Credit creation, asset prices and banking crises: What’s the link?

A recent Parliamentary Treasury Committee Inquiry considered three issues that are significant for economic policy:

  • What determines the aggregate level of household net saving and the saving ratio in the macro-economy? Can policy affect the aggregate level of household saving?
  • Household indebtedness and consumer credit and incomes
  • Is the overall level of UK household debt and consumer credit sustainable?

These are important questions for economic policy in general, since it would be agreed across political parties that whatever the government does should at least not harm, and preferably enhance, private sector financial resilience.

Many factors impact upon this objective. To avoid the problem of drowning in the complexity of this topic and therefore “not seeing the wood for the trees”, I will build a series of simple stylized models to address core factors in private sector financial resilience.

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