Larry Summers today reviews in the FT House of Debt by Atif Mian and Amir Sufi, praising it highly – except in one respect. Amusingly, he starts out by emphasising that it is the most important economics book of 2014, based on unchallengeable data and clearly written. Still, (not so) subtle side-swipes at Capital in the 21st Century aside, Summers’ acceptance of the argument in House of Debt is significant, given his key role in responding to the financial crisis. The book argues that the roots of the crisis lie not in the banking or shadow banking system but in household over-leverage, drawing on a line of argument dating back to Irving Fisher and running more recently through Richard Koo’s work on Japan.
House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent it from Happening Again
Where Summers disagrees with the book concerns the authors’ interpretation of the policy response, criticising the authorities’ failure to tackle the mortgage overhang more directly with sweeping relief for over-indebted households. Summers writes: “Obviously, as the director of President Barack Obama’s National Economic Council in 2009 and 2010, I am an interested party here. It seems to me that Mian and Sufi are naive on policy.”
There is support for Summers’ point that implementation of more extensive mortgage debt relief simply could not get through Congress in one of the essays I’ve just read in The Best Business Writing 2013, The Great American Foreclosure Story by ProPublica’s Paul Kiel. In general, I think economists – even those with a tremendous interest in policy issues – fail to take into account the sheer difficulty of implementing anything in a modern democratic polity, where politics meets complexity. Just glance at The Blunders of Our Governments by Anthony King and Ivor Crewe….
The Blunders of Our Governments
House of Debt sounds like an essential read on the crisis. I wonder if any economists are doing similar empirical work on household indebtedness in the European economies?