Rajan’s (2010) analysis of the “fault lines” in our economies reveals some of the deeper drivers of excessive credit growth, in particular as a way of addressing the macroeconomic consequences of inequality in societies. Household indebtedness rose substantially – in some cases, doubling relative to the 1980s – reaching historically unprecedented levels and exceeding 100% of disposable income in many advanced economies.
However, as subprime mortgage losses rose to levels that threatened even highly rated tranches, investors began to question the reliability of the credit ratings and became increasingly unwilling to hold these products. Similar concerns arose in the market for asset-backed commercial paper (ABCP).