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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?
...and a large part of the increase in wealth inequality, and the mechanism of asset price bubbles and a whole lot more. I have read far more than is healthy about debt and the sub-prime crisis, but this book is something new. Wonderfully simple illustrations of economic phenomena - watch out for how debt allows 'optimists' to set the clearing price in a market. Mian and Sufi also have a brilliant knack for mining existing economic data to retroactively create natural experiments to tease out cause and effect. A bit like Freakonomics. Did the availability of mortgages cause the rise in house prices, or did rising house prices cause an increase in borrowing?
The book has a strong moral message and provides concrete proposals to move towards a safer and fairer economic model, with a better spread of risk. I really cringe when I think of the (UK) 'Help to Borrow' scheme in the context of this book. If you follow the arguments of this book, the 'Help to Buy' policy - encouraging poorer people to take on more housing debt - is utterly poisonous.
Some provisos : you have to be pretty good at auditing to enjoy this as an audiobook - I have ordered the hard copy for a second read. You also have to be pretty interested in the economic history of the US 2002-20012, there is detail and rigour here.
Narration. 'Leveraged Lorses,' as in Horses; still you get used to that. The narration is ANGRY, which I find tiring. Appropriate, but you can be angry and slightly laid back and ironic, rather than bitter and sarcastic for seven hours.
2 of 2 people found this review helpful
Economic research and discussion for the rest of us. Analysis of data supports theory explaining how excessive debt produces recession due to spending multipliers. Consumer spending drives 60%of GDP in USA, when leveraged debt is called in through margin calls or foreclosures then spending drops. Bailing out the banks is exalted the wrong solution.
Author presents a reasonable outline of Shared Risk lending that could alternate the present student loan crisis and fairly mitigate future crises.
Must reading for every concerned citizen.
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.
The narration needs a bit of getting used to.