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 today: Why do severe recessions happen? Could we have prevented the Great Recession and its consequences? And what actions are needed to prevent such crises going forward?
About the Author
Atif Mian is professor of economics and public policy at Princeton University.
Amir Sufi is professor of finance at the University of Chicago Booth School of Business.
Reviews
"Mian and Sufi have produced some of the most important and compelling research on the impact of debt on consumer behavior during the recent housing bubble and bust. This excellent new book presents and expands this research in a rigorous, yet engaging and accessible way" – Christina D. Romer, former chair of the Council of Economic Advisers for the Obama administration
"This is a profoundly important book that makes a huge range of serious empirical evidence on the financial crisis accessible to a broad readership. A compendium of Mian and Sufi's own celebrated work would already be a spectacular contribution, but this book is so much more. Although the authors present all views in a balanced, scholarly way, their quiet insistence that we should have moved faster to write down household mortgages is well-reasoned and compelling" – Kenneth Rogoff, Harvard University
"Much has been written about the boom and subsequent bust that rocked the US economy during 2007-2009, but insightful and informed analysis is much rarer. This book is one of those rare gems. It offers an in-depth look at the state of housing, consumer credit, household incomes, and debt around the crisis and presents an informed discussion about its causes and consequences. The analysis of crisis resolution has resonance, not only for the United States, but for the many countries that are still entangled in severe financial difficulties" – Carmen Reinhart, Harvard University
"'House of Debt' is a very important book, reaching beyond surface explanations of the Great Recession to identify the fundamental cause – excessive private debt built up in the pre-crisis boom years. It combines meticulous empirical research with an ability to see the big picture. Its message needs to be heeded and its proposals for reform seriously considered if we are to avoid repeating in future the mistakes of the past" – Lord Adair Turner, former chair, Financial Services Authority
