Economists Amir Sufi and Atif Mian have been researching the housing crisis and its impact on the economy for more than six years. They have now written a book for general audiences entitled “House of Debt: How They (and You) Caused the Great Recession, and How to Prevent It from Happening Again.”
Mian and Sufi's findings challenge many of the assumptions behind conventional policy thinking about the recession. We spoke with Amir Sufi (see video above) about the book, which coincidentally was published almost simultaneously with former Treasury Secretary Tim Geithner’s self-serving memoir, “Stress Test.”
Sufi summarized their findings this way:
"It is our view, based on six or seven years of academic research ... that the dramatic rise in household debt from 2000-2007, in combination with the dramatic decline in housing values ... is essentially what triggered the Great Recession.”
When asked about the conventional view that financial crises are a periodic event – JP Morgan Chase CEO Jamie Dimon famously claimed that he told his seven-year-old daughter they happen every seven years or so – Sufi disagreed. He and Mian found that the recession was human-made, rather than reflecting some innate economic cycle. In fact, said Sufi, their conclusion was that the 2008 banking crisis was the symptom of much larger problems: the housing bubble, a significant increase in household debt, and the subsequent collapse of housing prices.
Sufi and Mian studied microeconomic data that had been unavailable to previous researchers and concluded that "when household prices crashed, households dramatically pulled back on spending." Sufi added that “Even in the heart of September, October, November, and December of 2008” – the peak months of the banking crisis – “the areas of the country that saw the biggest decline in spending and the biggest increase in unemployment were the areas that were getting hit hardest by the housing crisis."
"So our view is very much contrary to that of Mr. Geithner and others. Where they place the banking crisis as the central feature of the Great Recession ... we think that's mistaking an effect for a cause. The real cause was elevated household debt and a housing crash that led to a massive pullback in spending."
“Policymakers had a very singular, almost tunnel-vision view of the problem: the view of the world that says if you save the banks you save the economy, that the only problem was a banking problem, when in fact the banking crisis was the result of the housing crisis.”
This is a Copernican shift away from traditional thinking about the financial crisis. I asked if it was correct to infer from their work, as I had earlier, that “Washington rescued the wrong economy.”
"Exactly correct,” said Sufi, adding that “the policy implications were that we should have moved much more aggressively to relieve debt ..."
Sufi indicated that he and Mian were not advocating for debt forgiveness, but for sharing the losses between lenders and borrowers. He and Mian also supported policies that would have allowed bankruptcy judges to write down mortgage debt – adding that this was a position that candidate Barack Obama supported in September 2008.
Sufi was asked about that subtitle: "How They (And You) Caused the Great Recession ..." How did the collective “we” contribute to our current economic difficulties? "Our view is that ... people who may be prone to more myopic behavior, who may not think about the future, may excessively borrow when they don't have (increased income)."
"Now of course that process is only possible if there is a group of lenders willing to lend,” Sufi added. “Our view is that it's something of a shared responsibility problem. That's why our view is that at the end of the day both (borrowers and lenders) should experience some loss. Instead what we got is that essentially the borrowers were forced to bear all the losses and the lenders escaped unscathed."
We told Prof. Sufi that we may have a somewhat different perspective. For decades, Americans were offered easy credit under extremely self-serving terms by the financial industry. Banks, not homeowners, fueled the housing bubble – and got enormously rich doing it. The bundling and trading of overvalued mortgages, together with the evasion of long-standing property in tax laws, led to the creation of evasive industrywide schemes like the combined database and false-front corporation known as MERS.
Meanwhile the middle class, plagued with wage stagnation during decades of growing inequality, was increasingly forced to rely on debt to maintain its standard of living – a mechanism which also served as a pressure valve to defuse potentially explosive economic dissatisfaction. Irresponsible borrowing did take place, on an occasional basis, but the irresponsibility of the financial sector was systemic.
Sufi and Mian found that the 2008 crisis was a crisis in debt and housing prices. In our eyes, the debt portion of that crisis was brought on by irresponsible lending, while the housing bubble was fueled by reckless (and often fraudulent) bundling and selling of the mortgages written by the same irresponsible lenders. Both the irresponsible lending and the housing bubble itself were fueled by bankers, and both enriched them.
We shared some of these thoughts with Sufi and suggested that the financial industry should bear the lion's share of the blame.
"I think we're closer than maybe I gave the impression,” Sufi answered. “It's almost a sure thing that a lot of people didn’t understand the debt they're taking on."
What about today? We may have missed important opportunities over the last five years but what policy solutions should we be focusing on now?
"We're very much focused on student debt,” said Sufi. “We have (an editorial) where we're thinking about ways to provide student debt forgiveness ... in (the current) environment it actually makes sense to forgive some debt." Sufi indicated that their proposal would share some basic principles with the student debt relief plan proposed by Sen. Elizabeth Warren.
"Both ideas say look, if the economy is suffering and people can't find jobs, then it doesn't make sense to ask people to ... keep making high interest payments."
If you want to hear Prof. Sufi speak for himself, rather than have his comments filtered through our perspective, the interview can be heard in its entirety in the above clip.
