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House of Debt – Atif Mian and Amir Sufi


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[amazonsearch]House of Debt[/amazonsearch]


Larry Summers wrote a review in the FT calling it the possibly most important book to come out of the 2008 financial crisis and subsequent Great Recession:


House of Debt is important because 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.



Most in the financial community, the policy community and the commentariat see a breakdown in financial intermediation as the root cause of the financial crisis and Great Recession. The failure to bail out Lehman Brothers is usually viewed as the prelude to crisis intensification.



Mian and Sufi point out a variety of problems with this approach. First, they note that data on credit spreads suggest that the financial system was fully repaired by late 2009, and that even though the economy at that point was very depressed, growth has been anaemic since. Second, they observe that spending on housing and durable goods such as furniture and cars decreased sharply in 2006 and 2007, well before any financial institution became vulnerable. Likewise, they note that the initial impetus behind recession in the US appears to have been a decline in consumer spending. Additionally, the authors observe that when asked why they were not borrowing more, even small businesses, the sector most dependent on banks, more often than not blamed a lack of customers rather than banks’ unwillingness to lend.


None of this sits easily with what Mian and Sufi call the banking view of the Great Recession. They argue that, rather than failing banks, the key culprits in the financial crisis were overly indebted households.

(http://www.ft.com/intl/cms/s/2/3ec604c0-ec96-11e3-8963-00144feabdc0.html – paywall)


I haven't read the book yet but this sounds very interesting to me.


Here's an interview with the authors.


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