A well functioning financial system should grow and shrink along with the general trend of economic activity, specifically the need for business credit. If businesses want to expand but don’t have the cash on hand, the financial system should grow.
Lending to consumers is a different story. The financial sector has grown as a share of GDP from around 5% in 1980 to around 7.5% today. A robust financial sector is essential for the “real” economy, but not only has the financial sector not become more efficient, most of the recent growth is due to increased lending to households.
Unlike lending to businesses, there is no evidence that increased household credit has positive effects on overall growth, explaining why the expansions of the financial sector in developed countries (where household, rather than business, credit has been expanding) has not boosted overall growth.
This is why the news that personal loans are at a record high isn’t necessarily something to cheer about. From Bloomberg:
Personal loans surged to a record this year and are the fastest-growing U.S. consumer-lending category, according to data from credit bureau TransUnion. Outstanding balances rose about 18 percent in the first quarter to $120 billion. Fintech companies originated 36 percent of total personal loans in 2017 compared with less than 1 percent in 2010, Chicago-based TransUnion said.
Of course, consumer credit is a good thing–up to a point. If you prefer consumption now to consumption later, borrowing might be the thing for you. But the dose makes the poison, and increasing leverage on the balance sheets of both households and financial institutions can lead to disaster–as we experienced in the financial crisis of a decade ago.
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