The article begins with presenting an analysis of how finance contributes to growth. For the purposes of the article, “finance” is defined as consumer lending. The article researches the extent to which the various types of lending directly impact economic growth. The authors find that, in general, bank lending is the most effective source of economic growth. While governmental spending is also known to fuel economic growth, this topic is not identified in the research. The analysis is how, and to what extent, does consumer lending cause economic growth. The author proceeds to display a thorough review of historic analysis relating to consumer financing and economic growth. The interest of the paper is in finding how well the historic literature illustrates the relationship between financing and growth. The researchers extend from the previous literature to highlight two key issues. First, the researchers seek to find whether the estimated effect of credit upon growth is consistent among various countries in different stages of economic development – developing versus developed. Second, the paper examines the other capacities that may influence economic growth in addition to consumer debt and increased spending; such as, legal, cultural, political, and monetary policies.
The investigators found that there is evidence that suggests the relationship between credit and growth is the strongest within countries that are considered to be developing economically. The important type of consumer credit lending is bank financing. The previous research attempted to reveal evidence of the relationship between finance and growth; however, the researchers adopted a mixed methodology. The resulting evidence has shown a very strong correlation between consumer debt and economic growth. This can be seen in both the banking industry as well as the stock market.
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"How Finance Contributes To Growth".
The researchers collected a tremendous amount of data to examine previous literary research. The results of the paper conclude that previous researchers may have premature in asserting the exact relationship between financing and growth. The previous data sets are “plagued” with high correlations between financing capacity and other factors such as legal, institutional, and regional factors. This makes it extremely difficult to tease out the exact impact of finance on economic growth. The researchers argue that the best way to approach this dynamic issue is to focus more exclusively on the long-term studies conducted historically that illustrate a smaller number of country data at the same stage of economic development. Essentially, countries that are developing such as China and India would be comparable and other countries such as the U.S. and Canada would be comparable. The paper argues that the research that takes a more dynamic approach to the data are more ready and able to separate the differences that may be working together to create economic growth.
Individuals and businesses obtain credit through banks and return that money in the form of expenses into the economy. Finance is the credit given to individuals. This article does not include the debt held by the government. Financing is spent on home mortgages, vehicle loans, credit cards, tuition, and personal loans. When controlled in a rational manner, consumer debt helps fuel the economy and encourages consistent growth. Consumer lending does increase economic growth; however, the global economic dilemma can be linked to the consequences of retaining too much debt mixed with the inability to meet payment on that debt. Consumer lending that is considered irrational does still impact the overall economy in a positive manner; however, those acute benefits are quickly eroded by long-run consequences. Nevertheless, consumer financing does support economic growth in the short term. In terms of macroeconomics, consumer financing is one of the largest supporters of economic consumption. Credit absorbs the significant portion of the demand side of the supply/demand curve on the U.S. economic picture.
The U.S. economy is driven by the behavior of consumers. Banks lend money to consumers in the form of credit and then that money is spent on consumer goods and services. The flow of cash is cyclical in nature and can be traced as it changes hands from business, to employee, to consumer, and then back to business. The economic recession currently underway in the U.S. shows a pattern of consumer financing that is unlike previous recessions. The consumers had the capacity to spend their way out of the previous recessions. Consumers today are likely maxed out on their financing capacity and banking institutions’ appetite for risk is diminishing. This leaves economists to ponder the reality that consumers have reached the peak of debt capabilities. The most plausible scenario is that consumers have become overburdened by such high levels of debt and now there is a shift in strategy to pay down debt instead of acquiring additional debt and spending.
The long-term correlation between the financial system size and economic growth is strong. This indicates the relationship between the banking industry, its lending, and consumer debt as being the strongest indicator of economic growth in a region. The researchers expand upon previous data sets to find that there is aggregate support of the long-term empirical evidence to add to the confidence in asserting that finance causes economic growth. The results of the research show that the size of the financing system also proportionately impact consumer lending capacity and consequential consumer spending that fuels economic growth. Surprisingly, the article did not discuss the impact of governmental spending on economic growth. While the other causes of economic growth were discussed, the author did not identify with the other significant cause of growth – governmental spending.
