House of Debt

Mian and Sufi argue that the Great Recession was caused by household debt rather than by a banking crisis, and they support this with county-level data on household leverage, house prices, consumption and employment across the United States.

Their central finding is that spending fell first and fell hardest in the counties where households had borrowed most against housing during the boom, and that this happened before the banking system seized in late 2008. They show that the wealth effect from falling house prices was concentrated among leveraged households with high marginal propensity to consume, so a given fall in aggregate wealth produced a far larger fall in spending than an unleveraged distribution would have. Job losses in non-tradeable local sectors followed the spending collapse geographically, which is evidence that demand rather than credit supply drove the employment fall.

From the diagnosis they draw a policy argument. Debt contracts concentrate losses on the borrower, who has the least capacity to bear them, while creditors are protected. They advocate mortgage contracts with equity features, in which payments adjust to local house price indices, so that losses are shared and the aggregate demand collapse is prevented. They also argue that bailing out banks without writing down household debt addressed the wrong problem.

The empirical work is well regarded and the county-level identification is the book's strength. The policy proposal has been criticised as difficult to implement and as creating its own moral hazard and pricing problems. Other economists continue to argue the credit supply channel mattered more than Mian and Sufi allow.