Tuesday, October 11, 2016

Mian and Sufi

From How high debt leads to income inequality (an excerpt from Atif Mian and Amir Sufi's book on the Great Recession):

The fundamental feature of debt is that the borrower must bear the first losses associated with a decline in asset prices. For example, if a homeowner buys a home worth $100,000 using an $80,000 mortgage, then the homeowner’s equity in the home is $20,000. If house prices drop 20%, the homeowner loses $20,000—his full investment—while the mortgage lender escapes unscathed.

The homeowner loses his full investment, while the lender escapes unscathed.

The irony is that it's the growing accumulation of debt that drives home and asset prices up, and later drives them down. Don't lose sight of that.

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