38
The credit crunch took place against a backdrop of the long-term rise in consumer
indebtedness in the US. For
years,
US consumers have
been living beyond
their
means. Between
1972 and 2008, US consumer indebtedness, as a share of
GDP,
grew
from 60% to 120%. Even
when one excludes
mortgage debt, US consumers
carry more than 2.5 trillion USD in consumer credit – up more than 50%
from
1.6
trillion USD in 2000. Indeed, the explosion in mortgage lending was, in
part, driven by consumers using the boom in housing prices to take on more debt
in order to fuel further consumption, based on the theory that still higher prices
later would pay for money borrowed today.
The wide availability of cheap debt was a key factor fuelling the growth of the
US economy, and, to the degree that the US economy has been an engine of global
economic expansion, the growth of the world economy as well. US household consumption
accounts for an unusually high – and unsustainable – 70% of US GDP.
As
a
consequence, the savings
rate of US households, barely above
zero, has reached
the
lowest
level
since the Great Depression during these times. But, of course, it is
not
just consumer debt that has driven
the growth
of the US economy.
Between
2000
and 2007, corporate and government
debt also increased, causing total US
debt
to climb from 250% to 350% of GDP.
Financial institutions used debt to boost returns.
39
In parallel, outstanding debt
of the total US financial sector grew from 10 trillionUSD in 2002 to 16trillionUSD
in 2007. Corporations used debt to fund global expansion. And, of course, the federal
government
increased its debt to increase spending while keeping
taxes
low.
But
debt cannot grow
faster than income forever.
The
days
of such extreme
debtfuelled
expansion
in the US economy by leveraging
households and financial institutions
are definitively
over.
In the last years,
both consumers and financial institutions
need to deleverage.
The
only way
to prevent
this is a reallocation of leverage
40
38 Cf. P. Gumble, Subprime on the Rhine, in: Fortune, 2007, pp. 45-48.
39 By contrast, in the 30 years between 1950 and 1980, total US debt stayed between 125% and 155% of GDP.
40 The top five US investment banks, for example, increased their leverage from 21 times to 30 times between 2000
and 2007 in order to compensate for a sharp fall in their return on assets; this increase in leverage allowed them
to boost their total asset base from 1.5 trillion USD to 4.3 trillion USD.
45The Great Subprime Credit Crisis and it
Source : Perguruan Tinggi Kedinasan
