AFTER credit dried up in America in 2008, the Federal Reserve scrabbled for ways to perk up spending. One trick it tried was to offer banks concessionary funding, hoping they would lend more to consumers and so induce Americans to open their wallets. An NBER working paper* published this week by Sumit Agarwal of the National University of Singapore, Souphala Chomsisengphet of the Treasury Department, Neale Mahoney of the University of Chicago and Johannes Stroebel of New York University looks at data from hundreds of millions of credit cards from 2008 to 2014 to work out why the results were so disappointing.
First, the researchers looked for evidence of pent-up demand for consumer credit. That involves comparing the credit-card balances of people who have very similar credit scores but end up on different sides of the various spending-limit thresholds that lenders impose on cardholders. The scale of excess borrowing by those with the higher limit, the theory runs, gives a sense of how much more those with the lower limit would spend if they could suddenly borrow more. This is important,…Continue reading]]>
