BEHAVE International Conference
Households in the Financial Crisis: Consumer credit and policy
January 17, 2014
The political economy of household debt:
putting household indebtedness into a financialised context
Ana Cordeiro Santos (CES, UC)
1. A political economy approach to household debt:
starting point
Individual decisions are never made in an unconstrained environment, the
overall socioeconomic context influences the relative position and the
alternatives available to individuals
 Need to consider the social and political institutions that determine how
resources are produced and distributed among different social groups,
and how these arrangements impact on dominant social norms and
values
 Need to consider the socio-economic conditions under which credit
operates
1. Financialisation and households:
the increased economic and political relevance of the
financial sector
1) The extraordinary expansion of financial assets and financial activity relative
to the rest of the economy;
2) The proliferation of different types of assets, including financial products
based on credit, e.g. mortgage backed securities (MBS) and credit default swaps
(CDS);
3) The absolute and relative expansion of speculative as opposed to or at the
expense of real investment;
4) A shift in the balance of productive to financial imperatives within the private
sector (e.g. the maximisation of shareholder value);
1. Financialisation and households: :
the increased economic and political relevance of the
financial sector
5) Increasing income inequality due to financial rewards and wage stagnation;
6) Consumer-led booms based on credit;
7) The penetration of finance into ever more areas of economic and social life
such as pensions, education, health, and provision of economic and social
infrastructure;
8) The emergence of a culture of reliance upon markets and private capital and
corresponding opposition to state-led provision, though the state has been a key
player in promoting financialisation.
1. Financialisation and households:
the increased economic and political relevance of the
financial sector
• The construction of the EMU: expansion of the financial sector
- privatisation, which has led to the expansion of stock markets;
- liberalization, which opened markets, especially to international players;
- deregulation on the financial sphere enabling the emergence of new
actors (such as hedge funds), products (the multitude of derivatives) and
markets (student loans)
• Fiscal constraints imposed by EMU: leading to the retreat of the welfares
states and the privatisation of social provision, e.g. health, education,
pensions
- Maastricht Treaty (1992), Stability Pact (1998), European Fiscal Compact
(2011), EC/ECB/IMF Economic Adjustment Programmes for Ireland (2010),
Greece (2010), Portugal (2011).
2. Financialisation and households:
debt and financial assets
• Faced with new consumption norms and real income stagnation, low and
medium-income households incurred in rising levels of debt in order to
keep up with consumer demands emerging in an increasingly unequal
society marked by the growing privatisation of public provision
Note: UK, USA, Spain, Greece, Ireland (Barba and Pivetti, 2009; Hein, 2012)
• The expansion of housing and consumer credit is a generalised trend in
Europe
• The systemic character of this process is also expressed in household asset
acquisition: growing levels of household holdings of shares, bonds, and
pension funds and securities (especially among wealthier households)
(Santos and Teles, 2013)
3. Recent trends in the EU
140%
Total household debt 1998-2011 (% GDP)
Denmark
120%
100%
UK
Netherlands
80%
Portugal
Spain
60%
Germany
Greece
40%
Poland
Hungary
20%
0%
1998
1999
Source: ECRI
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
3. Recent trends in the EU
100%
Housing loans to total household debt 2000 vs 2011 (%)
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
NL
DK
UK
PT
ES
2000
Source: ECRI
2011
EL
DE
PL
HU
3. Recent trends in the EU
225
200
Life insurance and pension funds reserves 1995-2012 (% GDP)
Netherlands
175
United Kingdom
150
Denmark
125
100
75
Germany
50
Portugal
Spain
Poland
Hungary
Greece
25
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Eurostat
3. Recent trends in the EU
Household financial wealth and debt, 2010 (% of household disposable income)
350%
NL
300%
UK
CY
DK
BE
250%
Financial Assets
IE
PT
IT
SE
FR
200%
EU17
DE
AT
150%
SI CZHU
ES
FI
EL
EE
100%
PL
RO
LT
SK
LV
50%
0%
0%
50%
100%
150%
200%
Total Debt
Source: Eurostat and ECRI
250%
300%
350%
3. Recent trends in the EU
Participation in financial markets by household income threshold 2009-10
(% of households)
90%
Housing loans
Voluntary pension plans
80%
70%
60%
50%
40%
30%
20%
10%
0%
SI
SK MT EL
Source: HFCS
FR
AT
ES
PT DE BE
LU
FI
CY
NL
EL
PT
SK
AT MT
SI
ES
Bottom income group
LU
DE
FR
NL
BE
CY
Top income group
3. Recent trends in the EU
Financial intermediation & real state vs manufacturing 1991-2010 (millions of euro)
7,000
UK
7,000
Germany
1,600
1,400
6,000
6,000
5,000
5,000
4,000
4,000
3,000
3,000
2,000
2,000
1,000
1,000
200
0
0
0
Netherlands
1,200
1,000
800
600
400
700
Poland
600
500
400
300
200
100
0
Source: EUROSTAT
Manufacturing
Financial intermediation & real state
3. Recent trends
the EU:
2. Financialisation
andinhouseholds:
whatdebt
doesand
it mean
for households?
financial
assets
Transformation of citizens into consumers of financial products, where collectively
earned individual rights are being replaced by increased access to financial markets
 Individuals, especially younger generations, are required to increasingly take more
responsibility for their own welfare, including education, planning of their own
retirement, and the coverage of their health care needs (e.g. focus on financial
literacy in schools)
 More aspects of individual and collective lives have become prone to volatility from
finance (e.g. evolution of interest rates, evolution housing prices, profitability of
pension funds)
 New sources of inequality stemming from the differentiated relations of individuals
and households with the financial markets, potentially benefiting those that have
access to more favourable credit conditions and are more protected from adverse
outcomes (high-income workers, wealthier households)
3. Recent trends
the EU:
2. Financialisation
andinhouseholds:
whatdebt
doesand
it mean
for households
financial
assets
A generalised common trend of growth of the financial sector is
producing and magnifying inequality among countries (e.g.
countries most hit by the financial crisis, e.g. Southern and
Eastern European countries) and within countries (e.g. most
vulnerable groups in each country, such as the long-term
unemployed, indebted households).
4. Policy implications:
Revising key assumptions about financial markets
Markets as the most effective and efficient allocation mechanism
i.
ii.
The expansion of financial markets promotes competition and supplies
more and better quality, through quasi-tailored made, financial products
Consumer welfare is promoted by market expansion: individuals will be
better off by having more and better to choose from
 Strong resistance to measures that restrain demand and supply (e.g.
regulation)
 The expansion of financial markets has been detrimental to the economy
(economic instability, unemployment) and to many areas of social
provision (reduction in quality and quantity of public provision)
4. Policy implications:
Revising key assumptions about individual choice
Individuals are rational utility maximisers, have perfect information, welldefined and fixed preferences
 Consumer credit is rational, it allows smoothing consumption during
individuals’ life cycle: borrow when income is lower and save when it is
higher than expected average income
 The growth of household debt is the result of consumers’ rational
responses to new incentives: easier access to cheap credit
 Social problems tend to be perceived the outcome of deficient, uniformed
individual market choices: consumers did not quite understood the risk
associated with financial products, low-income segments have lived
beyond their means
4. Policy implications:
Revising key assumptions about individual choice
 systemic causes pertaining to the recent evolution of capitalist economies
(as discussed above)
 the role of the current economic crisis: radical alteration of household
circumstances brought by unprecedented levels of unemployment and
cuts of wages, social benefits and also of pensions (which could not have
been predicted before the crisis)
 the role of the state: underdeveloped renting housing market, fiscal policy
incentives to the acquisition of houses on credit
 the role of creditors (who are in an asymmetric relation with debtors):
granted credit to low income and high-risk households
 The impact of the social context on preferences: changing social norms,
e.g. common sense that it’s rational to purchase homes on credit rather
than renting on the private market
4. Policy implications:
conclusion
• Consumer protection policy must go beyond fixing individual decisionmaking deficiencies, e.g. through information disclosure and financial
education initiatives
• It must take into account the structures that lead individuals and
households into debt and financial vulnerability, otherwise it perpetuates
extant constraints promoting unsustainable levels of household debt (e.g.
unemployment rates, the presence of safety nets for households that may
fall into arrears)
• It requires a more informed view about the nature of credit decisions (e.g.
their inter-temporal dimension and inherent uncertainty) and actual
individual decision-making, which is more complex than the mere choice
of the best alternative available (social norms, the differentiated needs of
the members of the household, the role of advertising, the role of
financial counsellors)
Thank You!