Abstract
This paper examines the macroeconomic implications of recent developments in financial engineering, with particular emphasis on the post-1987 growth of markets for securities backed by credit card, installment, student loan, and home equity receivables. Three linkages of financial engineering to effective demand are identified: (1) funding effects, (2) liquidity preference or speculative effects, and (3) balance sheet or Minsky effects. Data from the Survey of Consumer Finances are used to investigate the importance of asset-backed security-related funding and balance sheet (Minsky) effects in the United States. Evidence is shown that financial engineering has boosted borrowing power at all income levels. The liberal use of expanded borrowing opportunities has fueled the growth of consumption---especially since 1995. However, a secularly rising share of U.S. households have entered the categories of "speculative" or "Ponzi" finance units---a factor that raises doubts about the sustainability of the current spending boom.