House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again - Softcover

Mian, Atif; Sufi, Amir

Softcover

ISBN 10: 022627165X ISBN 13: 9780226271651

Publisher: University of Chicago Press, 2015

Synopsis

The Great American Recession resulted in the loss of eight million jobs between 2007 and 2009. More than four million homes were lost to foreclosures. Is it a coincidence that the United States witnessed a dramatic rise in household debt in the years before the recession—that the total amount of debt for American households doubled between 2000 and 2007 to $14 trillion? Definitely not. Armed with clear and powerful evidence, Atif Mian and Amir Sufi reveal in House of Debt how the Great Recession and Great Depression, as well as the current economic malaise in Europe, were caused by a large run-up in household debt followed by a significantly large drop in household spending.

Though the banking crisis captured the public’s attention, Mian and Sufi argue strongly with actual data that current policy is too heavily biased toward protecting banks and creditors. Increasing the flow of credit, they show, is disastrously counterproductive when the fundamental problem is too much debt. As their research shows, excessive household debt leads to foreclosures, causing individuals to spend less and save more. Less spending means less demand for goods, followed by declines in production and huge job losses. How do we end such a cycle? With a direct attack on debt, say Mian and Sufi. More aggressive debt forgiveness after the crash helps, but as they illustrate, we can be rid of painful bubble-and-bust episodes only if the financial system moves away from its reliance on inflexible debt contracts. As an example, they propose new mortgage contracts that are built on the principle of risk-sharing, a concept that would have prevented the housing bubble from emerging in the first place.

Thoroughly grounded in compelling economic evidence, House of Debt offers convincing answers to some of the most important questions facing the modern economy today: Why do severe recessions happen? Could we have prevented the Great Recession and its consequences? And what actions are needed to prevent such crises going forward?

About this title

Review:

"Mian and Sufi are convinced that the Great Recession could have been just another ordinary, lowercase recession if the federal government had acted more aggressively to help homeowners by reducing mortgage debts. The two men -- economics professors who are part of a new generation of scholars whose work relies on enormous data sets -- argue . . . that the government misunderstood the deepest recession since the 1930s. They are particularly critical of Timothy Geithner, the former Treasury secretary, and Ben Bernanke, the former Federal Reserve chairman, for focusing on preserving the financial system without addressing what the authors regard as the underlying and more important problem of excessive household debt. They say the recovery remains painfully sluggish as a result."--Binyamin Appelbaum "New York Times "

"Much has been written about the boom and subsequent bust that rocked the US economy during 2007-2009, but insightful and informed analysis is much rarer. This book is one of those rare gems. It offers an in-depth look at the state of housing, consumer credit, household incomes, and debt around the crisis and presents an informed discussion about its causes and consequences. The analysis of crisis resolution has resonance, not only for the United States, but for the many countries that are still entangled in severe financial difficulties."--Carmen Reinhart, Harvard University

"Sufi and Mian have been publishing important work on this topic for the last eight years, beginning well before the 2008 crisis. Their arguments are compelling and deserve widespread attention, especially at a time when Tim Geithner and others are trying to rewrite history - and when many homeowners still need help."--Richard Eskow "Huffington Post "

"Atif Mian and Amir Sufi, our leading experts on the macroeconomic effects of private debt, have a new blog [www.houseofdebt.org]-- and it has instantly become must reading."--Paul Krugman "New York Times "

"Mian and Sufi have produced some of the most important and compelling research on the impact of debt on consumer behavior during the recent housing bubble and bust. This excellent new book presents and expands this research in a rigorous, yet engaging and accessible way."--Christina D. Romer, former chair of the Council of Economic Advisers

"This is a profoundly important book that makes a huge range of serious empirical evidence on the financial crisis accessible to a broad readership. A compendium of Mian and Sufi's own celebrated work would already be a spectacular contribution, but this book is so much more. Although the authors present all views in a balanced, scholarly way, their quiet insistence that we should have moved faster to write down household mortgages is well-reasoned and compelling."--Kenneth Rogoff, Harvard University

"It is all too easy to get wrapped up in the glamour and squalor of financial maneuvers. One forgets that the financial system is useful only to the extent that it makes the everyday economy of production, employment, consumption and capital formation work better, and avoids doing harm. Mian and Sufi do not make this mistake. Their principles and their very ingenious research keep the focus where it belongs. They tell a powerful story about excessive debt that any reader can understand, they nail it down with careful use of data, and they have serious ideas about how to make the system better and safer. It is a splendid book."--Robert M. Solow

"The most important economics book of 2014; it could be the most important book to come out of the 2008 financial crisis and subsequent Great Recession. Its arguments deserve careful attention, and its publication provides an opportunity to reconsider policy choices made in 2009 and 2010 regarding mortgage debt. House of Debt is important because it persuasively demonstrates that the conventional meta-narrative of the crisis and its aftermath, which emphasizes the breakdown of financial intermediation, is inadequate. . . . All future work on financial crises will have to reckon with the household balance sheet effects they stress. After their work, we can still believe in the necessity of financial rescues; however, we can no longer believe in their sufficiency. And after their work, we have an important new agenda of reforms to consider if future crises are to be prevented."--Lawrence Summers "Financial Times "

"A concise and powerful account of how the great recession happened and what should be done to avoid another one. Atif Mian, an economist at Princeton University, and Amir Sufi, a finance professor at the University of Chicago, make a strong circumstantial case that household debt was the recession's main culprit. They also find it skulking in the background of previous downturns, usually loitering in the vicinity of a housing bubble. . . . House of Debt is clear, well-argued and consistently informative. . . . Mian and Sufi's proposal to shift much of the risk of falling home prices to lenders--while rewarding them for their trouble--is a good place to start. If we don't put moralizing aside and analyze dispassionately what caused the last crisis, we areunlikely to prevent the next one."--Wall Street Journal

"Distills lessons about the crisis from their recent research into one easily digestible package."--Economist

About the Author:

Atif Mian is the Theodore A. Wells '29 Professor of Economics at Princeton University and director of the Julis-Rabinowitz Center for Public Policy and Finance. Amir Sufi is the Chicago Board of Trade Professor of Finance at the University of Chicago Booth School of Business.

About this edition

• Publisher: University of Chicago Press
• Publication date: 2015
• ISBN 10: 022627165X
• ISBN 13: 9780226271651
• Binding: Paperback
• Number of pages: 238