Jansson: How do we stop the trend in house-hold debt? Work on several fronts
Several policy areas must cooperate so we can remedy the problems linked to household indebtedness. This was one of the messages when Deputy Governor Per Jansson spoke at SvD Bank Summit on Tuesday.
Mr Jansson began by noting that Sweden came through the financial crisis relatively well, compared to many other countries. But despite developments being good and the repo rate being low, the policy the Riksbank has conducted has been criticised for being insufficiently expansionary.
The purpose of the policy, Mr Jansson said, has been to create the right conditions for a stable long-term development, by reducing the risk of exaggerated debt and overly inflated housing prices. Swedish households' indebtedness is high from today both a historical and a cyclical perspective. This creates risks, especially for households with small liquidity reserves. A particularly troublesome situation would arrive if the debt ratio began to show a trend increase again. This would make the economy more vulnerable at the same time as the liquidity reserves shrank further. Sooner or later one reaches a point when even fairly minor shocks in, for instance, incomes, asset prices or interest rates could have fairly large real economic effects.
Mr Jansson said that the policy the Riksbank has conducted fits well within its mandate. However, he noted that as it means that inflation is approaching the target somewhat more slowly, a tension is created between short-term and long-term perspectives, which are not so easy to manage.
It is difficult for monetary policy alone to reduce the risks linked to household borrowing and developments on the housing market. It was therefore good that the Government recently declared its intention to give Finansinspektionen the main responsibility for macroprudential policy - the new policy area that is intended to be the primary defence against this type of problem.
The fact that macroprudential policy has begun to take shape is a step in the right direction, but it is not a quick fix that will solve all of the problems, Mr Jansson pointed out. Just as monetary policy cannot be left alone to try to manage the risks linked to household debt and developments on the housing market, macroprudential policy cannot be left without support. I believe it is important that there is some degree of concordance between macroprudential policy and monetary policy, commented Mr Jansson, saying that this is a view reflected in the current international discussions.
However, he went on to say, the question is whether even macroprudential policy and monetary policy in collaboration are sufficient to provide a lasting solution to the problems. It is likely that an even broader intervention is needed. One important reason for the increase in housing prices and indebtedness is that the supply of housing has been small in relation to demand. It is probably therefore a good idea to also include housing policy in the equation so that one can achieve a lasting solution, said Mr Jansson.
But it is necessary to take measures in a way that avoids as far as possible an unnecessarily rapid and dramatic adjustment of debt and housing prices. One could say that what we need to achieve is a "slow puncture", where we gradually return to a situation with much lower risk of a household debt overhang causing problems. This is of course a substantial challenge and we can only manage this if several policy areas collaborate in the process, concluded Mr Jansson.
Read the entire speech: How do we stop the trend in house-hold debt? Work on several fronts (pdf)