hr)
posted by infini (32 comments total) 9 users marked this as a favorite

 
You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Brother, how 'bout $5? (same as in town...)
posted by chavenet at 3:34 AM on September 10, 2012


Here is a link to the paper via the BIS for free.
posted by chavenet at 3:36 AM on September 10, 2012


Here is a link to the paper via the BIS for free.

And SSRN.com slips a little deeper into recession.
posted by three blind mice at 3:40 AM on September 10, 2012


Gee...
posted by MartinWisse at 3:49 AM on September 10, 2012


Of course, "private debt" is never going to be read as "poor people". It's going to be read as "government spending" and "taxes on rich people".
posted by DU at 3:54 AM on September 10, 2012


One of the key points of the paper is that excessive private debt is a better predictor of a recession than total debt - so in some ways, government debt and a current account deficit (import exceed exports) are a distraction.

It makes sense because excessive private debt is a bigger hole to crawl out from under when recession hits. It also goes hand in hand with the lower lending standards (e.g. NINJA loans) and deception about the quality of those loans which eventually destabilises the economy.

So fundamentally the central bank must have the will and ability to restrict credit growth (through increasing interest rates) in the good times to try to stop the boom going too high. This is where Greenspan failed in my opinion. He held rates in the US too low, for too long.
posted by dave99 at 3:55 AM on September 10, 2012 [6 favorites]


What is the scientific validity of this sort of meta-analysis? Isn't this muddying up the waters even more?
posted by Renoroc at 4:45 AM on September 10, 2012


I clicked on the video link and the first thing I saw was the statement, "No more comments from commies". Between that and the use of the word proves in a supposed research paper how do you expect me to take any of this seriously?
posted by Jernau at 4:54 AM on September 10, 2012 [4 favorites]


But debt funding is important to grease the economic wheels!
posted by Mezentian at 4:58 AM on September 10, 2012


I always thought it was bankers handing out loans way too freely, then on an agreed date, calling all the loans in and crashing things on purpose.
posted by MikeWarot at 5:01 AM on September 10, 2012 [1 favorite]


its not just about private credit growth, its that rapid private credit growth tends to result in a lot of really bad investment.

Note - this is Private Debt. Not government debt.
posted by JPD at 5:34 AM on September 10, 2012 [2 favorites]


I always thought it was bankers handing out loans way too freely, then on an agreed date, calling all the loans in and crashing things on purpose.

This is sarcasm right?
posted by JPD at 5:34 AM on September 10, 2012


You lost me at "proves".
posted by dfan at 5:35 AM on September 10, 2012 [3 favorites]


So fundamentally the central bank must have the will and ability to restrict credit growth (through increasing interest rates) in the good times to try to stop the boom going too high.

Or partially through encouraging an economy that does not depend so much on credit and constant consumerism at all.
posted by corb at 5:36 AM on September 10, 2012


Or partially through encouraging an economy that does not depend so much on credit and constant consumerism at all.

It's when lending slips into what some commentators call 'ponzi lending' (pace Minsky) that you get problems. Lending for investment in capital is (all other things being equal) absolutely necessary in a modern economy. Lending for speculation on future asset growth? Not really. Preventing the latter whilst allowing the former is a hard problem.
posted by pharm at 6:34 AM on September 10, 2012 [2 favorites]


Anyone who claims to "prove" anything about economics is deluding themselves.
posted by caddis at 6:35 AM on September 10, 2012 [1 favorite]


The word "prove" is not used in the article.
posted by meows at 6:39 AM on September 10, 2012 [4 favorites]


The word "prove" is not used in the article.
Thanks, you're right. Bad move by the Via link on ritholtz.com to use that language and instantly turn a bunch of us off.
posted by dfan at 6:55 AM on September 10, 2012


I know this is probably a "well, duh!" moment for many, but the witch doctors that have taken over economics since the 70s have to be dispelled by liberal application of fact, over and over.

Fucking neo-liberals are like crab lice; we might all end up naked and shivering in mass de-lousing showers if they continue to get their way.
posted by clvrmnky at 7:00 AM on September 10, 2012 [2 favorites]


Not all of us, clvrmnky, just those of us on the wrong side of the ledger.
posted by notyou at 7:21 AM on September 10, 2012


its not just about private credit growth, its that rapid private credit growth tends to result in a lot of really bad investment.

Note - this is Private Debt. Not government debt.


Though the same is true of government debt: its rapid growth also results in a lot of really bad investment.
posted by chavenet at 7:54 AM on September 10, 2012


Proof is incorrect, as others have said, when empirically testing a scientific hypothesis. From just glancing at this working paper, I suspect that there's (a) multiple causal pathways for each recession, (b) and disentangling them is beyond hard to do. The economics of business cycles is very big -- there's probably nothing that has been studied as extensively as that very phenomena. And there's large agreement about the theoretical channels that cause a cycle -- sticky prices, information problems, coordination, search costs, shocks to spending, bank runs, so forth -- but less so on the identification of those channels with data. Studying the macro economy is very different. We do not have the ability to run experiments, for one, with an economy, and any study that one undertakes likely will violate the Stable Unit Treatment Value Assumption (SUTVA) because of the spillovers between one treatment group and the control group through shared capital and trade channels. This means we cannot use the kind of experimental framework for understanding causality when undertaking a scientific study of the causes of a recession -- or rather, we must relax the SUTVA requirement, which to my understanding means "causality" is a much different thing to define if so.

I suspect that private debt is going to be very difficult to identify in any practical empirical test of a model. And will only be identified under almost herculean assumptions that if one understood them would make you feel very discouraged, to say the least. Probably no area in all of economics do you face nearly as significant of challenges with empirical work as you do the business cycle. Which isnt to say the work is low quality either -- it's extraordinarily high quality. But the constraints are far more binding than in applied microeconomics, like health, public, education, or labor where we actually do have teh ability to run experiments, or at least quasiexperiments.
posted by scunning at 7:55 AM on September 10, 2012


"high levels of private debt cause severe recessions"

Filed under: "no sh#$ Sherlock"

What do people think that a 400 billion dollar quarterly profit means?

Spoiler: It means that this specific $400B is no longer spread out among the "economy", and is instead in a single bank account.

I do not condone violence, but I'm pretty sure that the French Revolution did a pretty good job the last time around of fixing the French economy for a couple hundred years.
posted by Blue_Villain at 8:37 AM on September 10, 2012 [1 favorite]


Fucking neo-liberals are like crab lice; we might all end up naked and shivering in mass de-lousing showers if they continue to get their way.


Actually I don't think this particular idea is at odds with anything neo-liberals believe. Where you start to get big variance in opinion is how best to correct the issue.
posted by JPD at 8:39 AM on September 10, 2012


Spoiler: It means that this specific $400B is no longer spread out among the "economy", and is instead in a single bank account.

This statement is so wrong that I don't even know how to correct it.
posted by kiltedtaco at 10:05 AM on September 10, 2012 [5 favorites]


You would point out that the people who made $400B probably spend a lot of it, rather than sit upon it like a fairy tale dragon and that's what makes economies happen.

Unfortunately, economic data of late suggests that many of the very rich are starting to take their cues from various fairy tale fauna, famous French monarchs and so forth, so you might have some trouble convincing some people.
posted by Kid Charlemagne at 11:39 AM on September 10, 2012


Though the same is true of government debt: its rapid growth also results in a lot of really bad investment.

Depends on who's doing the investing: land wars in Asia, bad; American infrastructure, good; general 'stimulus', fair-to-mediocre.
posted by oneswellfoop at 12:15 PM on September 10, 2012


those are all examples of public expenditure - which isn't to say you can't have over investment in infrastructure - look at Japan for example. The massive infrastructure spending is past a point where it is stimulative.
posted by JPD at 1:17 PM on September 10, 2012


A $400b profit is shared among shareholders, and subject to tax.
posted by bystander at 2:15 PM on September 10, 2012


So, we can all at least agree that banks are usurious, moneygrubbing bastards, right? Completely f*cking rolling in it, because they are basically pulling money out of thin air, and lending it out for something that's actually worth something?!

So, then, why don't we just make a Bank of MeFi? I'm willing to be the CEO.
posted by markkraft at 2:54 PM on September 10, 2012


A $400b profit is shared among shareholders, and subject to tax.

Only when the company pays a dividend. Apple* has resisted doing so for a long time, and only recently started giving out small dividends. Check out their cash position.

* just one example, please don't derail on them alone
posted by DreamerFi at 3:33 PM on September 10, 2012


Seems to me like rising debt can be a leading indicator of recession, but not a cause.
posted by gjc at 8:38 PM on September 10, 2012


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