We all believed in 2009 what Mian and Sufi have now conclusively demonstrated – that reducing mortgage debt would spur consumer spending.
In The Social Network, when the Winklevii go to a Harvard administrator to complain about Mark Zuckerberg, the administrator they go to is Larry Summers -- the same Larry Summers who popularized the phrase "secular stagnation".
Summers offers some thoughts on Mian and Sufi's book House of Debt. He (Summers) writes in part:
Mian and Sufi, professors at Princeton and the University of Chicago respectively, have examined a profoundly important question: what causes protracted downturns in economic activity?
A profoundly important question, indeed. Summers continues:
They have marshalled new data – for example, on spending by zip code – to test their hypotheses, assembling such a range of evidence from so many different sources that their conclusions are not susceptible to challenge by those looking to point out statistical errors.
They have strong evidence, in other words -- with a sideways reference to the attacks on Thomas Piketty's new book.
[Mian and Sufi] argue that, rather than failing banks, the key culprits in the financial crisis were overly indebted households. Resurrecting arguments that go back at least to Irving Fisher and that were emphasised by Richard Koo in considering Japan’s stagnation, Mian and Sufi highlight how harsh leverage and debt can be ...
"The key culprits in the financial crisis were overly indebted households."
So their story of the crisis blames excessive mortgage lending, which first inflated bubbles in the housing market and then left households with unmanageable debt burdens. These burdens in turn led to spending reductions and created an adverse economic and financial spiral that ultimately led financial institutions to the brink.
Summers says that this view "resolves the anomalies" found in other explanations that the book evaluates. He calls it "a persuasive and novel idea". In other words Summers, the secular stagnation guy, seems to agree with Mian and Sufi that debt is the problem. This is a big deal.
I do have to point out one thing: The "key culprits" were overly indebted households this time. In the Great Depression the key culprits were excessively indebted businesses (or so I've read). The point is this: The problem is always excessive debt. Who owes the debt may vary from crisis to crisis, but there is always excessive debt. Don't be fooled by whack-a-mole explanations that focus on who is in debt.
After expressing strong agreement with the book's analysis of the problem, Larry Summers disagrees with "the last third of their book, where they discuss the policy responses to the crisis." Summers was involved in the policy response, and has some good insights to offer. An interesting read.
And Summers leaves us with a great ending:
The reality that the post-crisis policy challenges were more complex than they recognise detracts only slightly from Mian and Sufi’s accomplishment in House of Debt. All future work on financial crises will have to reckon with the household balance sheet effects they stress. After their work, we can still believe in the necessity of financial rescues; however, we can no longer believe in their sufficiency. And after their work, we have an important new agenda of reforms to consider if future crises are to be prevented.
Just remember, when it comes to preventing future crises, it's excessive debt that is the problem -- not households, and not mortgages. If you dam up the stream against excessive household debt exclusively, the problem will just spill over somewhere else.
EROC: Excessive Reliance on Credit