Debt dynamics
Speech given by
Ben Broadbent
London Business School
Wednesday 23 January 2019
I've received many helpful comments from colleagues at the Bank of England. I'd particularly like to
thank David Seaward, Danny Walker and Mette Nielsen for their invaluable help with what has proved
a data-heavy bit of work. The views expressed are my own and do not necessarily reflect those of the
Bank of England or other members of the Financial Policy Committee or the Monetary Policy
Committee.
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Introduction and summary
In mid-2007, as the first cracks in the financial system began to appear, some of the most indebted
households in the developed world were not in the US or the UK but in the Netherlands. Average mortgage
debt was almost twice average annual income. Yet over the following few years, there were almost no
defaults on Dutch mortgages and associated losses for the lending banks were minimal (Chart1).
In the UK, where households were less heavily indebted, mortgage losses were somewhat higher though still
comparatively low.1 It was in the US - of the three, the country with the least mortgage debt - where rates of
negative equity and ultimate default were by far the most severe. So at least among this mini-sample of
three, prior levels of debt were not a good guide to the scale of the subsequent distress in the mortgage
market (Chart 1).
What did a little better as an advance warning signal was the prior rate of mortgage debt (Chart 2).
growth
The ordering, at least, is in line with post-crisis defaults in the three countries.
Chart 1: Level of mortgage debt a poor guide to Chart 2: Pre-crisis growth rate does better
subsequent distress
Per cent of outstanding loans Per cent
Per cent
Per cent of outstanding loans
12 250 12 16
Maximum post-crisis default
Maximum post-crisis
rate (LHS)
10 10
default rate (LHS)
200 14
Average debt growth in the
Debt to income ratio, three years to 2007 Q2 (RHS)
8 8
2007 Q2 (RHS)
150 12
6 6
100 10
4 4
50 8
2 2
0 0 0 6
NL UK US NL UK US
Sources: Bank stats, Office for National Statistics (ONS), Sources: Bank stats, ONS, DataStream from Refinitiv, Stanga et
DataStream from Refinitiv, Stanga et al. (2017), CBS Netherlands, al. (2017), CBS Netherlands, US Flow of Funds and Bank
US Flow of Funds and Bank calculations. calculations.
Figures are for mortgage loans; default rate defined as Figures are for mortgage loans; default rate defined as
non-performing exposures over three months in arrears. non-performing exposures over three months in arrears.
This is obviously a very limited comparison. There are also particular reasons why, in this case, levels of
debt may have been poor indicators of cross-country risk. In the United States, for example, many
mortgages were "non-recourse" - it was lenders, not borrowers, who were liable for any negative equity in
the event of default. This increased both the borrower's incentive to walk away from the loan and the
1
British banks certainly lost much less on domestic mortgage lending during the last financial crisis than they had in the early 1990s -
when, as it happens, the level of debt was lower than in 2007. Most losses during the financial crisis were on banks' overseas assets.
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lender's subsequent loss. All else equal, this would mean the same level of debt was riskier in the US than
in the other two countries.
Thanks to the tax regime the opposite was true in the Netherlands. Mortgage interest was fully deductible
from taxable income and interest receipts were only lightly taxed. This encouraged so-called
"round-tripping". By ramping up both sides of their financial balance sheet - funding extra deposits with
higher mortgage debt - the more highly taxed households could reduce their overall tax bill without adding to
financial risk, either individually or collectively.
Yet it turns out that the superior predictive power of growth rates of debt, over levels, is a more general
phenomenon. In cross-country data the scale of the economic downturn after the crisis was positively
correlated with prior growth rates of debt but uncorrelated with its level (Charts 3 and 4 cover 15 European
countries, the US and Japan). In longer-term data, growth rates of debt are better predictors of financial
crises. Even across individual households, the rate at which debt had accumulated in the run-up to the crisis
seemed to tell you more about a borrower's subsequent difficulties than the level of gearing. I want to say a
little more about this today, using various examples from the UK.
Chart 3: Levels of gearing ahead of the crisis Chart 4: Growth of debt does better
unrelated to GDP growth after it
Sources: BIS total credit statistics, Datastream from Refinitiv and Sources: BIS total credit statistics, Datastream from Refinitiv and
Bank calculations. Bank calculations.
Sample includes 15 European countries, Japan and the US. Sample includes 15 European countries, Japan and the US.
I should say at the outset that I'm certainly not claiming that levels of debt are irrelevant. It must surely be
the case that, all else equal, more debt means more financial risk. It's possible there are lots of particular,
country-specific factors - things like the non-recourse status of mortgages in the US or the tax regime in the
Netherlands - that make a given quantity of debt more risky in some places than in others. If so, one
wouldn't expect to pick up any levels effects, even when they genuinely exist, in simple cross-country
comparisons like that in Chart 3. Those might simply be telling you that, for various structural reasons, a
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pound of debt is not quite the same thing, or equally risky, from one country to the next.2 Besides, the
distinction between levels and growth rates is in any case a bit fuzzy. If one country has a higher debt
burden than another it's probably gone through a period of faster growth as well. That's got to be the case if
one's comparing levels of debt in the same country but at different points in time.
Nevertheless, the comparatively poor predictive power of the level of debt is quite striking and I think there
may be a few lessons one can draw from this.
First, if there are structural differences in the nature or terms of debt, whether across countries or over time,
it is important to try and take account of them. One example in the UK is within unsecured household debt.
This is now a pretty broad category. It includes two things - PCP ("personal contract purchase") contracts
for car purchases and student loans - both of which are relatively new and neither of which, arguably, is
really unsecured debt in the conventional sense or at least carries the same risks for borrowers. PCP
contracts are more like rental agreements. They are now used by most car buyers, including (one
presumes) those who are overall savers. According to the government the majority of student loans will not
be fully repaid (the ONS has recently decided that most of it should therefore be re-allocated to the
government, an accounting change planned for later this year.) Taken together, car finance and student
loans account for almost all the rise in households' unsecured gearing in recent years, as currently
measured. The remainder - comprising the more conventional credit card balances, consumer loans and
overdrafts - is plotted in blue in Chart 5. It hasn't grown much and is pretty much the same as it was,
relative to income, in the mid-1990s.
2
You might, however, expect to see them in first differences (i.e. in the growth rate of debt), as these could help cleanse the data of
enduring country-specific differences in the sustainable level of debt.
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Chart 5: Growth in unsecured lending accounted Chart 6: Stock of mortgages still higher than
for by car finance and student loans precrisis average, interest cost well below average
Per cent
Per cent
Per cent of disposable income
30
Car finance
120
Student loans
8
25
Other consumer credit
100
20
6
80
15
4
60
10
2
Interest payments to income (LHS)
40
Debt to income (RHS)
5
Pre-crisis average (both series)
- 20
-
1987 1997 2007 2017
1994 1999 2004 2009 2014
Sources: Bank of England, ONS, FLA and Bank calculations. Sources: ONS, Thomas and Dimsdale (2017) sheet M12, Bank of
The stock of student loans has been projected to 2018 Q3. FLA England, and Bank calculations.
data for car finance interpolated and used up to 2012. 'Other Pre-crisis averages calculated over the period 1993-2007 Q2.
consumer credit' is predominantly personal loans, credit cards and
overdrafts.
Second, even when there aren't structural changes in the nature of debt, other things can affect its
affordability over time. The most important is the neutral or equilibrium rate of interest. Unlike consumer
loans and credit card debt, the stock of mortgages is still significantly higher than it was 25 years ago (Chart
6). But the rate of interest required to stabilise the economy was extremely high at that time, much higher
than it is today. So despite the higher stock, interest payments on mortgages are well below the pre-crisis
average. Looking ahead, from these very low levels, the neutral rate of interest is more likely to rise than fall
over the future. But it would have to rise a long way - and certainly by a lot more than is currently priced into
government bond markets - even for household interest payments to return to that average. The fact that
mortgage debt is higher than it was a generation ago doesn't make it "unsustainable".
Third, the fact that growth rates are better indicators than levels may be telling us something more
fundamental, not just that there are structural differences in affordability. In particular, it could be that the
things that drive speculative, riskier lending tend to develop faster than the fundamentals that determine
more sustainable levels of debt. Those fundamentals can vary (the decline in the neutral rate of interest is
an example), the sustainable level of debt along with them. But perhaps they usually do so only gradually. If
so, very rapid growth of debt would often be a sign of something else - of looser credit supply and a rise in
the proportion of lending that's riskier, less sustainable and more prone to default. It is these episodes of
looser supply that most concern policy makers, including the Bank's Financial Policy Committee, and they do
seem more prevalent at times of rapid growth in credit. The mortgage boom of the late 1980s in the UK was
accompanied by much higher loan-to-values and other signs of easier credit supply than anything in the past
20 years. There is evidence more generally that rapid growth in corporate debt tends to coincide with
deteriorations in the quality of credit. The recent surge in leveraged lending to companies, including those in
the UK, may be one such episode.
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In what follows I'll go through these points in a little more detail. I'll make some remarks about the particular
characteristics of student and car loans. I'll explain how aggregate mortgage debt evolves over time and
why the most reasonable forecast over the next few years is for relatively subdued rates of growth. (That's
why, barring a rise in interest rates well beyond what's priced in the yield curve, interest payments on
mortgages are likely to remain below the pre-crisis average). There's then some stuff on the recent surge in
leveraged lending to companies. The silver lining here is that UK banks look to be relatively uninvolved in
this activity. Most of the investors seem to be non-UK institutions and the channels that so disastrously
amplified defaults on US mortgages, during the financial crisis, are now much reduced. Nevertheless, this
does look to be a case where rapid growth has gone hand-in-hand with loosening supply and rising risk.
In the concluding section I'll make some brief points about policy.
The superior predictive power of debt growth
What we saw in Charts 3 and 4 was that, at least in that 17-country sample, prior growth rates of debt were
better predictors than levels of a country's economic performance after the last financial crisis. Even if they
went into the crisis with relatively high levels of gearing, countries with below average growth rates of debt
had a less severe experience after the event. A much more complete study by economists at the Bank,
based on the experience of 26 advanced economies over many economic cycles, dating back 50 years,
found very similar results.3 Charts 7 and 8 are one way of expressing those. They show what you might
expect of a country's relative economic performance during a recession if, based on these results, you knew
only that aggregate debt: income ratios beforehand were 10% points higher than the average and then if the
in that ratio was 10% points higher. The second has proved much more informative than the first.
growth
3
Bridges et al. (2017).
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Chart 7: Marginal impact on predicted GDP Chart 8: Higher debt growth (by 10% points)
growth of an extra 10% of GDP of aggregate debt more significant
Per cent change in real
Per cent change in real
GDP per capita
GDP per capita
1
1
0
0
-1
-1
-2
-2
-3
-3
-4
-4
0 1 2 3
0 1 2 3
Years since start of recession Years since start of recession
Source: Bridges et al. (2017). The shaded areas represent the Source: Bridges et al. (2017). The shaded areas represent the
coefficient on credit +/- one and two standard deviations. coefficient on credit +/- one and two standard deviations.
It turns out there are similar patterns in several other settings. Jordà et al. (2012) also find that financial
crises themselves are preceded not so much by high levels of debt but by rapid expansions in the level.
Note that there are several repeat offenders in their sample. This suggests that, even for the same country,
rapid growth is of more concern than the level of debt.
You can see this more directly in a recent study focused on individual borrowers. Andersen et al. (2016)
looked at the experience during the last financial crisis of half a million households in Denmark. There is a
correlation, it turns out, between the level of household gearing prior to the crisis and the drop in its
consumption spending afterwards. But this goes away once you also take into account the prior growth rate
of debt. Once you know the change in a household's indebtedness ahead of the crisis, knowing the level
tells you nothing more about its subsequent spending.
Anyway, I think we can take a couple of things from all this. First, there may be country-specific factors that
make the same quantity of debt more affordable and less risky in some places than in others, or even at
different points in time. If so, then one should at least try to take these into account. Second, however, this
probably isn't the only thing going on, since the superior predictive power of growth rates is apparent even
over single episodes in the same country.
Structural changes in unsecured household debt
One example of structural effects - things that affect measured debt but probably have less significance for
households' financial risk - is the series for unsecured household debt in the UK. In aggregate, this has
risen quite a bit in recent years, much faster than household income (Chart 5). But if you look under the
surface, there's less to this than meets the eye. It's true in general that unsecured debt carries more risk for
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the lender than the borrower, at least when compared with mortgage debt. Default on a mortgage carries
much more risk for households - the potential loss of a home - than non-payment of unsecured debt. It's
just that this has become more the case in recent years. As outlined in the introduction, almost all the growth
in unsecured household debt, relative to income, involves two relatively new developments that involve less
pound-for-pound risk, at least for borrowers, than other forms of debt. Nor do they tell you anything about
whether households are "living beyond their means".
One involves a change in the way people pay for cars. Conventional loans for car purchase have been
around for a while. But over the last decade or so these have been overtaken by so-called "personal
contract purchases" (PCPs) in which buyers make lower monthly payments but don't own the car outright
(there's usually an option to buy at the end of the term, but the car is otherwise returned to the dealer). This
is a highly contingent contract and, as far as households are concerned, it's one that looks more like a rental
arrangement than normal debt. The payments are mostly for depreciation, not pure interest. (They're, in any
case, set in advance and are therefore insensitive to subsequent changes in short-term interest rates.) The
car owner can choose costlessly to walk away from the contract, at least once half the original price has
been repaid. And if the value of the collateral should fall below that of the outstanding debt - say because of
weakness in the second-hand car market - it's the lender not the borrower that bears the resulting "negative
equity" (the loans are "non-recourse").
One shouldn't underplay the risks involved in PCPs. Even if they belong primarily to lenders, and even if
they're no greater than more traditional car loans, pound for pound, those risks still exist. But the lenders
may have deeper pockets than the borrowers, or at least greater scope for diversification. And as evidenced
by their dominance of the market these contracts clearly represent a convenient method of paying for a car,
even for households who are otherwise adding to savings. Their growth is not evidence that people are
outspending their income in aggregate.
The more significant contributor to the rise in unsecured debt comes from student loans. At face value,
these are currently worth almost 9% of annual household income, up from 21⁄2% in 2007. However, it's far
from clear this is really debt in the conventional sense. There's nothing to pay on it, either interest of
principal, unless and until annual income exceeds a threshold, one that's currently set above the median for
new graduates. So it's as if, rather than taking on a conventional loan, students are selling to the taxpayer a
"call option", payable only beyond some trigger point. Another way to think about it is as a tax on graduates'
income with a significant up-front allowance.
Anyhow, the Department for Education has estimated that only around a third of outstanding student loans
will be fully repaid. In response, the ONS has now decided that a good part of the stock should be recorded
as government debt. When that change in accounting treatment is made (it's planned for later this year) we
can expect an equivalent reduction in the recorded stock of household debt.
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As we saw in Chart 5, the remaining part of unsecured debt - including more conventional borrowing on
credit cards, consumer loans and overdrafts - has been broadly stable in recent years, relative to household
income, at levels well below the mid-2000s peak and similar to those in the mid-1990s.4
Now it's true that, if you look at a still finer level of detail, concentrating on flows of new lending and on an
even shorter period of time than the decade since the crisis, there was a pick-up in the issuance of
unsecured consumer credit in 2016 and 2017. At the time the FPC also saw independent signs of easing
supply and was concerned that lenders may have been placing too much weight on a continuation of
relatively benign economic conditions. The Committee responded by increasing the losses on consumer
credit in its annual "stress test", with implications for the capital banks had to hold against their lending.
I'll come back to general lessons for policy at the end of this talk. But I'll point out a couple of things about
the November 2017 measures here. First, they occurred despite the fact that the stock of unsecured lending
(conventionally defined) is significantly lower than in the mid-2000s, relative to income. What mattered more
were incipient signs of faster growth. Second, what also mattered were signs that the supply of credit, and
the associated under-writing standards were loosening.
Mortgage debt costs likely to remain below average
The consequences of default for households are much greater in the case of mortgage debt. Rates of
default are much lower, partly for this reason.5 On the other hand the stock of mortgages is much bigger.
And unlike conventional unsecured debt - the blue bit of Chart 5 - mortgage gearing is also significantly
higher than it was a generation ago, in the mid-1990s (Chart 6). However, that doesn't mean it's
unaffordable. You would have to see a marked rise in ratios of mortgage debt to income, and/or in the level
of interest rates, even for interest payments on those mortgages to return to their pre-crisis average. The
second is not what the bond market predicts. I want to explain here why the first is unlikely and, in doing so,
to describe briefly the links between these things.6
The main point to understand is that aggregate mortgage debt is largely a consequence, not a cause, of the
level of house prices. That's certainly true in the data: statistically, mortgage growth follows rather than
precedes changes in house prices. It's also easy to understand why. On the whole the mortgage stock
grows not because the same people, living in the same property, progressively take out bigger mortgages
over time. It does so because, if house prices go up, new entrants and those trading up the market have to
4
Even some of this is not debt as commonly understood. For example, if you use your credit card for retail spending but pay it off every
month, never incurring any interest, the rolling balance counts as debt in these statistics. Partly for this reason, and probably because
there has also been a rise in "zero-interest" offers on new cards, the share of credit card debt currently paying no interest at all seems to
have risen. A simple comparison of actual interest payments on credit cards to quoted interest rates suggests it's currently around one
half, twice what it was a decade ago.
5
Over the past five years, and for every £100,000 of debt, write-downs on mortgages have averaged just under £30 per year. The
comparable figure for credit cards and consumer loans is over £2,000. This gap is not untypical.
6
This is a repeat of some of the points in Broadbent (2012).
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borrow more than their predecessors did - those now moving down the market - to buy the same properties.
Even if there's no change in loan-to-value ratios for new lending, rising house prices mean that, as and when
people move house, new and higher mortgages replace older, small loans. The counterpart is a largely
matching flow into deposits as those trading down the market turn their capital gain into financial assets
(Chart 9).
Chart 9: Mortgage equity withdrawal got Chart 10: Mortgage growth determined mainly by
transferred across households, not spent prior growth in house prices
Per cent
Per cent of disposable income
25 Transactions x 15-year house price
14
change / mortgage debt, scaled
20 Growth in mortgage debt
10
6 15
10
2
-2 5
Mortgage equity withdrawal
Net flow into household cash and deposits
-6 0
1987 1992 1997 2002 2007 2012 2017 1991 1996 2001 2006 2011 2016
Sources: HM Revenue and Customs (HMRC) Transactions,
Sources: Bank of England, ONS, and Bank calculations.
ONS, Land Registry, Bank of England, and Bank calculations.
The blue line in Chart 10 plots a very crude proxy for this automatic, pre-determined part of mortgage growth.
It's just the change in the average house price over the previous fifteen years (a period designed broadly to
match the average tenure of owner-occupiers) multiplied by the number of housing transactions and then
divided by the existing stock of mortgage debt. This is a pretty good match for the real thing (the red line). It
explains the strength of mortgage growth after the jump in house prices in the years around the millennium.
It accounts for the drop in mortgage growth almost to zero after the crisis, largely as the result of a sharp fall
in the flow of transactions. It also suggests that, after a long period of relatively subdued growth in the
purchase price of housing - since 2004 the average rate of increase has been 3% a year - we can expect
the same for mortgage debt over the next few years.
I say "pre-determined" but there are obviously risks to any such forecast. One is higher loan-to-value ratios
on new mortgages (LTVs), a sign of looser supply. In the late 1980s boom the median LTV averaged over
85%, even as prices rose very rapidly (Chart 11). LTVs have been much lower since the early 2000s and, as
far as the future is concerned, I'd note that, in 2014, the FPC put in place restrictions on the share of new
mortgage lending banks could make at high loan-to-income (LTI) ratios. Against this backdrop, the chances
of any material rise in the average LTV on new mortgages are low.
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Chart 11: LTVs high in late 1980s, lower today Chart 12: The rental/gilt yield spread has been a
good predictor of house price inflation
Per Per cent cent Percentage points Per cent
95 10 16
12
LTV on new
8
90
mortgage
8
loans
6
4
85
4 0
Average
80
-4
2
Rental yield spread over government
-8
bonds (LHS)
75
0
Average house price growth over the
-12
following five years (RHS)
70
-2 -16
1985 1995 2005 2015
1987 1992 1997 2002 2007 2012 2017
Sources: UK Finance Regulated Mortgage Survey and Bank of Sources: ONS, Zoopla/Whenfresh, Land Registry, Bank of
England. England, and Bank calculations.
Another upside risk is a re-acceleration of house prices. I'm not so daring as to offer you a precise forecast.
Let me just point to a couple of pieces of evidence about the housing market and let you draw your own
conclusions. One is that housing is currently "cheaper" than government debt, at least on a very crude
comparison of their yields. The red line in Chart 12 is the difference between the estimated rental yield on
housing and the yield on 10-year indexed government debt, an indicator of the "neutral" real rate of interest.
When this spread is high, it's telling you that, unless you think rental prices are going to weaken, it's
prospectively cheaper to buy a house than rent one. You might in that environment expect the purchase
price of housing to grow faster than usual.
The blue line, which is average growth in house prices over the following five years, shows that this is what
has tended to happen. For example, the house price boom in the early years of the millennium was
preceded by a steep fall in longer-term real interest rates (driven, I would suggest, by a decline in the neutral
rate of interest), through the second half of the 90s. That raised significantly the spread between rental
yields and those on indexed government debt - when the spread was at its widest, in 1995, the gap between
the two was 10% points. But that boom in house prices, in its turn, depressed rental yields significantly - to
such an extent the spread over gilt yields fell to less than 4% points. Relative to gilts, houses were as
expensive as they had been in the late 1980s. Even without the intervention of the financial crisis you might
have expected much weaker growth of purchase prices over the following few years, and that's what
happened.
However, we should be careful not to extend this pattern too unthinkingly. The spread is currently relatively
high - on this measure housing is unusually "cheap" compared with government bonds - and, taken at face
value, would point to somewhat faster growth of house prices over the future. But perhaps this is justifiable.
If you thought relatively weak economic growth was likely to persist over the next few years - and that's
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certainly the consensus view - you might reasonably expect the same for rental prices. Amidst higher
uncertainty, prospective homebuyers might need an additional discount, relative to rents, to buy a house (the
warranted "risk premium" on housing might be above average). Recent house price growth is already quite a
bit lower than the rate crudely suggested by Chart 12. Near-term survey indicators - Chart 13 plots the
RICS balance - offer little prospect of an acceleration any time soon, let alone the kind of pick-up you'd need
to make much of a dent in the longer-term, 15-year average used in Chart 10. All this is why it seems to me
improbable that aggregate mortgage debt will grow that rapidly over the next few years. People coming into
the housing market, and trading up it, are unlikely to have to pay (or therefore borrow) much more than their
predecessors did, several years earlier.
Chart 13: The near-term indicators of house Chart 14: Interest cost of mortgages will
price growth have weakened probably remain below average for a while
Balance
Per cent Per cent
80 8
12
60
6
10
40
4
8
2
200
0
6
-20
-2
-40
4
-4
-60
Average 1993-2007Q2
-80 -6 2
2000 2005 2010 2015
0
RICS price expectations balance (LHS)
1987 1992 1997 2002 2007 2012 2017 2022
House price growth (RHS)
Sources: Royal Institution of Chartered Surveyors (RICS) Sources: ONS, Thomas and Dimsdale (2017) sheet M12,
Residential Market Survey, ONS, Land Registry and Bank Bank of England, Barclays Live and Bank calculations.
calculations. The fan is calculated using probability distributions implied by
RICS price expectations are three month ahead net balances. options on sterling interest rate swaps. For further information on
how option-implied distributions are derived, see Clews,
Panigirtzoglou and Proudman (2000).
I can now (finally) get to the point I wanted to make about interest payments. Even if low bond yields don't
presage rapid growth of house prices, one thing they do suggest is that interest payments on mortgage debt
will also remain relatively low. Chart 14 plots those payments over the past, as a share of household
income. It also includes a range for the future. This assumes that mortgage debt continues to grow in line
with household income (whatever that turns out to be). It then uses the probabilities of various paths for
short-term interest rates, taken from financial markets, to produce a "fan" of outcomes over the next five
years. At least if you believe what's priced into financial markets there is only a one-in-seven chance that
mortgage interest payments will return to the pre-crisis (post-inflation-targeting) average by the end of that
period.7
7
The equivalent calculation for households' aggregate interest payments, including on their non-mortgage debt, implies that the odds of
getting back to the pre-crisis average are if anything marginally longer than this. This might seem puzzling, given the rise in unsecured
debt in Chart 5, to levels well above the pre-crisis average. But what that Chart reveals is that the part of this aggregate whose
payments are sensitive to interest rates - the more conventional liabilities in blue - has not risen above the pre-crisis average. Indeed
it's slightly below it.
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This makes it slightly puzzling to read (as one often does) that household debt is "unsustainably" high. This
view is ubiquitous. My suspicion is that, at least in some cases, people come to it because they have in the
back of their minds an alternative and rather attractive world in which we all have fewer debts but the same
assets. In this imagined and happy place we'd all have lower mortgages but own the same houses. Firms
too would have fewer liabilities but possess the same productive capital. In other words, people might
implicitly be assuming that less debt would necessarily mean greater net wealth. If that's really what's being
asked - would we be better off if we were all better off? - then the answer's obvious.
But most debt, including the significant majority of household debt, is used to buy or finance assets. It's true
that, in principle, easier credit conditions could result in higher consu