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House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again
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 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?
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 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?
219 pages, Hardcover
First published May 21, 2014
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April 20, 2017
Certainly an important book, for the authors propose a credible idea: when heavily indebted people suddenly have their homes foreclosed and income stopped, they tend to consume less. Duh. What's more, one foreclosure in a neighborhood drives home prices down, leading to more foreclosures in a downward spiral. The overlooked fact here is that the indebted poor's marginal propensity to consume - the percent of each additional dollar earned that goes to consumption - is much higher than it is for the wealthy. When the poor cut back on consumption, everybody suffers, and things only get worse. When the rich cut back on consumption - like when the dot com bubble bursts - the effect is not felt as widely, because the rich continue to consume at practically the same amounts as before. Protecting the indebted poor is essential to protecting the economy as a whole.
The most important argument of the book is that bailing out the shareholders in banks serves no purpose. Deposits are already insured by the Fed, so our financial transaction system is secure no matter what. There is no reason to go above and beyond to save the secondary financiers of banks, especially when banks are the ones whose irresponsibility causes the problem in the first place.
The authors argue that we should restructure debt policies to avoid such a levered-losses framework, but the idea in the last chapter doesn't seem plausible. The authors don't really, either. The publisher made them scrap together a final chapter to try to end the book on a more optimistic note. I do agree that some degree of debt forgiveness on mortgages likely would have made the recession less severe, because the indebted poor would have kept consuming, and everyone would have been better off.
How can YOU help prevent a recession? Don't buy a house you can't afford!
Many more thoughts on this book to come...
The most important argument of the book is that bailing out the shareholders in banks serves no purpose. Deposits are already insured by the Fed, so our financial transaction system is secure no matter what. There is no reason to go above and beyond to save the secondary financiers of banks, especially when banks are the ones whose irresponsibility causes the problem in the first place.
The authors argue that we should restructure debt policies to avoid such a levered-losses framework, but the idea in the last chapter doesn't seem plausible. The authors don't really, either. The publisher made them scrap together a final chapter to try to end the book on a more optimistic note. I do agree that some degree of debt forgiveness on mortgages likely would have made the recession less severe, because the indebted poor would have kept consuming, and everyone would have been better off.
How can YOU help prevent a recession? Don't buy a house you can't afford!
Many more thoughts on this book to come...
November 11, 2016
In this very short and extremely readable book two young professors prove with mathematical rigor (and in plain English) that the recent "Great Recession" was caused by the overindebtedness of America's poorest homeowners. It is truly incredible how much economics they pack into this 187 page book and how much of it you can absorb without stretching yourself. Brief summary of the argument:
1. Always quoting relevant research, but never attempting to talk over your head, they start by explaining how the poorest 20% of homeowners on average lost their entire net worth in the crisis, all while the richest 20% came out unscathed. How come? Simple: 1. The top 20% mainly hold financial assets that were protected by the Fed 2. The top 20% are indirectly the guys holding on to the mortgages that the poorest 20% are still paying or alternatively the US government guaranteed by taking over the obligations of Fannie and Freddie. All the recent talk about inequality? Go no further. The authors have it covered by page 40. Next!
2. They then explain that the poorest 20% have a marginal propensity to consume that is a large multiple of that of the richest 20%, an effect that also works in reverse and explains most of the fall in consumption (and thus aggregate demand) in the economy once their home equity had wiped out their lifetime savings. Yes, I'm confusing wealth effects with income effects here, but only for the sake of brevity. The authors do not! In short, the way you lose your house is you lose your income first (for example, divorce cuts it in half or illness in the family keeps you from working), next you miss payments, then you lose the house, which represented all your wealth to cap it all off. Alternatively, it's all set off when your monthly payment rockets up. And that's how the spending stopped! Charts are provided that measure this impact and irrefutably demonstrate that this process was in full swing, with spending on cars, furniture etc. on its knees a good 2 years before anybody knew the word Lehman.
3. It does not end there. Banks sell foreclosed homes into a weak market, forcing prices lower, which drives everybody's house price down, forcing people's home equity down to below zero who have done nothing wrong. These are people who can make their mortgage payment, and indeed mostly carry on doing so. Meantime, however, they are in negative wealth, with the inevitable negative effects on spending, especially among the poor.
4. Lots of lower spending all-round then forces companies to trim production and triggers unemployment. This was to me the most fascinating part of the book. Through little parables about countries linked through trading etc. the authors demonstrate how lower spending in conjunction with three distinct inflexibilities in the labor market (1. It's easier to fire people than to cut pay 2. It's difficult to move labor around, especially when it's wedded to a house it cannot sell 3. Retraining does not happen instantly) inevitably leads to job losses even in parts of the country or indeed the whole planet where no overleveraging and no housing bubble ever occurred.
I'm probably making a total hash of explaining this here, but the authors don't; they totally rock.
5. Next, they explain how debt not only doomed the poor, it actually triggered the whole housing bubble to begin with. Their work here is, for lack of a better word, forensic. They go state-by-state, nay, ZIP code by ZIP code splitting America by (i) high/low leverage (ii) high/low constraints in expanding city limits (iii) high/low credit score and demonstrate that credit expansion led price house appreciation. NOT the other way round. The analysis is fascinating and totally convincing. Leverage came first, house price appreciation followed. Page 83 is where to look. But, needless to say, higher house prices of course subsequently also led to further borrowing by households who famously "used their house as an ATM."
6. My second-favorite part of the book comes next. It explains how even those who believe homes are overpriced are left with no choice other than to get involved if irrational buyers use leverage: It's pages 110 to 113 and I won't spoil it for you here, it's a total gem of an argument. And it's followed by an equally elegant argument (originally by Andrei Shleifer, the man who best refuted the efficient market hypothesis AFAIC) on who would lend into this type of boom: investors who are misled into doing so by investing in securities specifically designed by the banking sector that provide enhanced yield by dint of over-exposing them to "neglected risks." Like -10% HPA, for example.
And so on... I still can't believe how much they've managed to pack in. In summary, the Great Recession was not caused by the Lehman incident. Contrary to the literature about the "breakdown in financial intermediation" theory promoted by our self-styled saviours, it was caused by debt, and in particular by the overindebtedness of the poor.
QED
Next, they train their laser onto the inadequate response of policy makers. In one sentence, the most efficient thing to have done would have been partial debt foregiveness. Period. A chapter is dedicated to how hopeless all other policies (fiscal response, monetary response, you name it) are in comparison. And the blame is laid at the feet of those in charge.
This is so persuasive, that in response Larry Summers took it upon himself to review the book in the FT, lavishing it with praise, but also pointing out 5 (count'em) reasons his hands were tied.
Double QED
All in the space of 187 pages.
Admittedly, the book could have been even shorter. The authors dedicate a fair few pages to the purpose of debunking the "save the banks, save the economy" theory that informed the policies of the Paulson / Bernanke / Geithner response to the crisis. They needn't have. More people believe in UFOs today than in the importance of Citibank, AIG or Goldman Sachs in our future prosperity, let alone their propensity to hold up the economy through the provision of credit. On the other hand, if you ever bump into somebody who chooses to defend the indefensible, you can always mail him his own personal copy of "House of Debt" and if he is remotely honest or open-minded that should settle the argument.
It's all capped by a rather lengthy proposal regarding Shared-Responsibility Mortgages. I work in the markets and I have no idea who will buy them, especially since the Fed has had to buy the much simpler paper that nobody wanted.
But from where I'm sitting the contribution of the book is elsewhere. It's both the definitive account of what happened to the American economy from 2006 to 2014+ and a powerful punch in the stomach for anyone who advocates the "democratization of debt" as a path to prosperity.
Buy it, read it and lend it to a friend. Spread the word!
1. Always quoting relevant research, but never attempting to talk over your head, they start by explaining how the poorest 20% of homeowners on average lost their entire net worth in the crisis, all while the richest 20% came out unscathed. How come? Simple: 1. The top 20% mainly hold financial assets that were protected by the Fed 2. The top 20% are indirectly the guys holding on to the mortgages that the poorest 20% are still paying or alternatively the US government guaranteed by taking over the obligations of Fannie and Freddie. All the recent talk about inequality? Go no further. The authors have it covered by page 40. Next!
2. They then explain that the poorest 20% have a marginal propensity to consume that is a large multiple of that of the richest 20%, an effect that also works in reverse and explains most of the fall in consumption (and thus aggregate demand) in the economy once their home equity had wiped out their lifetime savings. Yes, I'm confusing wealth effects with income effects here, but only for the sake of brevity. The authors do not! In short, the way you lose your house is you lose your income first (for example, divorce cuts it in half or illness in the family keeps you from working), next you miss payments, then you lose the house, which represented all your wealth to cap it all off. Alternatively, it's all set off when your monthly payment rockets up. And that's how the spending stopped! Charts are provided that measure this impact and irrefutably demonstrate that this process was in full swing, with spending on cars, furniture etc. on its knees a good 2 years before anybody knew the word Lehman.
3. It does not end there. Banks sell foreclosed homes into a weak market, forcing prices lower, which drives everybody's house price down, forcing people's home equity down to below zero who have done nothing wrong. These are people who can make their mortgage payment, and indeed mostly carry on doing so. Meantime, however, they are in negative wealth, with the inevitable negative effects on spending, especially among the poor.
4. Lots of lower spending all-round then forces companies to trim production and triggers unemployment. This was to me the most fascinating part of the book. Through little parables about countries linked through trading etc. the authors demonstrate how lower spending in conjunction with three distinct inflexibilities in the labor market (1. It's easier to fire people than to cut pay 2. It's difficult to move labor around, especially when it's wedded to a house it cannot sell 3. Retraining does not happen instantly) inevitably leads to job losses even in parts of the country or indeed the whole planet where no overleveraging and no housing bubble ever occurred.
I'm probably making a total hash of explaining this here, but the authors don't; they totally rock.
5. Next, they explain how debt not only doomed the poor, it actually triggered the whole housing bubble to begin with. Their work here is, for lack of a better word, forensic. They go state-by-state, nay, ZIP code by ZIP code splitting America by (i) high/low leverage (ii) high/low constraints in expanding city limits (iii) high/low credit score and demonstrate that credit expansion led price house appreciation. NOT the other way round. The analysis is fascinating and totally convincing. Leverage came first, house price appreciation followed. Page 83 is where to look. But, needless to say, higher house prices of course subsequently also led to further borrowing by households who famously "used their house as an ATM."
6. My second-favorite part of the book comes next. It explains how even those who believe homes are overpriced are left with no choice other than to get involved if irrational buyers use leverage: It's pages 110 to 113 and I won't spoil it for you here, it's a total gem of an argument. And it's followed by an equally elegant argument (originally by Andrei Shleifer, the man who best refuted the efficient market hypothesis AFAIC) on who would lend into this type of boom: investors who are misled into doing so by investing in securities specifically designed by the banking sector that provide enhanced yield by dint of over-exposing them to "neglected risks." Like -10% HPA, for example.
And so on... I still can't believe how much they've managed to pack in. In summary, the Great Recession was not caused by the Lehman incident. Contrary to the literature about the "breakdown in financial intermediation" theory promoted by our self-styled saviours, it was caused by debt, and in particular by the overindebtedness of the poor.
QED
Next, they train their laser onto the inadequate response of policy makers. In one sentence, the most efficient thing to have done would have been partial debt foregiveness. Period. A chapter is dedicated to how hopeless all other policies (fiscal response, monetary response, you name it) are in comparison. And the blame is laid at the feet of those in charge.
This is so persuasive, that in response Larry Summers took it upon himself to review the book in the FT, lavishing it with praise, but also pointing out 5 (count'em) reasons his hands were tied.
Double QED
All in the space of 187 pages.
Admittedly, the book could have been even shorter. The authors dedicate a fair few pages to the purpose of debunking the "save the banks, save the economy" theory that informed the policies of the Paulson / Bernanke / Geithner response to the crisis. They needn't have. More people believe in UFOs today than in the importance of Citibank, AIG or Goldman Sachs in our future prosperity, let alone their propensity to hold up the economy through the provision of credit. On the other hand, if you ever bump into somebody who chooses to defend the indefensible, you can always mail him his own personal copy of "House of Debt" and if he is remotely honest or open-minded that should settle the argument.
It's all capped by a rather lengthy proposal regarding Shared-Responsibility Mortgages. I work in the markets and I have no idea who will buy them, especially since the Fed has had to buy the much simpler paper that nobody wanted.
But from where I'm sitting the contribution of the book is elsewhere. It's both the definitive account of what happened to the American economy from 2006 to 2014+ and a powerful punch in the stomach for anyone who advocates the "democratization of debt" as a path to prosperity.
Buy it, read it and lend it to a friend. Spread the word!
October 24, 2020
The statement in last paragraph of chapter 1 in this book - “Economic disasters are man-made”, is straight forward, painful but true. Economic disaster does not give excuse to any nation. American as world leader, Japan - Asia super power, Spain, Norway, and Sweden with strong European Alliances, they are not immune from economic disasters. Between 2007 -2009 in America, it has cost more than 8 million citizen unemployed, no less than 4 million family homeless, not to mention the increasing number of depression, suicide, and criminal all around. Most of them are middle to low economic citizen the class that represent almost 90% of American population. Unexpectedly, Economic disaster gives impact as hard as humanity disaster. However, who dare to did it, how was it happened, and who should take the responsibility for all the pain that people felt?
Atif Mian, through his historical record of economic disasters all around the world, reevaluate individual finance decision, banking system, government decision before crisis. These decisions may seems insignificant, but when were taken wrong together, they ignited the wildfire that promote great economic depression. First, high public enthusiasm for taking house credits beyond their capability, have create housing price bubble. It is a matter of time for price bubble to burst when borrower can not afford their monthly credit payment and got forced to sell their properties at plummeting price. Second, banking system burden all housing price loses on borrower who majority are financially poor. It drive dramatic reduction in market spending behavior. Third, during crisis, government are in war between the interest of investors, banks, politicians and citizen. Put at the center of negotiation between the needs of these three parties and bring win-win solution for everyone are the key function of government. The success and failure of their leadership may bring whole nation out from the dark moment or deeper into the great depression.
As what I have learnt from this book, the future of fixing small recession is not only the responsibility of bank and government but also citizen. Citizen who are wise in managing their money, spending habit, controlling credit and debt may play unique role in determining the future of economic recession. We have to be honest with ourselves whether we are the actor behind crisis and try to change our behavior. House of Debt is not simply collective historical record of crisis. Moreover, it gives suggestion about how we should prepare for recession, and how we can balance the interest of borrower and creditor to prevent more destructive economic disaster. All of it make this book timeless and worth to read. I belief since Economic Disaster is “man-made situation”, man is the only hope to synthesis its cure.
Atif Mian, through his historical record of economic disasters all around the world, reevaluate individual finance decision, banking system, government decision before crisis. These decisions may seems insignificant, but when were taken wrong together, they ignited the wildfire that promote great economic depression. First, high public enthusiasm for taking house credits beyond their capability, have create housing price bubble. It is a matter of time for price bubble to burst when borrower can not afford their monthly credit payment and got forced to sell their properties at plummeting price. Second, banking system burden all housing price loses on borrower who majority are financially poor. It drive dramatic reduction in market spending behavior. Third, during crisis, government are in war between the interest of investors, banks, politicians and citizen. Put at the center of negotiation between the needs of these three parties and bring win-win solution for everyone are the key function of government. The success and failure of their leadership may bring whole nation out from the dark moment or deeper into the great depression.
As what I have learnt from this book, the future of fixing small recession is not only the responsibility of bank and government but also citizen. Citizen who are wise in managing their money, spending habit, controlling credit and debt may play unique role in determining the future of economic recession. We have to be honest with ourselves whether we are the actor behind crisis and try to change our behavior. House of Debt is not simply collective historical record of crisis. Moreover, it gives suggestion about how we should prepare for recession, and how we can balance the interest of borrower and creditor to prevent more destructive economic disaster. All of it make this book timeless and worth to read. I belief since Economic Disaster is “man-made situation”, man is the only hope to synthesis its cure.
January 10, 2016
Well constructed - to my non-academic eyes - arguments about the causes and the issues of the Great Recession. Long story short: too much money chasing after too few assets, prices of houses go up, mortgage lenders looking to lend to anyone human, bankers packaging risky mortgages into supposedly "safe" bonds (interesting concept, that is!)...very depressing, really.
And the sad part is that, yes, there are things that could be done to prevent this from happening again, but the political situation during economic crises isn't usually conducive to making structural financial changes. So the takeaway advice is, in my opinion, don't put all your eggs in one basket. The reading is a bit thick at times, and I did prefer Michael Lewis' take on the financial causes of the Recession, but glad I read it nonetheless. Recommended for financial/economic junkies.
And the sad part is that, yes, there are things that could be done to prevent this from happening again, but the political situation during economic crises isn't usually conducive to making structural financial changes. So the takeaway advice is, in my opinion, don't put all your eggs in one basket. The reading is a bit thick at times, and I did prefer Michael Lewis' take on the financial causes of the Recession, but glad I read it nonetheless. Recommended for financial/economic junkies.
September 13, 2018
I picked up the book after the recent controversy about one of its authors (Atif Mian) being an Ahmadi just to confirm all the hype about his brilliance, and I can conclude that certainly, he has propagated a pretty revolutionary change in current responsibilities for both creditors and debtors. For me, his stance is very socialist and could be effective. The crust of his proposal is that tax has to be levied on wealth and not on income only. But this change can only work in socialist countries where senile old people are guaranteed state protection. I don't see his policy working in the capitalist USA where everything has to be paid even when you are retired but wealthy.
Most of the book is on individual debt, there is only a small mention of international debt and its repercussions. But the point he made about the poor countries not being able to print money to escape
poverty because they have borrowed in foreign currency is very valid.
He would have certainly made a very interesting addition to the Economic Advisory Council set up by the new PTI government though :(
Most of the book is on individual debt, there is only a small mention of international debt and its repercussions. But the point he made about the poor countries not being able to print money to escape
poverty because they have borrowed in foreign currency is very valid.
He would have certainly made a very interesting addition to the Economic Advisory Council set up by the new PTI government though :(
August 20, 2015
This book is divided into three parts. Part one focuses on one element of the Great Recession, the run up and melt down of home prices. The authors explain the run up, they explain the resulting crash, and they explain some effects on the wider economy. In part two the authors explain what they would have done to prevent the secondary effects of the melt down of home prices, that is how to mitigate the damage to the wider economy. In part three the authors discuss different mortgage contracts that could be offered in the future that might prevent the big busts in housing prices like those experienced in 2007 and to a lesser extent as part of the S&L crisis of the 90's.
Part one is excellent. I have only one criticism, in that of all the politicians and wags to call out the authors decide to target Senator Tom Coburn. There were many bad actors in the loose credit that resulted in the housing bust, but of all people they go after Coburn not because he was wrong, but because they disagree with one statement he made. Their attack is a profound warning to the reader that they are not disinterested academics whose research is not politically motivated, but that they are partisans, with an obvious hero worship for Paul Krugman, who is quoted more often than anyone else they mention in their writing. They do question an outcome in which banks were saved, but the stock holders and creditors to the banks were not. This is a good question to ask. I've thought the reason shareholders and creditors of "bad banks" were not wiped out is for the same reason "good banks" were forced at regulatory gunpoint to take TARP funds. If the government had differentiated between good and bad banks, the run on bad banks may have made the cost of intervention even higher. I do not know that to be true, which is why I write they've asked a good question.
Part two is terrible. One wonders how economies like those in South America and Cuba go into death spirals, despite a top-down command and control unbridled by the need for legislative buy-in can yield such terrible results, when the command and control function has highly educated ivy league economists riding sidecar to El Presidente. Unwittingly the authors provide the answer. When they offer their advice for remedying the damage to the wider economy from the housing bust, they toss out the freedom to contract, they care not for property rights, and the value to an economy of understood procedures are assigned a future value of zero. Their answer is to simply take money from those that have it and give it to those in debt based on the authors' (standing in for the governments) Solomon-like wisdom, because then the outcome would be more "fair." They fail to understand the powerful good that is built into a free market that allows people to freely enter into contracts. They fail to understand that a government that will reach out and take from individuals, simply because they have made loans, and give those takings to others, simply because they have taken out loans will a) have terrible bureaucratic costs such that each dollar take from the lender will probably only get 23 cents to the borrower and b) give the government a subjective power that will undermine all lending and all contracts going forward. Their naivety is striking as is their hubris. My read of the second chapter of their book disqualifies them from ever being allowed authority in the future beyond the ivy covered walls of their respective enclaves of higher education. The authors have all the makings of tyrants.
Part three is thought provoking, and perhaps some of their ideas about how to structure mortgage contracts in the future will be implemented. The failure of the third part of the book is that it calls for complex answers where more simple answers may prevail. Rather than a more complex mortgage contract, should we not simply ban the creation of traunched MBS'? The introduction of the private MBS has proven extremely hazardous to our economy, and it's a relatively new invention. It could easily be banned. In this case rather than selling off loans, banks would be back into the position of making and servicing loans, a position at which they excelled for decades. Similarly, would it not be better to prevent future liar loans (a subject to which the authors write no more than a sentence in part 2 of their book) through a more obvious penalty to the dishonest borrower? Should not each bank that sell loans for servicing to GSE's be subject to a clawback should the loans the bank has originated have a default rate outside the range of normal when compared to other bank loans of the same vintage and credit score? Again, they have some good ideas, but I don't think they go far enough in considering this simple question, "Is the more complex financial system ushered in since the 1970's helpful or is it aggregating risk rather than diversifying risk away?"
I give part one of the book 4.5 stars, but because of the insidious nature of part two, the book overall rates only two stars.
Part one is excellent. I have only one criticism, in that of all the politicians and wags to call out the authors decide to target Senator Tom Coburn. There were many bad actors in the loose credit that resulted in the housing bust, but of all people they go after Coburn not because he was wrong, but because they disagree with one statement he made. Their attack is a profound warning to the reader that they are not disinterested academics whose research is not politically motivated, but that they are partisans, with an obvious hero worship for Paul Krugman, who is quoted more often than anyone else they mention in their writing. They do question an outcome in which banks were saved, but the stock holders and creditors to the banks were not. This is a good question to ask. I've thought the reason shareholders and creditors of "bad banks" were not wiped out is for the same reason "good banks" were forced at regulatory gunpoint to take TARP funds. If the government had differentiated between good and bad banks, the run on bad banks may have made the cost of intervention even higher. I do not know that to be true, which is why I write they've asked a good question.
Part two is terrible. One wonders how economies like those in South America and Cuba go into death spirals, despite a top-down command and control unbridled by the need for legislative buy-in can yield such terrible results, when the command and control function has highly educated ivy league economists riding sidecar to El Presidente. Unwittingly the authors provide the answer. When they offer their advice for remedying the damage to the wider economy from the housing bust, they toss out the freedom to contract, they care not for property rights, and the value to an economy of understood procedures are assigned a future value of zero. Their answer is to simply take money from those that have it and give it to those in debt based on the authors' (standing in for the governments) Solomon-like wisdom, because then the outcome would be more "fair." They fail to understand the powerful good that is built into a free market that allows people to freely enter into contracts. They fail to understand that a government that will reach out and take from individuals, simply because they have made loans, and give those takings to others, simply because they have taken out loans will a) have terrible bureaucratic costs such that each dollar take from the lender will probably only get 23 cents to the borrower and b) give the government a subjective power that will undermine all lending and all contracts going forward. Their naivety is striking as is their hubris. My read of the second chapter of their book disqualifies them from ever being allowed authority in the future beyond the ivy covered walls of their respective enclaves of higher education. The authors have all the makings of tyrants.
Part three is thought provoking, and perhaps some of their ideas about how to structure mortgage contracts in the future will be implemented. The failure of the third part of the book is that it calls for complex answers where more simple answers may prevail. Rather than a more complex mortgage contract, should we not simply ban the creation of traunched MBS'? The introduction of the private MBS has proven extremely hazardous to our economy, and it's a relatively new invention. It could easily be banned. In this case rather than selling off loans, banks would be back into the position of making and servicing loans, a position at which they excelled for decades. Similarly, would it not be better to prevent future liar loans (a subject to which the authors write no more than a sentence in part 2 of their book) through a more obvious penalty to the dishonest borrower? Should not each bank that sell loans for servicing to GSE's be subject to a clawback should the loans the bank has originated have a default rate outside the range of normal when compared to other bank loans of the same vintage and credit score? Again, they have some good ideas, but I don't think they go far enough in considering this simple question, "Is the more complex financial system ushered in since the 1970's helpful or is it aggregating risk rather than diversifying risk away?"
I give part one of the book 4.5 stars, but because of the insidious nature of part two, the book overall rates only two stars.
November 4, 2019
The Great Recession of 2008 wiped out 8 million jobs in the United States and led to 4 million homes being foreclosed. The total value of housing plummeted by US$5.5 trillion. While there have been tomes written by economists, politicians, journalists and policy makers on the cause and consequences of this mighty recession, there has been a lamentable paucity of literature on the role played by household debt in the triggering of this financial crisis.
Atif Mian and Amir Sufi have tried honestly to ameliorate this lacuna with "House of Debt". A revealing work that emphasizes and elaborates the interplay between mounting debt burdens and recessionary conditions, this book serves as a useful guide to comprehend the vile impact of household leverage on the prospects of an economy (a fact that unfortunately and conveniently escaped the lens of politician policy makers and conniving bankers). Using concepts such as the Marginal Propensity to Consume ("MPC") and Irving Fisher's famous "Debt Deflation Theory", the authors highlight the cascading impact of a fall in housing equity upon the overall functioning of the economy. The knock-on effects are further exacerbated by the fraudulent and downright unethical practices engaged in by mortgage lenders and bankers who targeted vulnerable borrowers (those most likely to default on their mortgages) having low or no credit rating with a slew of mortgages.
Mian and Sufi also propose novel but perfectly implementable ameliorating measures such as Shared Responsibility Mortgages ("SRM's) where while the borrower is protected against the downside resulted by a fall in the value of housing, the lender is also incentivized whenever there is a surge in the real estate market indices. However as the authors rightly muse, the one biggest road block in introducing reformative measures of the nature proposed by them are more political in nature than practical. The vested interests preying on the susceptibilities of a gullible public would be deprived of their ill gotten gains if the system was to be revamped and restored to reflect human values and ethical safeguards. If the selfish clan were to succeed in their devious endeavours, it would alas be at the expense of a larger and moral good!
"House of Debt" - A timely warning before the entire edifice comes crashing down in a heap!
Atif Mian and Amir Sufi have tried honestly to ameliorate this lacuna with "House of Debt". A revealing work that emphasizes and elaborates the interplay between mounting debt burdens and recessionary conditions, this book serves as a useful guide to comprehend the vile impact of household leverage on the prospects of an economy (a fact that unfortunately and conveniently escaped the lens of politician policy makers and conniving bankers). Using concepts such as the Marginal Propensity to Consume ("MPC") and Irving Fisher's famous "Debt Deflation Theory", the authors highlight the cascading impact of a fall in housing equity upon the overall functioning of the economy. The knock-on effects are further exacerbated by the fraudulent and downright unethical practices engaged in by mortgage lenders and bankers who targeted vulnerable borrowers (those most likely to default on their mortgages) having low or no credit rating with a slew of mortgages.
Mian and Sufi also propose novel but perfectly implementable ameliorating measures such as Shared Responsibility Mortgages ("SRM's) where while the borrower is protected against the downside resulted by a fall in the value of housing, the lender is also incentivized whenever there is a surge in the real estate market indices. However as the authors rightly muse, the one biggest road block in introducing reformative measures of the nature proposed by them are more political in nature than practical. The vested interests preying on the susceptibilities of a gullible public would be deprived of their ill gotten gains if the system was to be revamped and restored to reflect human values and ethical safeguards. If the selfish clan were to succeed in their devious endeavours, it would alas be at the expense of a larger and moral good!
"House of Debt" - A timely warning before the entire edifice comes crashing down in a heap!
August 10, 2017
This is a near-perfect book of popular economics, which I have been meaning to read for a long time but only recently got around to. I am very often disappointed when I read popular economics books, generally because I end up wishing they were more academic. But Mian and Sufi manage an extremely difficult combination of writing in a very accessible style, providing both theoretical and empirical support, and even coming up with some decent policy recommendations.
The main thesis of the book is that the Great Recession was so bad primarily because of the debt overhang on households who had borrowed too much against residential real estate. They offer this view in contrast primarily to the view that the recession was bad primarily because of the near-collapse of the banking sector and the fact that "banks stopped lending". This is an important distinction because the two theories produce very different policy recommendations: bail out the banks, which is what was actually done, or bail out people with underwater mortgages, which was given lip service but barely done at all in practice. Mian and Sufi adduce a wide variety of empirical evidence to support their point, primarily based on disaggregated geographic data comparing regions with high debt burdens to those without. They make reasonably clean comparisons by, for example, looking at employment losses in tradeable vs. non-tradeable sectors, or comparing metro areas with geographic constraints on housing supply and those with no such constraints. They do an excellent job explaining these analyses in plain language, even though the underlying econometrics are somewhat complex.
In brief, their high-level argument is that debt is largely bad for the macroeconomy because it shifts risk precisely to the people who are least able to bear it. (Poor people borrow and rich people lend; the debt contracts expose the borrower to the first loss and give the lender a senior claim.) This setup gives lenders reason to lend even when they believe asset values are inflated (as long as the borrower puts in enough equity). It also concentrates asset price declines on those with the highest marginal propensity to consume out of wealth, which maximizes the deleterious impact on the economy. They argue for more equity-like financing arrangements, and while their "shared responsibility mortgage" seems a little bit complicated, I applaud them for coming up with a real policy proposal based on their analysis.
It is interesting that both views I described at the beginning can be characterized as "hold your nose morality plays". In the standard view, we hold our nose and bail out the banks even though they were making bad loans, because it's the right thing to do for the economy. In Mian and Sufi's view, we hold our nose and bail out indebted homeowners even though they borrowed too much, because it's the right thing to do for the economy. It's worth reflecting on which side we're more willing to hold our noses for.
The main thesis of the book is that the Great Recession was so bad primarily because of the debt overhang on households who had borrowed too much against residential real estate. They offer this view in contrast primarily to the view that the recession was bad primarily because of the near-collapse of the banking sector and the fact that "banks stopped lending". This is an important distinction because the two theories produce very different policy recommendations: bail out the banks, which is what was actually done, or bail out people with underwater mortgages, which was given lip service but barely done at all in practice. Mian and Sufi adduce a wide variety of empirical evidence to support their point, primarily based on disaggregated geographic data comparing regions with high debt burdens to those without. They make reasonably clean comparisons by, for example, looking at employment losses in tradeable vs. non-tradeable sectors, or comparing metro areas with geographic constraints on housing supply and those with no such constraints. They do an excellent job explaining these analyses in plain language, even though the underlying econometrics are somewhat complex.
In brief, their high-level argument is that debt is largely bad for the macroeconomy because it shifts risk precisely to the people who are least able to bear it. (Poor people borrow and rich people lend; the debt contracts expose the borrower to the first loss and give the lender a senior claim.) This setup gives lenders reason to lend even when they believe asset values are inflated (as long as the borrower puts in enough equity). It also concentrates asset price declines on those with the highest marginal propensity to consume out of wealth, which maximizes the deleterious impact on the economy. They argue for more equity-like financing arrangements, and while their "shared responsibility mortgage" seems a little bit complicated, I applaud them for coming up with a real policy proposal based on their analysis.
It is interesting that both views I described at the beginning can be characterized as "hold your nose morality plays". In the standard view, we hold our nose and bail out the banks even though they were making bad loans, because it's the right thing to do for the economy. In Mian and Sufi's view, we hold our nose and bail out indebted homeowners even though they borrowed too much, because it's the right thing to do for the economy. It's worth reflecting on which side we're more willing to hold our noses for.
September 18, 2024
Książka która kompletnie zmieniła moje postrzeganie kryzysu finansowego z 2008 roku i reakcji na niego. Wcześniej myślałem (nie wchodząc w szczegóły), że kryzys został wywołany przez nadmierne udzielanie kredytów wspierane przez politykę państwa plus wałki przez instytucje ratingowe i banki, udzielanie ich do osób bez dochodów i majątków sprawiło, że instytucje finansowe zaczęły upadać a rekacja rządu USA o bailout banków była prawidłowa. Autorzy książki bazując na danych i faktach zwracają uwagę na inny aspekt. Oczywiście że nadmierne udzielanie kredytów miało ogromną rolę w wywołaniu kryzysu natomiast dzieje się to przez samą konstrukcję kredytu. To kredytobiorcy ponoszą większe ryzyko niż kredytodawcy. Spadek wartości zabezpieczenia kredytu jest bardziej dotkliwy dla kredytobiorców niż kredytodawców, a to kredytobiorcy wydają większą część swoich dochodów co sprawia że w przypadku spadku wartości nieruchomości maleją wydatki gospodarstw domowych co nieuchronnie prowadzi do kryzysu. Niestety pomysły autorów książki by niwelować tego typu zjawiska mimo ponad 10 lat od napisania książki dalej nie znalazły zainteresowania, a szkoda.
October 10, 2021
This was a great book detailing what went on during the financial crisis. The authors highlight the role that increased household debt played in the recession, and lay out a levered losses framework. They also note the expansion of mortgage credit that helped drive household debt to unsustainable levels. The authors propose a financial system with more shared risk. This includes financial instruments such as shared risk mortgages as well as policies of mortgage cram-downs and more flexible debt restructuring.
4.5 Stars
4.5 Stars
May 9, 2015
Overall, an interesting, readable, thought-provoking work.
It changes my view of "moral hazard".
What constitutes reasonable, prudent house-buying?
Just how knowledgeable do we expect homeowners to be, and pay the consequences if they are not?
It is unfortunate that US laws and politics are not flexible enough to allow trying the proposed fix.
Chap 1.
Based on US and international data, a greater than normal increase in household debt,
followed by a restriction of credit, will cause a recession.
Also, normal recessions with high private debt are more severe than other normal recessions.
Even without a banking crisis, elevated debt makes recessions worse.
The worst recessions include both, high debt, and a banking crisis.
Chap 2.
The poorest are the most highly leveraged.
IE, a 20% drop in house prices will greatly reduce their equity.
Once a mortgage goes 'underwater', sale prices quickly drop, a fire sale,
and that makes it worse for everyone.
We have insurance for fires and other natural disasters, but not for recessions.
Debt, the anti-insurance.
Chap 3.
High debt and high leverage households are hardest hit by a reduction in asset prices.
They lose a lot of equity and will cut consumption much more that those with lower debt or leverage.
The dot-com bubble was over quickly since asset loses were mainly confined to low debt, low leverage households.
Most households are affected, but not to the same levels.
Chap 4 introduces the Levered-Losses Framework, frictions that inhibit quick adjustments,
and the overall effect, even on those who were low debt and low leverage.
Chap 5 discusses unemployment, Senator Bob Corker's "terrible public policy" statement, lose of jobs due to local or national factors, and more frictions, namely more unemployment benefits, avoidance of mortgage payments, etc.
Chap 6, the credit expansion, discusses how lenders made more credit available, so that people could refinance their home loans, pull out money for spending, and be in worse shape. Refinancing correlates with high debt, high leverage, and inelastic housing markets.
Chap 7.
Banking crises in 1990s Thailand pointed out the value of having adequate reserves in US dollars.
"Central banks in emerging markets consequently piled into safe US dollar-denominated assets."
"Money poured into the US economy" in 2002-2006 time-frame.
Local banks are "vulnerable to local or idiosyncratic risk." Bigger, more national, is less risky.
Government Sponsored Enterprises, GSEs, tranching, Private Label Securitizations, PLSs.
Difficult for individuals to assess risk. Create custom PLSs to appear risk-free.
Enables lenders to unload poor-quality loans; which opened lending to new (high-risk) markets.
Low/No documentation for some loans created a bigger pool of high debt, high leverage mortgages.
Chap 8, Debt and Bubbles.
Lindleberger notes "the main driver of asset-price bubbles is almost always an expansion of credit supply."
Chap 9, Save the banks, save the economy?
Bailing out a furniture maker vs. bailing out a bank. What are the differences?
If furniture company does poorly: equity holders lose, then creditors lose, then bankruptcy.
If bank does poorly (people default on mortgage): first equity holders, then subordinated debt, then FDIC.
To stress: depositor's are saved but equity and subordinated debt are wiped out.
Preventing bank runs is important, esp in cases of cash flow or maturation mis-match.
The national payment system depends on banks.
"To prevent runs and to preserve the payment system, there is absolutely no reason for the government to protect long-term creditors and shareholders of banks."
"Support for the banks in the US during the Great Recession went far beyond protecting the payment system."
But, in the 'banking view', "bank creditors and shareholders must be protected because banks have a unique ability to lend."
Can we borrow out way out of a recession?
Mom and Pop stores were not trying to borrow.
People were not spending.
Large employers are laying off staff because of poor sales.
So, who should be borrowing?
Yet, many still support the bank-lending view.
"In the levered-losses view, using taxpayer money to bail out bank creditors and shareholders, while ignoring the household-debt problem is counterproductive."
Chap 10, Forgiveness.
Securitization (MBS) makes it difficult to re-negotiate loans.
Keep a 'tough guy' image. Legal constraints.
Lessons from 1810s included moratoria on debt payments and foreclosures; also, delays on debt payments.
Other alternatives: Mortgage 'cram-downs'.
While some people mis-used refinancing, others were victims of time and mis-representation.
Ie, no moral failure. Do we punish them?
Chap 11 discussed monetary and fiscal policy.
Avoid the combo of debt and deflation. Stimulate with low interest. Of limited effectiveness.
QE is also possible, but how much did it really help?
Fiscal alternatives is confounded by political gridlock.
Chap 12, Sharing, lays out an alternative.
Share the risk and share the reward; limit losses for home-owners, have loaners share lose during bad times.
Detailed examples of what would happen during good years and during recessions.
Makes sense financially but practically impossible politically.
It changes my view of "moral hazard".
What constitutes reasonable, prudent house-buying?
Just how knowledgeable do we expect homeowners to be, and pay the consequences if they are not?
It is unfortunate that US laws and politics are not flexible enough to allow trying the proposed fix.
Chap 1.
Based on US and international data, a greater than normal increase in household debt,
followed by a restriction of credit, will cause a recession.
Also, normal recessions with high private debt are more severe than other normal recessions.
Even without a banking crisis, elevated debt makes recessions worse.
The worst recessions include both, high debt, and a banking crisis.
Chap 2.
The poorest are the most highly leveraged.
IE, a 20% drop in house prices will greatly reduce their equity.
Once a mortgage goes 'underwater', sale prices quickly drop, a fire sale,
and that makes it worse for everyone.
We have insurance for fires and other natural disasters, but not for recessions.
Debt, the anti-insurance.
Chap 3.
High debt and high leverage households are hardest hit by a reduction in asset prices.
They lose a lot of equity and will cut consumption much more that those with lower debt or leverage.
The dot-com bubble was over quickly since asset loses were mainly confined to low debt, low leverage households.
Most households are affected, but not to the same levels.
Chap 4 introduces the Levered-Losses Framework, frictions that inhibit quick adjustments,
and the overall effect, even on those who were low debt and low leverage.
Chap 5 discusses unemployment, Senator Bob Corker's "terrible public policy" statement, lose of jobs due to local or national factors, and more frictions, namely more unemployment benefits, avoidance of mortgage payments, etc.
Chap 6, the credit expansion, discusses how lenders made more credit available, so that people could refinance their home loans, pull out money for spending, and be in worse shape. Refinancing correlates with high debt, high leverage, and inelastic housing markets.
Chap 7.
Banking crises in 1990s Thailand pointed out the value of having adequate reserves in US dollars.
"Central banks in emerging markets consequently piled into safe US dollar-denominated assets."
"Money poured into the US economy" in 2002-2006 time-frame.
Local banks are "vulnerable to local or idiosyncratic risk." Bigger, more national, is less risky.
Government Sponsored Enterprises, GSEs, tranching, Private Label Securitizations, PLSs.
Difficult for individuals to assess risk. Create custom PLSs to appear risk-free.
Enables lenders to unload poor-quality loans; which opened lending to new (high-risk) markets.
Low/No documentation for some loans created a bigger pool of high debt, high leverage mortgages.
Chap 8, Debt and Bubbles.
Lindleberger notes "the main driver of asset-price bubbles is almost always an expansion of credit supply."
Chap 9, Save the banks, save the economy?
Bailing out a furniture maker vs. bailing out a bank. What are the differences?
If furniture company does poorly: equity holders lose, then creditors lose, then bankruptcy.
If bank does poorly (people default on mortgage): first equity holders, then subordinated debt, then FDIC.
To stress: depositor's are saved but equity and subordinated debt are wiped out.
Preventing bank runs is important, esp in cases of cash flow or maturation mis-match.
The national payment system depends on banks.
"To prevent runs and to preserve the payment system, there is absolutely no reason for the government to protect long-term creditors and shareholders of banks."
"Support for the banks in the US during the Great Recession went far beyond protecting the payment system."
But, in the 'banking view', "bank creditors and shareholders must be protected because banks have a unique ability to lend."
Can we borrow out way out of a recession?
Mom and Pop stores were not trying to borrow.
People were not spending.
Large employers are laying off staff because of poor sales.
So, who should be borrowing?
Yet, many still support the bank-lending view.
"In the levered-losses view, using taxpayer money to bail out bank creditors and shareholders, while ignoring the household-debt problem is counterproductive."
Chap 10, Forgiveness.
Securitization (MBS) makes it difficult to re-negotiate loans.
Keep a 'tough guy' image. Legal constraints.
Lessons from 1810s included moratoria on debt payments and foreclosures; also, delays on debt payments.
Other alternatives: Mortgage 'cram-downs'.
While some people mis-used refinancing, others were victims of time and mis-representation.
Ie, no moral failure. Do we punish them?
Chap 11 discussed monetary and fiscal policy.
Avoid the combo of debt and deflation. Stimulate with low interest. Of limited effectiveness.
QE is also possible, but how much did it really help?
Fiscal alternatives is confounded by political gridlock.
Chap 12, Sharing, lays out an alternative.
Share the risk and share the reward; limit losses for home-owners, have loaners share lose during bad times.
Detailed examples of what would happen during good years and during recessions.
Makes sense financially but practically impossible politically.
September 18, 2021
The author got the economic facts correct, but incomplete, and put them in a light to help the book narrative, which in most ways it shows a lack of understanding of individual interest. The book is written quite unscientifically, and the culminating point, where he proposes a product for the market made me laugh. The book is a joke. No reason to read it.
December 23, 2014
This book is easy to read, the right length (200 pages or so), and an incredible compendium of research on the Great Recession, and the role of debt in it. Specifically, it addresses:
--that the decline in household spending pre-dated (and indeed likely precipitated) the financial crisis, not the other way around; the Great Depression was similar
--that it was an expansion of credit (the supply side) that drove the mortgage crisis, rather than a consumer
--how, because houses are a highly leveraged investment, declines in home equity affect poorer homeowners disproportionately, and therefore the economy, because of differences in their marginal propensity to consume
--that the primary difference between a "normal" recession and this one was not the unavailability of credit (indeed, firms were stockpiling cash) but rather the severely reduced consumption because of the wealth loss from the decline in housing prices. Indeed the wealth loss in the tech bubble recession was roughly equivalent to the Great Recession, but with nowhere near the impacts on consumption and therefore the economy as a whole. So while there was a global savings glut, looking for returns, that probably would have inflated another bubble if not the housing market--another kind of bubble would have been better.
--that securitization encouraged riskier lending (an interesting study looked at mortgages to borrowers with credit scores just above and below the 620 cutoff for some types of securitization; the loans to lower-credit (non-securitizable) borrowers were less likely to default)
--that savers are equally culpable in a crisis such as this, in terms of how they invest and what sort of documentation and research they do
--that the demand for mortgage-backed securities in fact drove the ever-deteriorating mortgage standards (loan-to-value ratio, low documentation loans, the share that were sub-prime), culminating in borrowers that defaulted almost immediately after loans were made; and that rising defaults in 2007 precipitated house-price declines, and the dominoes from there
--that foreclosures are bad for banks, too, and that banks would have (in at least some cases) been better off writing down principal on loans than foreclosing and exacerbating house price declines, but that securitization prevents as much
Their cures I found somewhat less compelling. They note that "the securitization of mortgages during the housing boom made it very difficult to renegotiate mortgages, even when everyone would have been better off by doing so," which can't possibly be true as written, since someone else was on the right side of the various derivatives trades. Later, they argue that indeed moral hazard is a big issue, but that the Great Recession is analogous to telling a patient dying of a heart attack that he should have eaten less red meat. I can buy that, but it's a fundamentally different argument than that everyone would have been better off without securitzation.
They also suggest more equity-like mortgages, with lenders sharing in upside and downside, which is theoretically appealing but hard to see how it would be feasible.
In general, I think the authors advocate a degree of regulation that's so finely tuned as to be, in my view, untenable. And I would have liked to see some details about how the most senior tranches of mortgage-backed securities fared, because it's easy to lump all MBS together. To me the issue seems to be that investors didn't do their homework, and that "worse" MBS were mispriced (and therefore required more and more loans to be made, since these loans were selling for such inflated prices), rather than anything fundamentally wrong with MBS.
But those are small complains. The book is compelling, well researched, and well argued. For me, the clear takeaway is that monetary policy should have been much looser, post-crisis, than it was (and that fiscal policy should have been better-targeted, at writing down principal on mortgages). If a quarter of homeowners were underwater--!!!--and that's pushing the economy into a terrible, multi-year recession, then inflating away that debt seems like the most practical solution to spread the losses (themselves attributable to both borrowers and lenders) more equitably between borrowers and lenders.
--that the decline in household spending pre-dated (and indeed likely precipitated) the financial crisis, not the other way around; the Great Depression was similar
--that it was an expansion of credit (the supply side) that drove the mortgage crisis, rather than a consumer
--how, because houses are a highly leveraged investment, declines in home equity affect poorer homeowners disproportionately, and therefore the economy, because of differences in their marginal propensity to consume
--that the primary difference between a "normal" recession and this one was not the unavailability of credit (indeed, firms were stockpiling cash) but rather the severely reduced consumption because of the wealth loss from the decline in housing prices. Indeed the wealth loss in the tech bubble recession was roughly equivalent to the Great Recession, but with nowhere near the impacts on consumption and therefore the economy as a whole. So while there was a global savings glut, looking for returns, that probably would have inflated another bubble if not the housing market--another kind of bubble would have been better.
--that securitization encouraged riskier lending (an interesting study looked at mortgages to borrowers with credit scores just above and below the 620 cutoff for some types of securitization; the loans to lower-credit (non-securitizable) borrowers were less likely to default)
--that savers are equally culpable in a crisis such as this, in terms of how they invest and what sort of documentation and research they do
--that the demand for mortgage-backed securities in fact drove the ever-deteriorating mortgage standards (loan-to-value ratio, low documentation loans, the share that were sub-prime), culminating in borrowers that defaulted almost immediately after loans were made; and that rising defaults in 2007 precipitated house-price declines, and the dominoes from there
--that foreclosures are bad for banks, too, and that banks would have (in at least some cases) been better off writing down principal on loans than foreclosing and exacerbating house price declines, but that securitization prevents as much
Their cures I found somewhat less compelling. They note that "the securitization of mortgages during the housing boom made it very difficult to renegotiate mortgages, even when everyone would have been better off by doing so," which can't possibly be true as written, since someone else was on the right side of the various derivatives trades. Later, they argue that indeed moral hazard is a big issue, but that the Great Recession is analogous to telling a patient dying of a heart attack that he should have eaten less red meat. I can buy that, but it's a fundamentally different argument than that everyone would have been better off without securitzation.
They also suggest more equity-like mortgages, with lenders sharing in upside and downside, which is theoretically appealing but hard to see how it would be feasible.
In general, I think the authors advocate a degree of regulation that's so finely tuned as to be, in my view, untenable. And I would have liked to see some details about how the most senior tranches of mortgage-backed securities fared, because it's easy to lump all MBS together. To me the issue seems to be that investors didn't do their homework, and that "worse" MBS were mispriced (and therefore required more and more loans to be made, since these loans were selling for such inflated prices), rather than anything fundamentally wrong with MBS.
But those are small complains. The book is compelling, well researched, and well argued. For me, the clear takeaway is that monetary policy should have been much looser, post-crisis, than it was (and that fiscal policy should have been better-targeted, at writing down principal on mortgages). If a quarter of homeowners were underwater--!!!--and that's pushing the economy into a terrible, multi-year recession, then inflating away that debt seems like the most practical solution to spread the losses (themselves attributable to both borrowers and lenders) more equitably between borrowers and lenders.
August 14, 2023
Very interesting read and well written. I m an economist and I think the most impressive thing about the book is that the authors provide a credible redefinition of macroeconomics, building it up from empirical patterns at the micro level to the macro level.
September 21, 2014
A simple, straightforward, explanation of the housing crisis and the start of the Great Recession. In less than 200 pages the authors crystallize a compelling argument: Increased debt flowing from high net worth creditors to low net worth debtors caused a housing price bubble, a subsequent pullback in consumer spending by indebted households, a recession, the bursting of the housing bubble, a calamity for financial institutions, mass layoffs by businesses seeing lowered demand and subsequently the spiral of the foreclosure crisis.
The authors do a great job focusing their research on the cause of the great recession and potential policy recommendations that would avoid a future recession. The insights are likely limited to periods prior to recessions however - as they limit the scope and avoid discussing cash flow, income improvement, and realistic policy
Some conclusions from the book:
Income inequality will increase the frequency of recessions
Debt increase will lead to spending bubbles in the short term and lower spending over the long term - which is the cause of recessions
Policies that share risk between debtors and creditors will lead to better informed lending and resilience to recessions. (will note that this will lead to a further transfer of wealth from debtors to creditors -- equity has a higher implied rate than debt)
Some areas that I think are not conclusions from the book:
Very little insight from the book into debt that will increase income in the future. For instance, we're seeing a large increase in student loan debt currently, but you would expect that to lead to higher consumption in the future at the expense of lower consumption in the present. What does that mean - are we better off with increasing student loan debt or does it put us at risk for future recessions?
The discussions on the response to recessions was flawed in that it avoided discussing interventions that increased consumers income. If recessions are caused by a reduction in spending by consumers, forgiving debt has a much lower spending multiple than other interventions. In HAMP the most successful mortgage modifications per dollar spent, increased a borrowers disposable income (for instance by lowering interest rates or extending the term of the loan) rather than forgiving principle. The authors briefly discuss HOLC from the Great Depression, driving inflation and extending terms -- all of which would have a higher spending multiple than debt reduction. I'd add to that safety net programs. I wish the authors had spent more time and thinking here, as I found their recommendations on what to do after a recession started to be the weakest part of the book (and their insights into what happens before recessions is so insightful!)
I wish there had been more thought put into how to decrease income inequality. Housing is the primary source of net worth for low income households, and some serious thought needs to be put into alternatives to this if housing debt is a major factor in causing recessions.
Overall - smart, simple economics book about the causes of the Great Recession that is accessible to almost anyone. I'll be lending it out to several family members.
The authors do a great job focusing their research on the cause of the great recession and potential policy recommendations that would avoid a future recession. The insights are likely limited to periods prior to recessions however - as they limit the scope and avoid discussing cash flow, income improvement, and realistic policy
Some conclusions from the book:
Income inequality will increase the frequency of recessions
Debt increase will lead to spending bubbles in the short term and lower spending over the long term - which is the cause of recessions
Policies that share risk between debtors and creditors will lead to better informed lending and resilience to recessions. (will note that this will lead to a further transfer of wealth from debtors to creditors -- equity has a higher implied rate than debt)
Some areas that I think are not conclusions from the book:
Very little insight from the book into debt that will increase income in the future. For instance, we're seeing a large increase in student loan debt currently, but you would expect that to lead to higher consumption in the future at the expense of lower consumption in the present. What does that mean - are we better off with increasing student loan debt or does it put us at risk for future recessions?
The discussions on the response to recessions was flawed in that it avoided discussing interventions that increased consumers income. If recessions are caused by a reduction in spending by consumers, forgiving debt has a much lower spending multiple than other interventions. In HAMP the most successful mortgage modifications per dollar spent, increased a borrowers disposable income (for instance by lowering interest rates or extending the term of the loan) rather than forgiving principle. The authors briefly discuss HOLC from the Great Depression, driving inflation and extending terms -- all of which would have a higher spending multiple than debt reduction. I'd add to that safety net programs. I wish the authors had spent more time and thinking here, as I found their recommendations on what to do after a recession started to be the weakest part of the book (and their insights into what happens before recessions is so insightful!)
I wish there had been more thought put into how to decrease income inequality. Housing is the primary source of net worth for low income households, and some serious thought needs to be put into alternatives to this if housing debt is a major factor in causing recessions.
Overall - smart, simple economics book about the causes of the Great Recession that is accessible to almost anyone. I'll be lending it out to several family members.
November 28, 2017
I had heard a lot of positive buzz on this book, and found it often cited by many of the books I'm currently reading. Being cheap, I decided to add it to my book buying binge for my birthday.
When I got it I was surprised how small it was! I'm used to clawing through 300-500+ page books on economic theory. This one is less than 200 pages.
Looks are deceiving: this may be the best book I've read this year: easily the best book I've read this year on the great recession.
It's a book that every member of Congress should be forced to read in order to vote on key financial regulation.
The premis of the book is simple: excessive household debt is one of the man reason your garden variety recession becomes a full blown depression or banking crisis.
They boil this down into what they call the leveraged loss model: greater levels of debt acts as a multiplier that causes small losses to become huge blows to the economy.
This is especially true for mortgage debt, where any instance of housing depreciation wipes out the home owners equity. This loss of wealth is concentrated on the poor and middle class who's wealth is tied up in housing. This loss if wealth caused spending to fall drastically, which caused unemployment, which further caused spending to fall. The feedback loop is vicious.
The pair back up this argument with a ironclad series of tests, data, and evidence that is utterly convincing and fascinating.
The pair argue against the government's policy of subsided debt and saving the banking system (and it's stakeholders) at all costs, and focusses on policy to help distressed debters.
Enter the idea of Shared Responsibility Mortgage, a revolutionary idea. The plan ends the senior status of mortgage originators and combines the liability and reward of owning the home between the bank and homeowners. It's a mortgage that has it's principal linked to a zip code index of nearby homes. As prices decrease, both the bank and the owner take a loss, but the owner does not take all of the loss. interest payments are reduced when times are tough, and banks are rewarded with a percentage of the capital gains when they are good.
The implications of such an idea are amazing: the model has the potential to stabilize the market and requires minimal government intervention.
They also make similar arguments for student debt that also has great potential.
Read this book now: then read it again
5/5
When I got it I was surprised how small it was! I'm used to clawing through 300-500+ page books on economic theory. This one is less than 200 pages.
Looks are deceiving: this may be the best book I've read this year: easily the best book I've read this year on the great recession.
It's a book that every member of Congress should be forced to read in order to vote on key financial regulation.
The premis of the book is simple: excessive household debt is one of the man reason your garden variety recession becomes a full blown depression or banking crisis.
They boil this down into what they call the leveraged loss model: greater levels of debt acts as a multiplier that causes small losses to become huge blows to the economy.
This is especially true for mortgage debt, where any instance of housing depreciation wipes out the home owners equity. This loss of wealth is concentrated on the poor and middle class who's wealth is tied up in housing. This loss if wealth caused spending to fall drastically, which caused unemployment, which further caused spending to fall. The feedback loop is vicious.
The pair back up this argument with a ironclad series of tests, data, and evidence that is utterly convincing and fascinating.
The pair argue against the government's policy of subsided debt and saving the banking system (and it's stakeholders) at all costs, and focusses on policy to help distressed debters.
Enter the idea of Shared Responsibility Mortgage, a revolutionary idea. The plan ends the senior status of mortgage originators and combines the liability and reward of owning the home between the bank and homeowners. It's a mortgage that has it's principal linked to a zip code index of nearby homes. As prices decrease, both the bank and the owner take a loss, but the owner does not take all of the loss. interest payments are reduced when times are tough, and banks are rewarded with a percentage of the capital gains when they are good.
The implications of such an idea are amazing: the model has the potential to stabilize the market and requires minimal government intervention.
They also make similar arguments for student debt that also has great potential.
Read this book now: then read it again
5/5
January 27, 2023
More than a review this will be like a summary of the main concepts that this text put forward.
That's because it is so well written, and the main ideas are so well explained even for non technical readers, that I rather quote the book itself.
“A poor man’s debt is a rich man’s asset. Since it is ultimately the rich who are lending to the poor through the financial system as we move from poor home owners to rich home owners debt declines and financial assets rise. The use of debt and wealth inequality are closely linked. There is nothing sinister about the rich financing the poor, but it is crucial to remember that this lending takes the form of debt of financing.”
“The poorest home owners were the most levered, and the most exposed to the risks of the housing sector, and they owned almost no financial assets. The combination of high-level age, high, exposure to housing, and the little financial welfare would prove disastrous for the households who were the weakest.”
“Poor home owners were hit hardest by the great recession because they had almost no financial assets; their wealth consisted almost entirely of home equity; their home equity was the junior claim. So the decline in house prices was multiplied by a significant leverage multiplier. While financial assets recovered, poor households, so nothing from these gains.
(…)
High debt in combination with the dramatic decline in house prices increased the already larger gap between the rich and poor. The poor were poor to begin with, but they lost everything because debt concentrated overall house price declines directly on their net worth.”
“The higher marginal propensity to consume out of housing wealth for the highly levered households implies that the distribution of wealth and depth methods. During the great recession, how’s price declines wearing to the same for households with high-level age virtues those with low-level age, they felt the monster for households that had the highest leverage.”
They emphasized the difference in having a bubble that mainly affects the rich investors or the poor.
“The bursting of the tech bubble resulted in a huge loss of the household wealth, but had little effect on household spending, while the bursting of the housing bubble during the great recession had a great effect.
The differential marginal propensity to consume provides the answer: tech stocks were owned by very rich households, with almost no leverage”
“the financial system’s reliance on debt means that those with the most the wealth were protected when house prices fell, while those with the Leicester were hammered.
Debt amplifies the loss in home values due to the foreclosure externality and it concentrates losses on the indebted households that have the highest marginal propensity to consume”
“they collapse in the housing market amplified wealth inequality by destroying the net worth of poor indebted home owners.
The consequences of the sharper drop in spending spread through the entire economy, even workers in parts of the country that avoided the housing bust lost their job”
“The incredibly aggressive borrowing by home owners was instrumental: an increase in house prices represents an increase in wealth for home owners, and they respond to an increase in wealth by borrowing to spend more.
However, they should not feel wealthier because, unlike other investment assets, such as stocks, a home owner also consumes the home he owns.
The value of his home rising makes him feel richer, but the higher cost of living makes him feel poorer.
If the price of your car increases, you have a higher net worth, but you shouldn’t feel richer because you need a car.”
On top of that already chaotic situation, securitzation manufactured what were perceived as safe debts when in fact they weren’t.
Securitzation is not the main cause of the crisis, but it definitely increases its amplitude and magnitude.
The authors tried to turn round the rhetoric by which the borrowers are solely to blame, because they wanted to leave beyond their means.
But if the borrowers were willing to borrow, there must be someone that lends them money.
Why land into a bubble? There are many reasons, like neglected risks or underestimate them.
“Debt Instruments led investors to focus on a very small part of the potential set of outcomes. As a result, they tend to ignore relevant information, they may even miss blatant fraud.
They may act as irrational optimists and bet on an ever growing market.
During the financial crisis people investing in money market funds may have believed that no fund could ever break the buck or pay back less than the nominal amount put in the account.
Kindleberger first observed that historically asset-prize bubbles were often fuelled by debt that looked extremely safe”
The book itself and the solution proposed by the authors is very USA specific, given the peculiar structure of the house market and its financing system.
They try to break the common narrative regarding who to blame: debtors and borrowers are guilty, while creditors and lenders are not by definition.
But the reality is more complex than that, and if someone doesn't have what it takes to borrow money, there would be no trouble if there wasn't someone willing to lend them some.
“When the financial crisis erupts, lawmakers and regulators must address problems in the banking system.
They must work to prevent runs and preserve liquidity. But the policymakers have gone much further behaving, as if the preservation of bank, creditor and shareholder value is the only policy goal.
The bank lending view has become so powerful that efforts to help homeowners are immediately seen in an unfavourable light. Saving the banks won’t save the company instead, bolstering the economy by attacking the leveraged losses problem directly would save the banks.
We don’t believe the banks are unimportant, but the bank lending view assumes that assistance to in-depth households means hurting banks.
(…)
The Federal reserve did not implemented the so-called helicopter money, but instead they gave liquidity to banks, which did not lent it to the economy.
Aggressive monetary policy move the bank reserves significantly, but there was only a minute knock on effect on currency in circulation.”
“we have evaluated the potential policies that governments may implement when a levered-losses crisis hits. Saving the banks at any cost is counter-productive.
Monetary policy and fiscal policy help, but are inferior to a direct attack on household debt, which is after all the main problem. Restructuring debt will most effectively boost an ailing economy.”
“Households should use the financial system to share their discuss associated with purchasing at home or investing in education. Investors should look to the financial system not to exploit government subsidies, but to take some reschedule an illegitimate to return. The culprit is debt and the solution is straightforward: the financial system should adopt more equity like contracts, that are made contingent on risks outside the control of the household.”
This is a solution that relies heavily on the shared responsibility mortgages: the lender offers downside protection to the borrower and the borrower gives up 5% capital gain to the lender on the up side.
In this way, both actors have the skin in the game and not only the borrower.
That's because it is so well written, and the main ideas are so well explained even for non technical readers, that I rather quote the book itself.
“A poor man’s debt is a rich man’s asset. Since it is ultimately the rich who are lending to the poor through the financial system as we move from poor home owners to rich home owners debt declines and financial assets rise. The use of debt and wealth inequality are closely linked. There is nothing sinister about the rich financing the poor, but it is crucial to remember that this lending takes the form of debt of financing.”
“The poorest home owners were the most levered, and the most exposed to the risks of the housing sector, and they owned almost no financial assets. The combination of high-level age, high, exposure to housing, and the little financial welfare would prove disastrous for the households who were the weakest.”
“Poor home owners were hit hardest by the great recession because they had almost no financial assets; their wealth consisted almost entirely of home equity; their home equity was the junior claim. So the decline in house prices was multiplied by a significant leverage multiplier. While financial assets recovered, poor households, so nothing from these gains.
(…)
High debt in combination with the dramatic decline in house prices increased the already larger gap between the rich and poor. The poor were poor to begin with, but they lost everything because debt concentrated overall house price declines directly on their net worth.”
“The higher marginal propensity to consume out of housing wealth for the highly levered households implies that the distribution of wealth and depth methods. During the great recession, how’s price declines wearing to the same for households with high-level age virtues those with low-level age, they felt the monster for households that had the highest leverage.”
They emphasized the difference in having a bubble that mainly affects the rich investors or the poor.
“The bursting of the tech bubble resulted in a huge loss of the household wealth, but had little effect on household spending, while the bursting of the housing bubble during the great recession had a great effect.
The differential marginal propensity to consume provides the answer: tech stocks were owned by very rich households, with almost no leverage”
“the financial system’s reliance on debt means that those with the most the wealth were protected when house prices fell, while those with the Leicester were hammered.
Debt amplifies the loss in home values due to the foreclosure externality and it concentrates losses on the indebted households that have the highest marginal propensity to consume”
“they collapse in the housing market amplified wealth inequality by destroying the net worth of poor indebted home owners.
The consequences of the sharper drop in spending spread through the entire economy, even workers in parts of the country that avoided the housing bust lost their job”
“The incredibly aggressive borrowing by home owners was instrumental: an increase in house prices represents an increase in wealth for home owners, and they respond to an increase in wealth by borrowing to spend more.
However, they should not feel wealthier because, unlike other investment assets, such as stocks, a home owner also consumes the home he owns.
The value of his home rising makes him feel richer, but the higher cost of living makes him feel poorer.
If the price of your car increases, you have a higher net worth, but you shouldn’t feel richer because you need a car.”
On top of that already chaotic situation, securitzation manufactured what were perceived as safe debts when in fact they weren’t.
Securitzation is not the main cause of the crisis, but it definitely increases its amplitude and magnitude.
The authors tried to turn round the rhetoric by which the borrowers are solely to blame, because they wanted to leave beyond their means.
But if the borrowers were willing to borrow, there must be someone that lends them money.
Why land into a bubble? There are many reasons, like neglected risks or underestimate them.
“Debt Instruments led investors to focus on a very small part of the potential set of outcomes. As a result, they tend to ignore relevant information, they may even miss blatant fraud.
They may act as irrational optimists and bet on an ever growing market.
During the financial crisis people investing in money market funds may have believed that no fund could ever break the buck or pay back less than the nominal amount put in the account.
Kindleberger first observed that historically asset-prize bubbles were often fuelled by debt that looked extremely safe”
The book itself and the solution proposed by the authors is very USA specific, given the peculiar structure of the house market and its financing system.
They try to break the common narrative regarding who to blame: debtors and borrowers are guilty, while creditors and lenders are not by definition.
But the reality is more complex than that, and if someone doesn't have what it takes to borrow money, there would be no trouble if there wasn't someone willing to lend them some.
“When the financial crisis erupts, lawmakers and regulators must address problems in the banking system.
They must work to prevent runs and preserve liquidity. But the policymakers have gone much further behaving, as if the preservation of bank, creditor and shareholder value is the only policy goal.
The bank lending view has become so powerful that efforts to help homeowners are immediately seen in an unfavourable light. Saving the banks won’t save the company instead, bolstering the economy by attacking the leveraged losses problem directly would save the banks.
We don’t believe the banks are unimportant, but the bank lending view assumes that assistance to in-depth households means hurting banks.
(…)
The Federal reserve did not implemented the so-called helicopter money, but instead they gave liquidity to banks, which did not lent it to the economy.
Aggressive monetary policy move the bank reserves significantly, but there was only a minute knock on effect on currency in circulation.”
“we have evaluated the potential policies that governments may implement when a levered-losses crisis hits. Saving the banks at any cost is counter-productive.
Monetary policy and fiscal policy help, but are inferior to a direct attack on household debt, which is after all the main problem. Restructuring debt will most effectively boost an ailing economy.”
“Households should use the financial system to share their discuss associated with purchasing at home or investing in education. Investors should look to the financial system not to exploit government subsidies, but to take some reschedule an illegitimate to return. The culprit is debt and the solution is straightforward: the financial system should adopt more equity like contracts, that are made contingent on risks outside the control of the household.”
This is a solution that relies heavily on the shared responsibility mortgages: the lender offers downside protection to the borrower and the borrower gives up 5% capital gain to the lender on the up side.
In this way, both actors have the skin in the game and not only the borrower.
September 5, 2019
A thoughtful and incisive answer to why a housing and financial bust morphed into a deep recession. The authors identify a build-up of household (primarily mortgage) debt as a common factor in financial crises. The book's historical narrative places this crisis in the such a context of higher household leverage used to fund real estate. Using a clever parable of "debtor / credit islands", the authors demonstrate cogently the transmission channel from the collapse of real estate prices / wealth destruction to the real economy where a negative feedback loop is created between reduced consumption, increased unemployment, and lower output. Such financial crisis-driven recessions (aka: balance sheet recessions) are characterised by steeper and more protracted declines than in the case of so-called garden-variety recessions. Lastly, they offer the description of debt as "anti-insurance" denoting the reality that poorer and more highly leveraged households experience disproportionately higher losses and highlight the often hidden truth that poorer Americans suffered greatly in the aftermath of 2008, without the benefit of the subsequent rally in the financial markets.
Read
August 8, 2017I am still digesting the concept outlined at the end of this book labeled the SRM - Shared Risk Mortgage. It is interesting.
The larger issue is that this is a USA book written about the USA system. And the CDN system has key differences. Differences that allowed us to move through the exact same period of time without anywhere near the problems. The authors decision to completely ignore any analysis of the CDN market, one with very similar foreclosure laws as are set out in their example of Spain is odd.
Guys, why Spain? We are right next door and share a language and many cultural norm with you. Surely there must have an interest on how we can be so close yet so far.
This is only a useful book for a CDN to read if they have a truly strong grasp of the differences in CDN mortgage securitization vs the USA model. With such an understanding the picture of the actual risk (low) in the CDN market is much clearer.
The larger issue is that this is a USA book written about the USA system. And the CDN system has key differences. Differences that allowed us to move through the exact same period of time without anywhere near the problems. The authors decision to completely ignore any analysis of the CDN market, one with very similar foreclosure laws as are set out in their example of Spain is odd.
Guys, why Spain? We are right next door and share a language and many cultural norm with you. Surely there must have an interest on how we can be so close yet so far.
This is only a useful book for a CDN to read if they have a truly strong grasp of the differences in CDN mortgage securitization vs the USA model. With such an understanding the picture of the actual risk (low) in the CDN market is much clearer.
April 12, 2021
Nice clear analysis of the mortgage market that led to the Great Recession, and an interesting proposal of an alternative to reduce the risk in mortgage contracts. Some interesting reminders about marginal propensity to consume of the bottom half, and how increasing inequality reduces the consumption disproportionately. A nice sentence: can save the deposits without saving the banks shareholders. Another one: securing income and wealth for the borrowers translates in immediate consumption; protecting the bankers adds nothing since their marginal propensity to consume is very low. Key for post-crisis economic policies.
May 27, 2019
This is a dense, but insightful work on the causes of the Great Recession in the US. Mian and Sufi show how the downturn affected low income families much more than it affected higher income families due to the proportion of family wealth that was tied to the equity of the home. They argue that the run up in household debt was one of the major causes of the Recession due to how the debt was financed. They offer an in depth exploration of the mortgage backed securities market and collateral debt obligations while using a levered losses model in which there are differences in debt across the population. Borrowers tend to be lower income families while savers tend to be higher income families. This means that a decrease in real estate prices places the largest concentration of losses on debtors because their spending habits are more sensitive, causing them to stop spending. Creditors then restrain credit, making it more difficult for debtors to gain more spending power. This in turn cuts wages, which leads to higher debt burdens for households, which leads to them cutting spending even more, known as debt-deflation. Foreclosures exacerbate this because the bank sells the foreclosed home at a lower price, which then drives the price of other homes in the area down, creating a snowball effect. The authors note that it is important that we remember that the country is in this together due to the interconnected nature of the economy (auto workers in TN, which did not have a housing crisis, sell vehicles to people on the coastal areas which had a housing crisis, thereby hurting the job prospects of workers in TN even though they made better home purchases). They also offer a chapter on how optimists often use debt to artificially inflate the housing market, which is what created the housing bubble of the early 2000s.
The authors offer their own solution in the form of shared rate mortgages, in which lenders would write down the principal on a home loan where the home has declined in value since the purchase so that the borrower's equity is not completely wiped out. On the flip side, the lender would be owed 5% of the capital gain on the home if it increases in value and is sold during the life of the mortgage. This is a better solution, they argue, than relying on the Fed to inject cash into the system, as the Fed can only increase bank reserves, but then relies on the banks to put that money back into the economy through lending, which banks are wont to do in an economic downturn.
This is a fairly readable book with a lot of information on the Great Recession that I highly recommend to anyone interested in learning more about the topic.
The authors offer their own solution in the form of shared rate mortgages, in which lenders would write down the principal on a home loan where the home has declined in value since the purchase so that the borrower's equity is not completely wiped out. On the flip side, the lender would be owed 5% of the capital gain on the home if it increases in value and is sold during the life of the mortgage. This is a better solution, they argue, than relying on the Fed to inject cash into the system, as the Fed can only increase bank reserves, but then relies on the banks to put that money back into the economy through lending, which banks are wont to do in an economic downturn.
This is a fairly readable book with a lot of information on the Great Recession that I highly recommend to anyone interested in learning more about the topic.
January 17, 2018
A nice book, concise, well documented, & clear! A rare gem for economics. Paul Krugman recommends this book as a counter to Timothy Geithner's self-congratulatory volume on his stewardship of the remediation of our recent financial crisis & Great Recession. To a large extent the authors, Mian & Sufi, contend that Geithner failed to consider the real cause of the disaster & consequently missed the boat on the most thorough & effective means to dig us out of the crisis resulting in the major economic dislocations in employment & transfers of wealth in the wrong direction we are still experiencing.
Research is traced showing that recessions are preceded by & significantly caused by excess debt, particularly leveraged household debt. When a bubble in prices bursts, the least wealthy persons find their sole source of wealth evaporated (or under water) which causes them to cut down on purchases thus reducing demand. A loss of demand results in layoffs, loss of income results in missed mortgage payments & foreclosures with further significantly reduce neighborhood property values. This we have a vicious cycle of loss of economic strength.
The Great Recession would have been mitigated by attacking the source & pressuring lenders, ie mortgage grantors, to renegotiate thus keeping mortgagees in their homes & preserving equity. This would have supported demand & kept the economy & employment from circling the drain. Instead financial support went to lenders who still did not lend nor were borrowers seeking to borrow.
The authors offer solid suggestions for eliminating or greatly reducing the ill effects of recessions before they occur. Loans to private citizens - like mortgages & student loans - should be more like equity than fixed payment guaranteed vehicles. Risks of gain & loss should be shared but being indexed to locally relevant averages which are updated periodically. This would also have the beneficial effect of sidestepping the moral hazard argument as these indices would prevent individuals from gaming the system.
This book demonstrates that solutions to problems do exist if we could find the political will to deal in solutions instead of blame games.
Research is traced showing that recessions are preceded by & significantly caused by excess debt, particularly leveraged household debt. When a bubble in prices bursts, the least wealthy persons find their sole source of wealth evaporated (or under water) which causes them to cut down on purchases thus reducing demand. A loss of demand results in layoffs, loss of income results in missed mortgage payments & foreclosures with further significantly reduce neighborhood property values. This we have a vicious cycle of loss of economic strength.
The Great Recession would have been mitigated by attacking the source & pressuring lenders, ie mortgage grantors, to renegotiate thus keeping mortgagees in their homes & preserving equity. This would have supported demand & kept the economy & employment from circling the drain. Instead financial support went to lenders who still did not lend nor were borrowers seeking to borrow.
The authors offer solid suggestions for eliminating or greatly reducing the ill effects of recessions before they occur. Loans to private citizens - like mortgages & student loans - should be more like equity than fixed payment guaranteed vehicles. Risks of gain & loss should be shared but being indexed to locally relevant averages which are updated periodically. This would also have the beneficial effect of sidestepping the moral hazard argument as these indices would prevent individuals from gaming the system.
This book demonstrates that solutions to problems do exist if we could find the political will to deal in solutions instead of blame games.
November 24, 2020
I picked this study of the 2008 financial crisis up to see if there were any lessons that could be learned about how to help our economies recover from the hit of COVID-19. Quite remarkable how much these guys manage to cram into such a short number of pages – figures included! Among the clearest explanations of some of the more tricky issues surrounding The Great Recession that I've come across.
They make a really compelling case for the role of household indebtedness in causing and exacerbating not just 2008 but previous financial meltdowns too. Their arguments are so well put as to make one feel like their case is obviously true and it's a wonder nobody already made it. As someone with an interest in inequality, I found Mian and Sufi's demonstration of how and why the wealthy came out of 2008 so much better placed by those at the bottom of the wealth spectrum.
The authors acknowledge in an afterword that they didn't draw out the relationship between debt and inequality as much as they would have liked in the main text, providing a few indications there. I would certainly be interested to see more in that space.
While I'm convinced by some of Mian and Sufi's arguments, I don't think they've necessarily captured the full picture here, though I don't think they would claim to. Their data certainly seemed to strongly support their case, though also left space for additional factors not discussed in the book.
Their policy suggestions seem fairly sensible. Part of me wishes that they went in a bit harder on the debt-driven economy, but another part of me thinks that even their recommendations are quite bold at a time of legislative impasse on a lot of fiscal policy in countries like the US.
They make a really compelling case for the role of household indebtedness in causing and exacerbating not just 2008 but previous financial meltdowns too. Their arguments are so well put as to make one feel like their case is obviously true and it's a wonder nobody already made it. As someone with an interest in inequality, I found Mian and Sufi's demonstration of how and why the wealthy came out of 2008 so much better placed by those at the bottom of the wealth spectrum.
The authors acknowledge in an afterword that they didn't draw out the relationship between debt and inequality as much as they would have liked in the main text, providing a few indications there. I would certainly be interested to see more in that space.
While I'm convinced by some of Mian and Sufi's arguments, I don't think they've necessarily captured the full picture here, though I don't think they would claim to. Their data certainly seemed to strongly support their case, though also left space for additional factors not discussed in the book.
Their policy suggestions seem fairly sensible. Part of me wishes that they went in a bit harder on the debt-driven economy, but another part of me thinks that even their recommendations are quite bold at a time of legislative impasse on a lot of fiscal policy in countries like the US.
March 3, 2021
“Economic disasters are man-made”.
Who pays the highest price when a man-made economic crisis hits a nation? It is not the 1% millionaires and billionaires or for that matter the other 10% who invest in stocks and bonds but the 90% commoners who work 10-12 hrs a day just to survive. These hapless poor people who work for minimum wage and lead a hand to mouth existence are the first to suffer disproportionately. Between 2007-2009 during the so called subprime crisis 8 million people lost their jobs, 4 million were made homeless, hundreds committed suicide and crimes and violence including domestic violence all around spiked. As per one estimate the total value of real estate alone plummeted by a whopping US$ 5.5 trillion in USA alone! And who has the highest equity in homes and who avails highest mortgage against their home? Again it is the poor.
Atif Mian and Amir Sufi bring out elaborately in simple language how the house hold debt, leverage on real estate and the advent of recession wreak havoc on the life of these hapless men and women In House of Debt.
This is a must read for those who falsely believe in the infallibility of the housing sector and who go over board on leveraging it. Like any bubble it is susceptible for crash at any time and the crash in the real estate sector affects far too many citizens when compared to the collapse of other sectors.
Highly recommended to all those who are interested in economic and financial matters.
Favorite Quote:
“Economic disasters are almost always preceded by a large increase in household debt.”
April 29, 2021
House of Debt is a short book that covers the great recession of 2008 and explains why it happened and how it could have been mitigated or prevented. The explanation that they give is that before all big depressions household debt increases especially in low-income areas, the easy supply of credit begins to form a bubble. Then the bubble burst and if real estate prices fell by only 20% homeowners who owned 20% of their homes now own nothing and many went underwater I.E their mortgage was bigger than what their home was worth. This caused many households especially low-income ones to lower their consumption to pay off their debt which causes less revenue for companies. Those companies have to cut wages or fire employees which then can consume less. Essentially the whole economy goes on a downward spiral all because of debt. They show a lot of evidence supporting this theory, debunk other theories and go more in-depth. The solution they propose is to transfer money from the creditor to the borrower because the borrower has a higher propensity to spend then the creditors who are saving money.
They suggest shared responsibility mortages as a solution. A SRM is mortgage where if the price of a house decreases the loan payments decrease proportionally but if the price is higher then it was originally the payments wont grow. The banks also get 5% capital gain so if the owner decides to sell the house the bank gets 5%.
Good Book
They suggest shared responsibility mortages as a solution. A SRM is mortgage where if the price of a house decreases the loan payments decrease proportionally but if the price is higher then it was originally the payments wont grow. The banks also get 5% capital gain so if the owner decides to sell the house the bank gets 5%.
Good Book
May 20, 2017
Extremely clear and compelling explanation of the financial crisis and the weak recovery backed up by empirical evidence. They also note that the crisis was misunderstood by Bernanke, Paulson, Geithner, et al and so too much support was given to the banks and much too little was given to homeowners. The book is not written to criticize what was done but in the hope that policy will be better in the future. [personal comment not directly related to the book: I suspect that the way the bailout was executed was not simply a misunderstanding but also a matter of political influence of the banks and so am less optimistic than the authors. I would cite Neil Barofsky's book "Bailout" as support for this claim.]
The authors are excellent economists who have done extensive empirical work but the concepts are very well explained and illustrated so that general readers should not have a problem following the argument. I am convinced by what they say and very much hope many people will read it so that there will be better understanding and perhaps, despite my pessimism.
The authors are excellent economists who have done extensive empirical work but the concepts are very well explained and illustrated so that general readers should not have a problem following the argument. I am convinced by what they say and very much hope many people will read it so that there will be better understanding and perhaps, despite my pessimism.
September 25, 2021
House of Debt is an excellent book that describes the many mechanisms that led to the Great Recession.
While most theories focus on the sub-prime mortgage bubble that burst which led to the recession, this book also focuses on the harmful effects of debt. The fact that debt puts the entirety of risk on the debtor and none on the lender leads to the irresponsibility of what happened in the mid-2000's.
Backed by data and simply stated, this book illustrated difficult economic concepts in a way that any person could understand.
My only issue was the prose. I know it was an economics book but the prose felt repetitive. The same points would be reiterated multiple times. I'm sure it helped solidify concepts but it also made the reading dry at times.
Definitely a worthwhile read if you want to know about the recession and what to look for in the future!
While most theories focus on the sub-prime mortgage bubble that burst which led to the recession, this book also focuses on the harmful effects of debt. The fact that debt puts the entirety of risk on the debtor and none on the lender leads to the irresponsibility of what happened in the mid-2000's.
Backed by data and simply stated, this book illustrated difficult economic concepts in a way that any person could understand.
My only issue was the prose. I know it was an economics book but the prose felt repetitive. The same points would be reiterated multiple times. I'm sure it helped solidify concepts but it also made the reading dry at times.
Definitely a worthwhile read if you want to know about the recession and what to look for in the future!
August 18, 2021
The book could have been a more scathing attack on Obama but it wasn't. Obama was very much in the pocket of big finance. Very well written and easy to grasp. Everything is meticulously referenced.
To quote on Obama
"Housing policy during the Obama administration was severely hampered by strong adherence to the banking view. Clea Benson at Bloomberg covered President Obama’s approach to housing and came to the conclusion that “while his [housing] plan was undermined in part by the weak U.S. economic recovery, it also lacked broad and aggressive measures. Relief programs have tinkered around the edges of the housing finance system because Obama’s advisers chose early on not to expend political capital forcing banks to forgive mortgage debt” (our emphasis)."
To quote on Obama
"Housing policy during the Obama administration was severely hampered by strong adherence to the banking view. Clea Benson at Bloomberg covered President Obama’s approach to housing and came to the conclusion that “while his [housing] plan was undermined in part by the weak U.S. economic recovery, it also lacked broad and aggressive measures. Relief programs have tinkered around the edges of the housing finance system because Obama’s advisers chose early on not to expend political capital forcing banks to forgive mortgage debt” (our emphasis)."
May 11, 2025
Things I learned about the Great Recession of 2008:
- it was consumption driven (rapid decline in consumption)
-debt concentrates the losses on individuals with the least net worth.
-Severe recessions are not initiated by some calamity that destroys the productive capacity of the economy. They are set off when asset prices collapse and households sharply pull back on spending.
-Outstanding student debt doubled from 2005 to 2010 and by 2012 total student debt in the USA economy surpassed 1 trillion
-overall: DEBT IS A NO NO and when housing prices collapse, the homeowners with high debt are literally screwed
- it was consumption driven (rapid decline in consumption)
-debt concentrates the losses on individuals with the least net worth.
-Severe recessions are not initiated by some calamity that destroys the productive capacity of the economy. They are set off when asset prices collapse and households sharply pull back on spending.
-Outstanding student debt doubled from 2005 to 2010 and by 2012 total student debt in the USA economy surpassed 1 trillion
-overall: DEBT IS A NO NO and when housing prices collapse, the homeowners with high debt are literally screwed
September 9, 2017
A new perspective for me on the banking system
The idea of banks and investors sharing the risks with borrowers when macro or system wide events take place was really interesting and novel to me. In theory at least this could be a good way to soften the crash for the people that need it the most when a crisis comes. The problem is, however, that investors would need to make these decisions prior to crisis and I think it would be hard to sway them in normal conditions.
"Read" in audible: The narration needs a bit of getting used to.
The idea of banks and investors sharing the risks with borrowers when macro or system wide events take place was really interesting and novel to me. In theory at least this could be a good way to soften the crash for the people that need it the most when a crisis comes. The problem is, however, that investors would need to make these decisions prior to crisis and I think it would be hard to sway them in normal conditions.
"Read" in audible: The narration needs a bit of getting used to.
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