The Crisis and The Asset Driven Household

Please cite the paper as:
Jake Jennings, (2018), The Crisis and The Asset Driven Household, World Economics Association (WEA) Conferences, No. 2 2018, The 2008 Economic Crisis Ten Years On, 15th October to 30th November, 2018

This paper has been included in the publication
“The 2008 Crisis Ten Years On: in Retrospect, Context and Prospect Paperback”


The financialization of the US economy leading up to the 2008 economic crisis altered the structure and behavior of household saving and consumption. Shocks from the crisis to consumer confidence and credit markets rerouted the declining household saving rate and steady upward progression of consumption. Ten years later, with the gradual recovery and slow middle-income growth, US household saving and consumption have re-set upon their initial precipitous path. This paper outlines the theoretic and empirically observed links between wealth driven by asset prices and credit and their direct and indirect impacts upon household behavior. In analyzing the multi-tiered relationships between wealth and credit, we argue that the tenuous and vulnerable links within the asset driven household sector remain unresolved 10 years after the crisis.

Recent comments


9 comment

  • Maria Madi says:

    Hi Jake,

    Many thnaks for your interesting paper that clearly shows the impacts of QE on the complex interrelations between wealth and credit. In your conclusions, you wrote ” Rather than changing income conditions through rebuilding and the socialization of investment Keynes advocated for, policy makers have restored credit conditions. Effectively, we have traded current income for credit, hoping it has the ability to finance the present and future”.
    I completely agree with your conclusions and I would like to ask you two questions: Is it possible to avoid the continuity of the unsustainable trade relation between income and credit? Which kind of positive agenda can stop this unsustainable relation?


    • Jake Jennings says:


      Thanks for both thoughts and questions, which I’ve been thinking about for a couple days. In regard to the first question, yes I believe it is possible albeit unlikely. I believe much of the current tradeoff between income conditions and credit are a result specific to this phase of financialization and wealth concentration.
      As to the second question I would argue for a mix of Keynesian public spending (infrastructure, green new deal, etc.), Minskyan ELR, all essentially in an attempt to sustain effective demand in a more sustainable manner. Additionally macro prudential safeguards and limits on international finance, global liquidity restrictions, and much more could be done to minimize the negative aspects of asset price –credit feedbacks. I do believe that there is a significant need and room for a positive agenda.

  • Arturo Hermann says:

    Your paper is full of insights and underscores the role of credit creation in increasing effective demand.
    For instance, only through new loans can a firm afford, here and now, investment expenses necessary to start production. And, in the sphere of consumption (and especially in situations of high income inequalities), only through new loans can a consumer afford to buy, here and now, some expensive durables (for instance, new cars).
    These aspects were also stressed by John Kenneth Galbraith’s “The Affluent Society”. Here he appraises the process of consumers’ debt creation as just an aspect of massive advertising campaigns leading to constantly induce in consumers artificial needs.
    Considering that the ratio of private debt/GDP has boosted over the latest decades across virtually all OECD countries, this points to the importance of length and imperfection of debt repayment (or consolidation) in maintaining effective demand. Of course, this way of maintaining effective demand would not solve the contradictions of the system, especially if it is accompanied by a widespread financialisation of the economy.

    • Jake Jennings says:

      Your thoughts and suggestions are greatly appreciated. Early versions of this paper focused more on the institutional nature of the issue. In addition to what you correctly point out from Galbraith, much of the alteration is in line with Duesenberry’s Relative Income Hypothesis and Veblen. In re-reading some of Galbraith, his point that individual ‘want for private goods reduces willingness for public goods’ feels especially prescient.
      I very much agree with your point on ‘the importance of length and imperfection of debt repayment (or consolidation) in maintaining effective demand.’
      Many thanks for your thoughts!

  • Carmelo Ferlito says:

    Dear Professor Jennings,
    I read your insightful paper.

    I have a brief question. You put a lot of emphasis on how expansion of credit altered consumption behavior, and generated a non-natural relationship between saving and consumption. The Austrian School developed, over several decades, a business cycle approach centered indeed on the role of credit manipulation in generating such imbalances, putting them at the root of cyclical fluctuations (I partially moved away from such a vision, but I still believe in a role for this interpretation). Among contemporary economists, Peter Boettke, Steven Horwitz and Roger Kopple read the Great Recession with Austrian lens. Why did you choose not to refer to such a literature, at least as reference for understanding the potential role of credit expansion on business cycles?

    With best regards

    • Jake Jennings says:

      Hi Carmelo,

      Thank you for thoughtful suggestion. I, like you had moved away from much of the Austrian ‘vision’ or lens, and that is much the reason for the omission. However, after reading your points, I do feel that I should revisit some that literature and include it. Much of my reading is that the current situation is a result of wealth-credit interaction in this specific era of financialization and rising income and wealth concentration more in line with post-keynesian authors. All of that said, I think you’re correct in pointing out my omission of the Austrian approach to credit – business cycle fluctuation.

      Again thank you for reading my paper and for your thoughts/questions.

  • Arturo Hermann says:

    As for the Austrian school and its stress on credit expansion on business cycle: this is true, but it is also true that in our system new loans (especially if imperfectly repaid) constitute a central way for creating effective demand. This is especially so in the neo-liberal agenda that, for instance, prescribes very low wages as a necessary means to acquire competitiveness. This will reduce the marginal propensity to consume, and most likely the resulting level of GDP. In this situation, in order to keep the system going, workers should consume much beyond their income capacity. For that purpose, credit creation comes in to provide, here and now, new effective demand. Of course, this process is full of shortcomings, but the solution lies in addressing at the root the contradictions of our mature capitalistic economies.

  • Arturo Hermann says:

    Dear Jake, I have found in “The Affluent Society” of John Kenneth Galbraith some interesting passages on the pathology of consumers’ debt creation.

    “It would be surprising indeed if a society that is prepared to spend thousands of millions to persuade people of their wants were to fail to take the further step of financing these wants, and were it not then to go on to persuade people of the ease and desirability of incurring debt to make these wants effective. This has happened. The process of persuading people to incur debt, and the arrangements for them to do so, are as much a part of modern production as the making of goods and the nurturing of the wants.”, (J.K.Galbraith, “The Affluent Society”, New York” Mariner Books, second edition 1998: 145-146).

    In this context, consumer credit has grown exponentially in the post Second World War period. But, after the benefits of consumption (assuming they be relevant) come the pains of payments, especially for lower income families. In this regard,

    “One wonders, inevitably, about the tensions associated with debt creation on such a massive scale. The legacy of wants, which are themselves inspired, are the bills which descend like the winter snow on those who are buying on the instal(l)ment plan. By millions of hearths throughout the land, it is known that when these harbingers arrive, the repossession man cannot be far behind. Can the bill collector or the bankruptcy lawyer be the central figure in the good society?”, (ibid: 146-147).

    These passages can be regarded as a good anticipation of the debt trends that have led to the recent economic crisis.

  • Jacob Jennings says:

    Dear Arturo,

    Thanks for both of your recent comments. First, I couldn’t agree with you more on the “solution, is in addressing at the root the contradictions of our mature capitalistic economies.”
    Second, I very much appreciate your points in revisiting J.K. Galbraith. Each time I re-read his work, I’m shocked at how early on he anticipated the private credit and debt trends emerging in the 1980s, all of which were prevalent in the 60s and 70s. Furthermore, there is much to the 80s to present mix of financial deregulation, financial innovation, globalization, stagnating middle-income wages, changing welfare policy in mature economies (specifically the US) that amplified the debt –asset price- household behavior relation (and I would argue asset price relationship).
    The last quote you cite very much shows the difficulty in relying upon credit to persistently sustain demand. As Maria points out, the challenge is providing a thoughtful and sustainable progressive path forward.

    Again, thank you for your thoughts.