Overview
The Great American Recession led to the loss of eight million jobs from 2007 to 2009, along with over four million homes lost to foreclosure. Was this linked to the soaring household debt preceding the recession? The total debt for American households doubled between 2000 and 2007, reaching $14 trillion.
Insights from the Authors
In House of Debt, Atif Mian and Amir Sufi present compelling evidence showing how the Great Recession, Great Depression, and ongoing economic struggles in Europe stem from a significant increase in household debt followed by a drastic reduction in spending.
The Role of Debt in the Economic Crisis
While the banking crisis caught widespread attention, Mian and Sufi highlight, with robust data, that the current policies focus too much on safeguarding banks and creditors. They argue that simply increasing the flow of credit is ineffective when the core issue lies in excessive debt. Their research indicates that high household debt often leads to foreclosures, thereby reducing individual spending and promoting saving habits. This decreased spending creates less demand for products, resulting in reduced production and extensive job losses.
Proposed Solutions
Mian and Sufi advocate for a comprehensive approach to tackling debt. They suggest that more aggressive debt forgiveness following economic downturns could be beneficial. However, they emphasize that to break the cycle of financial instability, the system must shift away from rigid debt agreements. As a solution, they propose new mortgage contracts based on the principle of risk-sharing, a framework that could have averted the housing bubble's formation.
