The Great Recession of 2008 wiped out 8 million jobs in the United States and led to 4 million homes being foreclosed. The total value of housing plummeted by US$5.5 trillion. While there have been tomes written by economists, politicians, journalists and policy makers on the cause and consequences of this mighty recession, there has been a lamentable paucity of literature on the role played by household debt in the triggering of this financial crisis.
Atif Mian and Amir Sufi have tried honestly to ameliorate this lacuna with “House of Debt”. A revealing work that emphasizes and elaborates the interplay between mounting debt burdens and recessionary conditions, this book serves as a useful guide to comprehend the vile impact of household leverage on the prospects of an economy (a fact that unfortunately and conveniently escaped the lens of politician policy makers and conniving bankers). Using concepts such as the Marginal Propensity to Consume (“MPC”) and Irving Fisher’s famous “Debt Deflation Theory”, the authors highlight the cascading impact of a fall in housing equity upon the overall functioning of the economy. The knock-on effects are further exacerbated by the fraudulent and downright unethical practices engaged in by mortgage lenders and bankers who targeted vulnerable borrowers (those most likely to default on their mortgages) having low or no credit rating with a slew of mortgages.
Mian and Sufi also propose novel but perfectly implementable ameliorating measures such as Shared Responsibility Mortgages (“SRM’s) where while the borrower is protected against the downside resulted by a fall in the value of housing, the lender is also incentivized whenever there is a surge in the real estate market indices. However as the authors rightly muse, the one biggest road block in introducing reformative measures of the nature proposed by them are more political in nature than practical. The vested interests preying on the susceptibilities of a gullible public would be deprived of their ill gotten gains if the system was to be revamped and restored to reflect human values and ethical safeguards. If the selfish clan were to succeed in their devious endeavours, it would alas be at the expense of a larger and moral good!
“House of Debt” – A timely warning before the entire edifice comes crashing down in a heap!