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Notes From the Fieldby Martin Weil

August 1, 2014

House of Debt

Probably the last thing anyone wants to read is yet another book that attempts to explain why the financial crisis happened. Most of the territory, from the plausible to the incomprehensible, has been covered and recovered ad nauseam. That said, there is a strong case that Atif Mian and  Amir Sufi have actually contributed a new and worthwhile line of thinking in their House of Debt.

The most interesting thing I took away from my reading of their book was that the mortgage crisis hit lower wealth households the hardest, by a substantial margin. In most cases, the wealth of lower income groups is mostly tied up in their homes and their equity was completely wiped out as home prices fell. As these lower income groups have a “higher propensity to spend” income, this severe negative wealth effect had – and continues to have – a dramatic dampening effect on economic growth. As a byproduct, this consequence of the financial crisis also exacerbated the already growing wealth disparities in the country.

If Mian and Sufi are correct, then many of the public policies to shore up the financial system in response to the crisis – decried by both conservatives and liberals – were off target. Most notably in their view, the greatest error of both the Bush and Obama Administrations was failing to enact true mortgage relief for underwater homeowners. Failing to do this created a self-reinforcing cycle of default, falling home prices, lower consumer spending, slower growth and job loss that continues to depress the economy to this day.

 

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