How They (and You) Caused the Great Recession, and How We Can Prevent it from Happening Again
Look, I am going to level with you. Economics and finance are not my strong suits. It takes a lot for me to understand repeatedly the difference between micro and macro. And derivatives? Forget about it. It’s just another made up word that means nothing to me.
However, I have to hand it to authors and economists Atif Mian and Amir Sufi. In House of Debt, they take a progressive yet simple approach to explaining the financial crisis of 2008 in words I can understand. They also happen to be very smart and provide an alternative to our current financial system. You know the one – steal from the poor and give to the rich? Wishful thinking, in my opinion, but a solid system proposed nonetheless.
The Build Up
It may well be that the classical theory represents the way in which we should like our economy to behave. But to assume that it actually does so is to assume our difficulties away.
– John Maynard Keynes
In short summary, the Great Recession was caused by over-leveraged households that had accumulated way too much debt. These homeowners never should have been approved for home ownership in the first place. They were subprime candidates, which is why we heard a lot about subprime mortgages after the crash. Nonetheless, the homeowners acted responsibly and reduced their spending. This essentially caused the crash as it was magnified across the United States.
Mian and Sufi go into great detail to explain the build up of the over-indebtedness, the role of the banks who set this up for failure in the first place, and the ineffective government bailouts. Now you may be thinking, so what? We know this. Big banks always win. The small guy gets screwed over. What else is new?
Levered-Losses
The first half of the book is essentially a set up of what happened and how it can be prevented in the future. There’s a quick but effective lesson on modern economic theory and why “invisible market forces” don’t really pan out in real life. Then they introduce the concept of the levered-losses framework. I am no Economics major, but the model proposed here made sense on a lot of fronts. Especially the part about big banks taking on their fair share of the risk in losses.
The claims are backed up by a fair amount of evidence and past trends. Also, the whole talking point about debt being good is beaten to a pulp. Debt is not good. It never is for the common household.
Recommendation: Worth a Read
I can’t say that I argue anything the authors have written. It is clear, concise, and makes a lot of sense. However, at this point in the game…it just seems like those in control of the financial system will never adopt these changes. Shared responsibility and the potential for real risk is just not something the big banks would gravitate towards, even with government intervention.
I hope I am wrong.
