Dangerous New Book Out - House of Debt

House of Debt: How they (and you) caused the Great Recession, and how we can prevent it from happening again, Atif Mian and Amir Sufi, University of Chicago Press, 192 pp.

House of Debt, for all that is right about it, is a dangerous book. Yes it is big data proof that private debt was the cause of the financial crisis. Yes, it points fingers at the culprits in the Obama Administraiton, at Tim Geithner and Ben Bernanke. Yes, it brings along Rogoff and Reinhart and even Paul Krugman. But it pigeon-holes problems, placing the remedies in a past that cannot be changed or in naive policy recommendations for a future we will never see, thus removing them from the working table of policy where they belong.

Were the policy mistakes of Ben and Tim and the rest in focusing exclusively on the rescue of the banks and returning them to a form of solvency -- mistakes that continue to this day -- actions of good faith? Or were the tools of government simply captured by the financial sector? Sadly, it is both.

Ben Bernanke rode his academic reputation as a student of the Depression into first a post as George W. Bush's chief economist and then as Fed chairman. His academic hypothesis was a sincere belief that bailing out the banks would have prevented the deep slump of the 1930s. It was no different than Alan Greenspan's sincere belief that corporations would police themselves out of long-term interest in their companies' fundamental health. Greenspan was anti-regulation by conviction, so he was chosen by forces that did not want regulation. Bernanke was banks first, so he was chosen by forces... well, by the banks. [Note to young economists -- It is always better for one's career prospects to find a niche in a theory that has powerful backers.] Neither was particularly qualified otherwise.

One awaits the day when Bernanke sits before Congress, like Alan Greenspan did, and admits that he was wrong when he assumed healthy banks would lend, wrong when he thought the Fed could resurrect the mortgage securities market, and wrong to ignore homeowners' contracts in favor of the financial markets and the big players. 

In hindsight, Amir And Sufi point to the critical need that was ignored, to write down the debt. But plenty of people were calling for it at the time. A New Deal style renegotiation of individual mortgages was rejected out of hand. Too complicated to unpack the MBS's. Bankruptcy procedures were rejected in a bloodier battle. Instead of rationalizing the housing market to its true value, the Fed ratified the excesses by buying the securities and allowing extend and pretend. Four million foreclosures. Untold millions more now shackled to uncertain futures by their mortgage contracts.

Why is this a dangerous book? House of Debt is just out, but already accepted widely by mainstream economists who cannot pronounce Keen or Pettifor or Koo. It offers a door for the respectable that does not require the embarrassment of concession to their critics. Those critics can still be ignored. But even so, one can simply shrug and say that this is the price of change. The orthodoxy must be allowed its privilege. That is not why this is a dangerous book.

It is dangerous because it tries to stuff a huge and looming problem into pigeon holes where it can continue to be ignored. The pigeon holes of housing, of the actions of 2007-2010, and of naive policy suggestions for making sure "it doesn't happen again."

The problem did not go away. Debt is still suffocating households. The banks never started lending. Bernanke's hypothesis was rejected by history. A tremendous transfer of wealth to the wealthy has not stabilized economics, nor brought any meaningful recovery to Main Street. The debt problem still suffocates economies across the globe. Banks are still fragile, and are still being subsidized. Debt is 30 percent higher worldwide than it was then. Real investment is nonetheless dormant. Corporations are not investing. Government is in austerity mode. Housing is bouncing back down. Even if the naive expectation comes true that mortgage contracts will be written to ensure that the lenders share risk with borrowers, it does not address the problem of debt today.

The choices now are no less difficult than they were then. And we are no closer to making them.