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Over at Equitable Growth: Things I Should Have Written About When They Were Published: Lawrence Summers on ‘House of Debt’: Daily Focus


Over at Equitable Growth: Lawrence Summers: On ‘House of Debt’: "Atif Mian and Amir Sufi’s House of Debt, despite some tough competition...

...looks likely to be the most important economics book of 2014; it could be the most important book to come out of the 2008 financial crisis and subsequent Great Recession.... It persuasively demonstrates that the conventional meta-narrative of the crisis and its aftermath, which emphasises the breakdown of financial intermediation, is inadequate. It then goes on to provide a supplementary and in some ways alternative explanation focusing on the deterioration of household balance sheets, an analysis that has profound implications for policy directed both at preventing crises and responding to them when prevention fails.... READ MOAR

It is a summary of a highly serious programme of economic research--one that is in many ways a model for what economists should do.... They argue that, rather than failing banks, the key culprits in the financial crisis were overly indebted households. Resurrecting arguments that go back at least to Irving Fisher and that were emphasised by Richard Koo in considering Japan’s stagnation, Mian and Sufi highlight how harsh leverage and debt can be....

Their analysis, presented with far more depth and subtlety than I have been able to reflect here, is a major contribution that furthers our understanding of the crisis. It certainly affects what I will examine in trying to predict and forestall future crises. And it should influence policies aimed at crisis prevention by demonstrating the insufficiency of keeping financial institutions healthy and by making a case for macroprudential measures directed at preventing runaway growth in household debt.

When one has a persuasive and novel idea, there is an inevitable temptation to push it a bit too far and to weight it excessively relative to less novel truths. Mian and Sufi succumb to this temptation in the last third of their book, where they discuss the policy responses to the crisis...

Economists--well, sane economists who have done their homework--divide into three groups on the causes of the deep and long Lesser Depression:

  1. Those who believe it was the attempted regulatory arbitrage by the major universal money-center banks and their consequent collapse when the housing bubble collapsed that destroyed financial-center risk tolerance and the credit channel. (I tend to be in this camp, most of the time at least).

  2. Those who believe that even if the financial-market collapse of 2008-9 had been properly handled (i.e., no uncontrolled Lehman bankruptcy, etc.), we would still be on the same track unless we had dealt with the enormous overhang of bad housing-purchase and home-equity loans created by the collapse of the housing bubble. (Mian and Sufi are in this camp. I am sometimes in this camp.)

  3. Those who believe that even if housing finance and high finance had been better handled, we would still be on the same track because it was the collapse of housing wealth and its knock-on effects on consumption spending that are at the root. (Dean Baker tends to be in this camp.)

I must confess that as time passes and as single-family housing construction continues to fail to recover, I find myself shifting from (1) to (2), or perhaps from (1) to (1) and (2)...