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

    By Atif Mian, Amir Sufi
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 recessionthat 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 AUTHORS
Atif Mian is professor of economics and public policy at Princeton University.
Amir Sufi is the Chicago Board of Trade Professor of Finance at the University of Chicago Booth School of Business.

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A shortlist for the 2014 Financial Times and McKinsey Business Book of the Year Award was announced yesterday. The books chosen focus very much on the big-picture issues of the day, "the most important trends shaping our world" as the press release puts it, so the switch from Goldman Sachs to McKinsey as a partner to FT has not reduced the scope of the books as I thought it may. (I speculated back in May when the announcement was made that McKinsey would now be backing the award that it may change focus to the more nuts-and-bolts business management issues that McKinsey ostensibly focuses on in its own work. Read more


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Pages 219
Published 05/01/2014
Publisher University of Chicago Press

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