High leverage and weak balance sheets hinder household recovery: Cleveland Fed
An increase in household and corporate leverage is what drove The Great Recession of 2007. And, according to a new report from the Federal Reserve Bank of Cleveland, it's still what hinders a recovery today. Economist Filippo Occhino and analyst Timothy Bianco compared the last recession to the previous eight to reach this conclusion. According to their report, weak household and corporate balance sheets drove down real activity by raising the cost of credit, reducing credit availability and constraining consumption. This is not a unique circumstance in recession, they said; however, the magnitude of these occurrences is what sets The Great Recession apart. "Household leverage reached record high levels, and corporate leverage hit near-high levels," they said. According to the report, both households and corporations suffered a simultaneous loss of assets during the recession. Both financial assets and real estate assets experienced their largest percentage drop on record. Households in particular experienced a 22% decrease in financial assets and a 27% decrease during the recession. "The contractionary effects of the losses on leverage and real activity were compounded by the simultaneous drops in the two kinds of assets," the analysts commented. "Leverage ratios in both sectors have since decreased but remain close to their peaks" thus slowing the current recovery. Write to Christine Ricciardi. Follow her on twitter @HWnewbieCR.