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Roots of the 2008 Crisis

by David Beckworth
House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again, by Atif Mian and Amir Sufi (Chicago, 192 pp., $26)

The “Great Recession” of 2007–09 was the most severe economic crisis since the Great Depression of the 1930s. The net worth of households fell $13 trillion, the stock market declined more than 50 percent, and 8 million jobs were lost. The severity of this recession led many to question why it happened and what could be done to prevent it from happening again. Atif Mian and Amir Sufi provide answers to these questions in an accessible and engaging manner, and anyone wanting to better understand the Great Recession should read this book.

Mian and Sufi make the case that it was the large run-up in household debt between 2000 and 2007 that set the stage for the crisis. During this time, household debt doubled, to $14 trillion, rising at a pace far faster than the growth of household income. Most of the debt was in the form of mortgages. When house prices started falling, the debt became unbearable and households were forced to start paying down or defaulting on their debt. This deleveraging by households led to a sharp collapse in consumption, which in turn ushered in the Great Recession. The authors note that rapid debt accumulation and deleveraging also occurred in other countries during the same period — and occurred in the U.S. economy during the Great Depression. According to the authors, then, this boom–bust cycle in debt is the key to understanding the recent crisis.

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