Jordà, Ο., Taylor, A. & Schularick, M. (2014) “The great mortgaging“, VoxEU Organisation, 12 October.
The Global Crisis prompted Lord Adair Turner to ask if the growth of the financial sector has been socially useful, catalysing an ongoing debate. This column turns to economic history to investigate whether the financial sector is too big. New long-run, disaggregated data on banks’ balance sheets show that mortgage lending by banks has been the driving force behind the financialisation of advanced economies. Real estate lending booms are chiefly responsible for financial crises and weak recoveries.
Understanding the causes and consequences of the rise of finance is a first order concern for macroeconomists and policymakers. The increasing size and leverage of the financial sector has been interpreted as an indicator of excessive risk taking and has been linked to the increase in income inequality in advanced economies, as well as to the growing political influence of the financial industry (Johnson and Kwak 2010). Yet surprisingly little is known about the driving forces behind these trends.
In our recent research we turn to economic history. We build on our earlier work that first demonstrated the dramatic growth of the balance sheets of financial intermediaries in the second half of the 20th century and how periods of rapid credit growth were often followed by systemic financial crises and severe recessions (Schularick and Taylor 2012, Jordà, Schularick, and Taylor 2013).
We unveil a new long-run dataset covering disaggregated bank credit for 17 advanced economies from 1870 to today (Jordà, Schularick, and Taylor 2014). The new data allow us to delve much deeper than has been previously possible into the forces driving the growth of finance. For the first time we can construct the share of mortgage loans in total bank lending for most countries back to the 19th century. In addition, we can calculate the share of bank credit to business and households for most countries for the decades after WW2, and back to the 19th century for a handful of countries.
Relevant posts:
- Zartaloudis, S. (2014) “The financial crisis has badly damaged the Greek and Portuguese welfare states“, LSE EUROPP, 23 September.
- Altomonte, C. & Bussoli, P. (2014) “Asset-backed securities: The key to unlocking Europe’s credit markets?“, Bruegel Institute, 24 July.
- Dorn, Ν. (2014) “The real lesson from the financial crisis is that we need to stop insulating financial regulation from democracy“, LSE EUROPP, 15 July.