11 January 2016

Loan growth during and after recessions

The St Louis Federal Bank web site has a paper entitled Why Did Loan Growth Stay Negative So Long after the Recession? by Maximiliano Dvorkin and Hannah Shell.

The first graph on it shows that QoQ loan growth turned negative soon after the start of the 2007 recession and stayed negative for a long time thereafter. This was in sharp contrast to the recessions of 1990-91 and 2001. The paper concludes that both the demand for loans and the supply of loans played a role in this behaviour.

One way of estimating the demand for loans is to graph the movement of Real Personal Consumption Expenditure. Below I have drawn a graph of Real PCE for the three recessions and it is noteworthy how closely the line for the 2007-09 recession follows the graph of loan growth in the above-mentioned paper compared with the previous two. It seems that the 2007-09 recession was much more a demand-driven recession compared with the others.

Why should Real PCE growth be related to the demand for loans? The reason is that capitalists make investments depending on the change in consumption compared with the previous time period. Remember that in Paul Samuelson's famous accelerator paper of 1939, I(t) is a function of C(t)-C(t-1).


Category: Economics


Philip George
Debunker of Keynesian, monetarist and Austrian economics

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