16 September 2009

Survey: Government Cannot Replace Consumers in the Long Run

Banks may resume robust lending sooner than expected

Daniel Gros

Daniel Gros
Director, Centre for European Policy Studies

July 15

The first answer is, of course, the U.S. government.  It is at least trying very hard by running deficits that are, at over 10 percent of gross domestic product, much larger than the previous overspending of U.S. households. 

But this is evidently not an approach that can work over the long run.  Chinese households cannot step in because they are not earning enough and the Chinese corporate sector, which was responsible for much of the increase in Chinese savings over the last years, is unlikely to invest even more than it does now.  Hence global growth is likely to remain weak until the U.S. consumer recovers.

That might actually happen sooner than anticipated since most U.S. mortgages are ‘no recourse’ [that is secured by collateral, which is usually property], and generous bankruptcy legislation allows U.S. households to get rid of their debt by handing over their house (and most other moveable assets) to their creditors.  Once this has happened and house prices have stabilized U.S. banks will be happy to start a new lending cycle.