Home Equity Extraction, Growth, and the Subprime Crisis within the Theory of the Monetary Circuit

Economic policy attempts to stimulate growth after the subprime crisis. In light of the theory of the monetary circuit, this paper focuses on a too much neglected phenomenon associated with this crisis, which makes it difficult for growth to restart in the United States. The phenomenon at issue is as follows: home equity extraction gave an increasing support to consumption, but this support is suppressed by the subprime crisis. We first explain home equity extraction and the related support, before incorporating the latter within the theory of the monetary circuit. This leads to consider this support as a decisive component of the working of the economy, as it increasingly contributes to the reflux phase of monetary circuits. We then explain the suppression of this support by the subprime crisis. As this comes to suppress a decisive component of the working of the economy, we thereafter explain why recovery is undermined, since monetary circuits can no longer rely on the above support to achieve their reflux phase.