Three economists writing for the
Federal Reserve Bank of San Francisco’s Economic
Letter, are theorizing that the explosion of lending, especially mortgage
lending, has played a more important role in shaping the business cycle that
previously thought. If they are correct,
they say, then economic policy must adapt to this reality.
In their paper, “Mortgaging the Future?”
the three, Oscar Jordà vice president in the Economic Research
Department of the Bank, Moritz Schularick, professor of economics at the
University of Bonn; and Alan M. Taylor professor of economics and finance at
the University of California, Davis say that bank lending has quadrupled as a
ratio to GDP in advanced economies since World War II. This lending has been driven to a large
extent by the growth in mortgage loans which has in turn allowed households to leverage
up. This “Great Mortgaging” as they call
it has also fundamentally changed the nature of traditional banking and profoundly
influenced the dynamics of business cycles.