The debt overhang

Larry Summers today reviews in the FT [amazon_link id=”022608194X” target=”_blank” ]House of Debt [/amazon_link]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 [amazon_link id=”067443000X” target=”_blank” ]Capital in the 21st Century [/amazon_link]aside, Summers’ acceptance of the argument in [amazon_link id=”022608194X” target=”_blank” ]House of Debt[/amazon_link] 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 [amazon_link id=”1469947080″ target=”_blank” ]Irving Fisher[/amazon_link] and running more recently through [amazon_link id=”0470824948″ target=”_blank” ]Richard Koo’s work on Japan[/amazon_link].

[amazon_image id=”022608194X” link=”true” target=”_blank” size=”medium” ]House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent it from Happening Again[/amazon_image]

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 [amazon_link id=”0231160755″ target=”_blank” ]The Best Business Writing 2013[/amazon_link], 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 [amazon_link id=”1780742665″ target=”_blank” ]The Blunders of Our Governments[/amazon_link] by Anthony King and Ivor Crewe….

[amazon_image id=”1780742665″ link=”true” target=”_blank” size=”medium” ]The Blunders of Our Governments[/amazon_image]

[amazon_link id=”022608194X” target=”_blank” ]House of Debt[/amazon_link] 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?