Global Markets Forum
April 21, 2014, 5:30 PM - 7:00 PM
House of Debt: How They (And You) Caused the Great Recession, and How We Can Prevent It From Happening Again
The Great American Recession resulted in the loss of eight million jobs between 2007 and 2009. More than four million homes were lost to foreclosures. Is it a coincidence that the United States witnessed a dramatic rise in household debt in the years before the recession—that the total amount of debt for American households doubled between 2000 and 2007 to $14 trillion? Definitely not. The Great Recession and Great Depression, as well as the current economic malaise in Europe, were caused by a large run-up in household debt followed by a significantly large drop in household spending.
Though the banking crisis captured the public's attention, increasing the flow of credit is disastrously counterproductive when the fundamental problem is too much debt. As Professor Sufi and coauthor Atif Mian show — in the research they describe in their forthcoming book, House of Debt — excessive household debt leads to foreclosures, causing individuals to spend less and save more. Less spending means less demand for goods, followed by declines in production and huge job losses. How do we end such a cycle? With a direct attack on debt, say Mian and Sufi. More aggressive debt forgiveness after the crash helps, but as they illustrate, we can be rid of painful bubble-and-bust episodes only if the financial system moves away from its reliance on inflexible debt contracts. As an example, they propose new mortgage contracts that are built on the principle of risk-sharing, a concept that would have prevented the housing bubble from emerging in the first place.
Amir Sufi, Chicago Board of Trade Professor of Finance at Chicago Booth, discussed this forthcoming book, coauthored with Atif Mian, which is grounded in compelling economic evidence and offers convincing arguments to some of the most important questions facing the modern economy today: Why do severe recessions happen? Could we have prevented the Great Recession and its consequences? And what actions are needed to prevent such crises going forward?
Learn more, visit the House of Debt blog
The Myron Scholes Global Markets Forum is part of the Initiative on Global Markets (IGM) and is generously sponsored by Myron Scholes. The IGM also receives financial support from Kenneth and Anne Griffin.
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Chicago, IL 60610
Amir Sufi is Chicago Board of Trade Professor of Finance at the University of Chicago Booth School of Business. He is a research associate at the National Bureau of Economic Research and serves as an associate editor for the American Economic Review and the Quarterly Journal of Economics.
Sufi's research focuses on finance and macroeconomics and has won numerous prizes, including the Brattle Prize for Distinguished Paper from the Journal of Finance and the inaugural Young Researcher Prize from the Review of Financial Studies. Sufi has published articles in the American Economic Review, the Journal of Finance, and the Quarterly Journal of Economics. He was also awarded an Alfred P. Sloan Research Fellowship in 2011.
His recent research on household debt and the macroeconomy has been profiled in The Economist, the New York Times, and the Wall Street Journal. It has also been presented to policy makers at the Federal Reserve and the Senate Committee on Banking, Housing, and Urban Affairs.
In 1999, Sufi graduated Phi Beta Kappa from the Walsh School of Foreign Service at Georgetown University with a bachelor's degree in economics. He earned a PhD in economics from the Massachusetts Institute of Technology in 2005, where he was awarded the Solow Endowment Prize for Graduate Student Excellence in Teaching and Research. He joined the Chicago Booth faculty in 2005.