I’m rather late to
[amazon_image id=”022627165X” 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]
However, Mian and Sufi also point out that while political campaign contributions can be shown to have led the US Congress to support bank bailouts, there was next to no household debt relief. The core of their argument is that the effects of household leverage spilled over to the whole US economy, and that writing off some of the debt owed by homeowners underwater (not because of idleness or irresponsibility but because of a macro shock) would have benefited everyone. I found their argument convincing, along with the corollary that you can not fix an excess debt problem by getting people to take on more debt. The book makes a strong case for reducing the attractiveness of debt, due in large part to the tax system. They write:
“Debt instruments lead investors to focus on a very small part of the potential set of outcomes …In a world of neglected risks, financial innovation should be viewed with some degree of scepticism. If investors systematically ignore certain outcomes, financial innovation may just be secret code for bankers trying to fool investors into buying securities that look safe but are actually extremely vulnerable.” They are also critical of the extent of the bailouts for the financial sector: “The fundamental business of a bank is lending, just as the fundamental business of a furniture company is to sell furniture. Few economist believe that the government should promote the sale of bad furniture by stepping in to protect the creditors and shareholders of a poorly performing furniture company.” This understates the externalities involved in a bank failure, of course, and – as I noted – Mian and Sufi do not condemn the authorities’ response in 2008/9.
Given where we are, they advocate instead a range of measures to reduce debt dependence in future, including levelling the tax code as between debt and equity, and encouraging the use of more equity-like financial instruments, including in lending for home purchase. They cite approvingly Bob Shiller’s suggestions for instruments to insure against macro risks (in his book
I always, living in Nevada, thought the banks put it to the borrowers. The toxic loans were too expensive. They could have tried perpetual loans but maybe Nevada knows that those may not work out as well. Anyway, when to interest only was up, and the promise by the RE agent who sold them the house, to refi later, was not granted, people walked away and they are suffering to this day.