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Thursday, July 17, 2014

'Debt, Great Recession and the Awful Recovery'

Cecchetti & Schoenholtz:

Debt, Great Recession and the Awful Recovery: ... In their new book, House of Debt, Atif Mian and Amir Sufi portray the income and wealth differences between borrowers and lenders as the key to the Great Recession and the Awful Recovery (our term). If, as they argue, the “debt overhang” story trumps the now-conventional narrative of a financial crisis-driven economic collapse, policymakers will also need to revise the tools they use to combat such deep slumps. ...
House of Debt is at its best in showing that: (1) a dramatic easing of credit conditions for low-quality borrowers fed the U.S. mortgage boom in the years before the Great Recession; (2) that boom was a major driver of the U.S. housing price bubble; and (3) leveraged housing losses diminished U.S. consumption and destroyed jobs.
The evidence for these propositions is carefully documented... The strong conclusion is that – as in many other asset bubbles across history and time – an extraordinary credit expansion stoked the boom and exacerbated the bust. Of that we can now be sure.
What is less clear is that these facts diminish the importance of the U.S. intermediation crisis as a trigger for both the Great Recession and the Awful Recovery..., while the U.S. recession started in the final quarter of 2007, it turned vicious only after the September 2008 failure of Lehman. ...
What about the remedy? Would greater debt forgiveness have limited the squeeze on households and reduced the pullback? Almost certainly. ...
The discussion about remedies to debt and leverage cycles is still in its infancy. House of Debt shows why that discussion is so important. Its contribution to understanding the Great Recession (and other big economic cycles) will influence analysts and policymakers for years, even those (like us) who give much greater weight to the role of banks and the financial crisis than the authors.

They also talk about the desirability of "new financial contracts that place the burden of bearing the risk of house price declines primarily on wealthy investors (rather than on borrowers) who can better afford it."

    Posted by on Thursday, July 17, 2014 at 08:16 AM in Economics, Financial System, Housing | Permalink  Comments (36)

          


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