Terminology

When you borrow money and spend it, you are using credit. But the person that you pay receives money, not credit. (They don't have to pay interest on it; you do.) And after you spend it, you don't have that money anymore; you owe it. You have the debt.

"breakdown"

From The Disintegrations of Civilizations (chapter 5 in A Study of History):

... [T]he horizontal schism ["between geographically intermingled but socially segregated classes"] of a society along lines of class is not only peculiar to civilizations [as opposed to primitive societies] but is also a phenomenon which appears at the moment of their breakdowns ...

From How Do I Stop My Garden Hose From Leaking? at Backyard Boss:

Occasionally a leaky hose might be as simple as a loose connection at the faucet that is easily remedied with a quick turn of the joint. But more often than not, once something begins to leak, if a tightening of the hose connection at the spigot head doesn’t solve the problem, or if the leak is found elsewhere, there is a good chance it will get worse. The most common reason for joint or spout leakage is due to a breakdown of the connection ...

So maybe, if you're fiddling with your hose and suddenly it starts to leak, maybe you caused the breakdown of the connection by fiddling.

And maybe, if you're fiddling with economic policy and it doesn't reduce or eliminate the schism along lines of class, maybe you didn't fix the problem.

Evolution: An accumulation of changes

Following Wikipedia's histories of HUD and Fannie Mae we have:

• 1938: Fannie Mae is created "to provide local banks with federal money to finance home loans in an attempt to raise levels of home ownership and the availability of affordable housing"
• 1942: The National Housing Agency is established by Executive Order 9070
• 1947: "The Housing and Home Finance Agency is established through Reorganization Plan Number 3"
• 1950: Fannie Mae is acquired by the Housing and Home Finance Agency from the Federal Loan Agency
• 1954: Fannie Mae becomes a "'mixed-ownership corporation', meaning that federal government held the preferred stock while private investors held the common stock"
• 1959: "The Housing Act of 1959 allows funds for elderly housing"
• 1964: "The Housing Act of 1964 allows rehabilitation loans for homeowners"
• 1968: Fannie Mae becomes a privately held corporation "to remove its activity and debt from the federal budget." [Note that as of 2003, the "combined debt [[of Fannie Mae and Freddie Mac]] is equal to 46 percent of the current national debt."]
• 1968: Ginnie Mae split off from Fannie Mae
• 1968: Ginnie Mae guarantees "the first mortgage passthrough security"
• 1970: Fannie Mae is authorized to purchase conventional loans
• 1970: Freddie Mac created, "to compete with Fannie Mae"
• 1971: "Freddie Mac issued its first mortgage passthrough"
• 1981: "Fannie Mae issued its first mortgage passthrough and called it a mortgage-backed security."
• 1992: Fannie Mae and Freddie Mac "have an affirmative obligation to facilitate the financing of affordable housing for low- and moderate-income families"
• 1999: Fannie Mae "under pressure from the Clinton administration to expand mortgage loans to low and moderate income borrowers"
• 2003: "in 2003–2004, the subprime mortgage crisis began"

Policymakers went out of their way to make sure credit was available in the economy, and to encourage people to use it. The result? An unprecedented increase of debt, public and private.

Fannie Mae is only one example of such policies.

The Difference Between Recessions and Depressions

GDP goes up and down. It goes down during recessions, and otherwise up. The behavior of debt is similar but more severe: Debt goes down during depressions, and otherwise up.

You can look at the changes in accumulated debt to determine whether a slowdown is a recession or a depression. During recessions, GDP goes down while debt continues to go up (though more slowly than usual). During depressions, GDP and debt both go down.

The units on the graphs below are "change in billions". On these two graphs, the lines always go up and down. But GDP is going down only when the lines are below zero. This occurs at the gray bars that indicate recessions:

Graph #1: Quarterly Change in Real GDP

Debt is also going down only when the lines are below zero, but this only occurs at the rightmost gray bar. Other than that, debt is always going up -- faster or slower, but always up:

Graph #2: Quarterly Change in All Sectors Debt

It's not the easiest thing to see, but debt goes up more slowly near the gray bars than elsewhere; perhaps not in every case, but often.

On the first graph, GDP, the lines go below zero at the gray bars or very near them. On both graphs, the upward trend seems to slow before the gray bars, often well before. The "up slower" starts before the recessions because the central bank is increasing interest rates before recessions, in order to slow the economy.


I notice that in a recent post, David Glasner refers to the Great Recession as the "Little Depression". He's right.

Incomplete transactions

Again, from the Boston Fed's The Evolution of Consumer Credit in America (PDF):

During the early years of the 20th century, a few hotels issued credit cards to favored guests, but the cards were mainly a gimmick — status symbols that distinguished the cardholders from the masses of cash-paying customers. Retail stores and oil companies were issuing credit cards during the 1920s, but they were single-party cards issued by merchants who saw them as a way to sell more goods and services...

Credit cards as we know them today didn’t take off until the 1960s, when financial innovation, improved technology, and changing consumer attitudes all converged. Financial innovation came in the form of a concept pioneered by Diners Club in 1949: the dual-party card. Dual-party cards represented a major breakthrough because the card issuer wasn’t actually providing the goods or services being purchased. Diners Club was not a restaurant chain or a food service company. It simply signed up hotels and restaurants to participate in its credit card plan, and it then issued cards to creditworthy people who were willing to pay a yearly fee for the convenience (and status) of having a card — no need to handle cash or fumble with a checkbook. When a cardholder charged a meal, the restaurant sent the bill to Diners Club, and Diners Club then paid the price of the meal, minus a small commission, directly to the restaurant’s bank. Finally, Diners Club sent the cardholder a monthly statement (bill), and the cardholder sent Diners Club a check.

But Diners Club was only a first step. The innovation that ultimately put dual-party credit cards into so many wallets was the bank card — a general-purpose card that consumers could use in a wide variety of situations. Franklin National Bank (Franklin Square, New York) introduced the first bank card program in 1951. A few years later, Bank of America launched BankAmericard (now Visa), and Chase Manhattan Bank followed with MasterCharge (now MasterCard).

Terminology: "single-party" and "dual-party". Apart from the customer, a single-party card involved only the merchant. The merchant provided both the item purchased and the credit needed to buy it. By contrast, a dual-party card involved not only the merchant but also a bank; and it was the bank that provided the credit.

With the single-party card, it was buy now and pay later. With the dual-party card it was buy now and pay someone else later.

For the single-party card, the picture is a little fuzzy in my mind. Those cards were before my time. But for the dual-party card the situation is clear. With the dual-party card there are two transactions for every purchase.

1. You buy from the merchant and pay with a credit card.
2. You pay the credit card bill.

Now the nomenclature makes sense to me: single-party, one transaction ... dual-party, two transactions. The "parties" are the ones who get paid. That's why the customer doesn't count as a "party". The fuzziness fades.

Anyway, today's credit cards are two-party cards. Every credit card purchase requires two transactions. Whenever you buy something with a credit card, the purchase is not complete until the credit card bill is paid.

Likewise, if you take a bank loan, buy something, and pay the merchant using the borrowed money, your transaction with the merchant is complete but your transaction with the bank is not.

Looking at it this way, debt is a measure of incomplete transactions.

The argument leaves something out

From the Boston Fed: Credit History / The Evolution of Consumer Credit in America (PDF):

Nineteenth century Americans had more than their share of financial pressures, and they weren’t opposed to borrowing. It’s just that they rarely went into debt for things that were fun or frivolous...

But the definition of “luxury” or “nonessential” has a way of changing from one generation to the next. In 1980 most Americans still thought home computers were frills or expensive toys; color televisions were luxury items in 1960; second bathrooms were a relative luxury in 1940; ditto for cars, refrigerators, and washing machines in 1920. Yet by 21st century standards, using credit to acquire any one of these things is neither extravagant nor extraordinary.

Okay. Sure. We use credit more now than we did years back. No shit. But the analysis always stops there and, explicitly or implicitly, we are told that the character of the American people has declined. We're just not as good as people used to be.

Well, I don't like that argument too much. Maybe it's true that our character has declined. I couldn't say. But the argument, the argument leaves something out.

Every time policymakers decide they need to boost economic growth, they come up with a plan to expand the availability and use of credit. It's not something that happened once. It seems to happen in every decade and under every President.

That long-term focus on boosting the use of credit surely contributed much to the change in our credit habits. That part of the story is always left out.


If you happen to think that our "character" has declined or our "moral fiber" has declined, and our use of credit is evidence of this, then you can go F yourself. On the other hand, if you think that policies promoting the use of credit are the big part of the problem, then I'm with you.

And if you think that the gradual, long-term increase in our use of credit increased the financial costs embedded in the cost of living and in the cost of things we buy and sell, then you and I have something in common: You and I can see what's wrong with the economy.

What I could live with

In his links of 8/23/2019 Mark Thoma quotes Summers and Stansbury:

In an environment of secular stagnation in the developed economies, central bankers’ ingenuity in loosening monetary policy is exactly what is not needed. What is needed are admissions of impotence, in order to spur efforts by governments to promote demand through fiscal policies and other means.

Thoma doesn't say that he agrees with the statement, but I figure he does.

I don't. Sure, "admissions of impotence" wouldn't hurt. But the rest of that sentence bothers me: "in order to spur efforts by governments to promote demand through fiscal policies and other means." It suggests that the authors know what policies are needed.

Figuring you know what policies are needed is a good way to create problems. Especially after the problem our policies created a decade ago, economists ought to be very hesitant to jump into anything. Especially if they want to jump into the same policies we had before, or the ones we had before that.

If the quote said that admissions of impotence are needed in order to spur efforts to question everything we think we know about the economy, I could live with that.

As is, no way.