House of Debt | Atif Mian

Summary of: House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again
By: Atif Mian

Introduction

In ‘House of Debt,’ Atif Mian sheds light on the true causes of severe recessions, specifically focusing on how high household debt leads to economic crises. Throughout the book, Mian unravels the factors that fueled the Great Recession and the Great Depression, pointing towards skyrocketing household debt as the main culprit. The role of the housing bubble, poor lending practices, and the struggles of low-income households are thoroughly examined. As you dive into this summary, expect to gain insights into the catastrophic consequences of household debt and the steps we can take to protect the global economy from future collapses.

The Role of Household Debt in Severe Recessions

The cause of severe recessions like the Great Depression and the Great Recession is not natural or political disasters nor irrational beliefs infecting public consciousness, but high household debt. From the 1920s to 2007, household debt dramatically increased, causing severe consumer spending cuts and intensifying the harsh effects of a subsequent recession. There is a clear correlation between the amount of household debt before a recession and the amount of spending cuts observed during the downturn. For instance, Ireland and Denmark both experienced greater jumps in household debt, leading to more severe cuts in household spending. Thus, data about consumer debt can help predict the severity of a recession, and without elevated levels of debt, banking crises recessions are unexceptional.

Housing Bubble Debacle

The housing bubble of the early 2000s resulted in serious debt for many Americans, with the poorest borrowers suffering the most. The poor were hit hardest by the collapse of the bubble as their equity was tied to their homes, and foreclosure rates were at an all-time high, lowering the value of homes in the entire neighborhood. On the contrary, the rich borrowed less, had fewer debts, and suffered less from economic downturns.

The Ripple Effect of Debt

In times of economic downturn, indebted households tend to sharply cut down on their spending while those without much debt maintain their pre-recession spending levels. Eventually, reduced consumer demand from the indebted households leads to nationwide job losses, impacting the entire economy, both tradable and non-tradable jobs. The effects of the Great Recession on households’ net worth reduced overall spending by up to 30% and led to nationwide job losses even in areas that didn’t experience significant debt-driven downturns, such as Iowa. The financial services industry also played a significant role in the Great Recession, which will be discussed in later summary parts.

The Devastating Effects of Mortgages

Low credit-score borrowers received more mortgage credit than those with higher income growth, leading to a housing bubble. The expansion of credit caused a surge in housing prices, which were already high due to high demand and low supply in inelastic cities. Although lenders believed taking on borrowers with bad credit was safe if prices continued to rise, the opposite was true. The housing bubble was fueled by zealous lending to borrowers who had little chance of paying off their new debts.

The Deceptive Origins of the Great Recession

The US government began buying mortgages from local banks in the 1970s, and this financial practice led to mortgage-backed securities (MBS). Private-label MBS developed in the 1990s, which used a structure called tranching. Tranching misled investors to think the level of risk associated with the precarious underlying mortgages was lower. Ultimately, private-label MBS led to lowered lending standards. Mortgages that didn’t conform to MBS criteria were accepted. Fraud was used to deceive investors into thinking they were buying super-safe securities. This led to the Great Recession of 2007.

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