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House of Debt

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House of Debt

How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again

University of Chicago Press,

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The Great Recession showed that debt is toxic and dangerous even to those who aren’t in debt, because their debt-ridden customers stop buying.

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Editorial Rating

8

Qualities

  • Innovative

Recommendation

Using a rich data set, Princeton economics professor Atif Mian and University of Chicago finance professor Amir Sufi demonstrate convincingly that debt, especially household borrowing, is pernicious and likely to lead to economic catastrophe. They explain that excessive borrowing, driven by overeager lenders who did not fully appreciate the risks they were taking, created the boom preceding the Great Recession. The authors make a compelling case that direct assistance to homebuyers through adjusting mortgage principal and addressing debt could have mitigated the impact of the recession, especially the devastating rise in unemployment. The text’s occasional quirks of phrasing and lapses in copy editing need not detract from the reader’s edification. getAbstract recommends this cogent analysis to economists and policy makers, as well as to householders with mortgages seeking to understand their risks more fully.

Summary

Jobless in America

In 2008, one of the biggest employers in the region of Elkhart, IN, laid off half its workforce in response to plummeting revenue. Its sales fell because indebted households elsewhere in the US sharply reduced their consumer spending. Businesses were laying off workers across the country, often far from the regions where homes were suddenly worth less than the mortgages on them.

Debt, an integral but harsh component of the US financial system, concentrates risk on borrowers, who may lose their net worth if the value of their mortgaged assets declines. Foreclosure and fire sales may further depress home prices. Debt is dangerous, in part, because it forces losses on those least able to bear them. In response, debtors cut back on spending. In the consumption-driven American economy, this can – and did – lead to job losses far and wide.

Debt and Disaster

Economic catastrophe invariably follows a jump in household indebtedness. A subsequent spending collapse paves the way from debt to disaster. Experts offer three explanations for financial crises: The “fundamental” reason says some basic factor triggers recessions, such as, for example...

About the Authors

Atif Mian is a professor of economics and public policy at Princeton University. Amir Sufi is a finance professor at the University of Chicago.

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