Modigliani Meets Minsky: Inequality, Debt, and Financial Fragility in America, 1950-2016

Abstract

This paper studies the secular increase in U.S. household debt and its relation to growing income inequality and financial fragility. We exploit a new householdlevel dataset that covers the joint distributions of debt, income, and wealth in the United States over the past seven decades. The data show that increased borrowing by middle-class families with low income growth played a central role in rising indebtedness. Debt-to-income ratios have risen most dramatically for households between the 50th and 90th percentiles of the income distribution. While their income growth was low, middle-class families borrowed against the sizable housing wealth gains from rising home prices. Home equity borrowing accounts for about half of the increase in U.S. housing debt between the 1980s and 2007. The resulting debt increase made balance sheets more sensitive to income and house price fluctuations and turned the American middle class into the epicenter of growing financial fragility.

Is Rajan’s Hypothesis Confirmed by Empirical Evidence? A Critical Review

“…In other words, inequality encouraged more mortgage debt accumulation by high-income households than by low-income households before the 2008 financial crisis. The conclusion reached by these three papers, that is, high- and middle-income, rather than low-income, households are responsible for the mortgage boom in the United States is further supported by other studies, such as Bartscher et al (2020) and the studies we examine in section 4.1.…”

Wealth of Two Nations: The U.S. Racial Wealth Gap, 1860-2020

“…After reveiling, equity holdings still account for just 7% of the assets of Black households while making up 18% of the assets of white households.29 Table2presents averages over the full 1950-2019 period. In Appendix TableJ.1, we show that differences in portfolio composition have been highly persistent over time, with white household wealth portfolios consistently more diversified than those of Black households.30 For a detailed analysis of the debt composition of U.S. households overall, seeBartscher, Kuhn, Schularick, and Steins (2020).…”

Monetary Policy and Racial Inequality

“…Expressing these losses relative to income, Figure 6b shows that they are small: about 0.5% of annual income for white households and about half as much for black households. Mortgage debt balances of U.S. households are, after four decades of growth, large and correspond to almost 100% of SCF household income (Bartscher et al, 2020). The dollar decline in mortgage payments from refinancing after a 100bp decrease in interest rates is shown in Figure 6a.…”